Pay Cash or Finance?

Discussion in 'Business, Investing & Finance' started by bradgator2, Jul 30, 2020.

  1. Detroitgator

    Detroitgator Well-Known Member
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    You're all wrong. ;)
     
  2. Gator By Marriage

    Gator By Marriage A convert to Gatorism
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    You're not wrong, but least he's our arrogant cuuunt.
     
    • bradgator2

      bradgator2 Rioting
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      See, I think that proves my statement is correct :lol:
       
    • Detroitgator

      Detroitgator Well-Known Member
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      On a serious note, and I've said this many times over the years both about striking out on ones own to start a business and for personal finance, but assuming everyone here is intelligent enough to make at least decently intelligent decisions (and 99.99% are), it all comes down to this: "What is your personal risk tolerance?"
       
      • TLB

        TLB Just chillin'
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        I think this 'inflation' aspect needs to be dropped from your consideration. If you wish to view inflation as chipping at your payment "value" you would have to consider it is also chipping at your investment "value". No matter what you choose, inflation is at work, and therefore not really part of the equation when it resides on both sides.


        The comments of emotional tolerance are spot on, and personal. You'll have to figure out your level of accepted interest.


        Personally, I went the wrong path with credit cards and car payments and don't have the flexibility to entertain the decision. I'm working my way out of it, but I'm still just shy of a year from that freedom (it has been a perpetual 2y until I'm out of credit card debt for the past 30y). I'm probably not the best to ask on the original question. However, I will offer that my philosophy more closely aligns with some of those above = if I can pay for something outright, I will. The discipline to invest that money in the short term to get better gains over the life of the interest loaded payments simply doesn't exist for me, and I think for most people. Short term investment like that, takes effort to find the right place to park it and pull it out when needed. Rather, for savings, I simply plow a % of paycheck into savings and let it grow over the long view; and on the short view I'll take paying something off ASAP.
         
        • bradgator2

          bradgator2 Rioting
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          Yeah, I am not smart enough to know this answer to this. I do believe that a $500 payment on August 1, 2025 is definitely worth "less" than a $500 payment on August 1, 2020. But it probably doesnt really have much an impact over a 5 year period anyway.

          The "item" in this case has no investment value. It's value is guaranteed to go down each year. We are not "car" people. We are not attached to them. They are not a status symbol to us. Actually, in this case, it's more a change in our life as we are transitioning from a minivan life to a non-minivan life.

          Keep chipping away at your debt TLB. You can get there!!!
           
          • bradgator2

            bradgator2 Rioting
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            So as I sit back and read this a few times... I am struggling to find the "personal risk tolerance" in this scenario.
             
          • Detroitgator

            Detroitgator Well-Known Member
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            Because you used the "say you have $100,000..." example in another post. In that case, it really does involve "what is your risk tolerance?" Because in the current stock market situation, if you have a fairly high risk tolerance, and using leveraged index or commodity ETFs (not even options, just straight leveraged ETFs), and if you were willing to use that $100,000, you could generate that $20,000 in about 2 to 2.5 months, pay cash for the vehicle (or buy it in whatever way you wanted), and still have 100% of your principal. That's all about one's personal level of risk tolerance.
             
          • bradgator2

            bradgator2 Rioting
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            Gotcha.

            I dont think I am confident enough or have the risk tolerance to attempt that over a 2 month period. Or actually... I probably am... just not with 20% of the cash egg.

            What I thought you were going to say was: what happens if you lose your job in the 5 years. Would you be more comfortable knowing you have no debts and obligations... or knowing you still have this cash sitting in the bank.
             
          • Detroitgator

            Detroitgator Well-Known Member
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            Which, again, is a personal risk tolerance question. ;)
             
          • bradgator2

            bradgator2 Rioting
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            Exactly. But that was the only "risk" I could think of as I was pondering your post.
             
          • TLB

            TLB Just chillin'
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            I didn't mean the investment value of the car. I took your posts as choosing between two options:

            1. Pay it off now, and avoid the interest payment on a loan, but you also are losing out on the interest gained on investing the money over that time frame (ie, holding in savings, putting in some fund, etc)
            2. Pay it off later, incur the loan interest, and hope the interest gained on the short term investment of savings-funds outpaces the interest of the loan.

            This is where others were mentioning 'paying it off' being 'worth it' over paying the loan interest. The key being which is higher, the interest you're paying on the loan or the interest you can gain by saving the money and investing it. If the loan is at 5% and your savings option is earning you 2%, you would lose money overall by going with the loan, you'd want to pay in full up front. If the loan is as 2%, and you could earn 5% by investing (mythical mutual fund or equivalent), you would want to choose to invest and make payments on a loan at 2%, you would in theory be netting a gain of 3% on the money over that time.

            That's the basic math of the decision, but it gets a lot more complicated to really dial it in. What isn't accounted for is you are decreasing your savings gains everytime you pull out a bit to make the monthly payments (there's less in the fund to earn interest). Additionally, the gains on such an investment pay off usually over a longer time, you'd be OK comparing Annual Percentage Rate (APR) of the loan vs the Annual Percentage Yeild (APY) of the investment, you just need to ensure you're comparing apples to apples on rates, a question that confuses a lot of average Americans (it gets muddied in trying to figure out monthly interest of both options, or if they are given over longer terms than 'Year'). Biggest issue for average folks is it takes time and effort to have a good mechanism to put the money in and watch frequently you are getting the gains expected, and are making the payments on time to avoid additional penalties. ALL of this means a little bit of work and effort, something most folks don't care to do.

            None of that brings the 'emotional' aspect into it, it's just straight...well, 'bent' math. If we bring the emotional aspect, the 'peace of mind' into it, probably the best way to gauge it is put yourself halfway into the loan from a mental state. Now, I hand you $100. Are you going to use that $100 to pay off the loan just that little bit earlier, or are you going to keep loan payments as-is and use that $100 to invest into your retirement or savings for the future? That right there helps you see which is more important to you at a gut level.

            Personally, the view I take is I am in debt, I bring home $X every month. I cannot pay for things up front. I set my priorities somewhat in line with Dave Ramsey, but a little mixed up as I jumped on retirement early. My monthly money goes to:

            Retirement = set $ that I never see and learn to live without, this is taken out before the budget planning
            Debt = Mortgage, Car, Credit Cards; though I'm paying them off in the opposite order (see optional)
            Savings = Emergency fund. Reached where I need it to be now, so it gets little love. Though, any withdrawal makes it a priority to get back up.
            Discretionary = whatever is left is used for living (dinner out, kid activities, etc), or pushed back into rebuilding Emergency fund if needed OR paying down Debt faster.

            Lately, I've been squeezing discretionary to a minimum and working that Debt (once Emergency was covered). Living expenses (dinner out, kids, etc) learn to live leaner knowing we'll live fatter when debt is gone.

            My answer to your question is somewhat muddled in my personal example, because I'm saying I'm 'stuck' in debt but putting savings (retirement, emergency) as the priority for me personally. That is my emotional decision, because I'm used to having debt since my late teens, and I've structured my life to not count retirement (taken out before any brain activity begins) and have learned from 50y experience I HAVE to have some emergency fund available. I'll say debt is a priority, but my actions say savings is.


            Thanks. It's weird having my debt horizon (ignoring mortgage) be NOT 2y, LOL. It's like something is gonna blow up on me and karma will push that date back out again or something. I'll certainly celebrate with the wife when it does actually happen. Kicker is we refinanced the mortgage last year to a 10y and will pay it off earlier than that.
             
          • bradgator2

            bradgator2 Rioting
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            Yeah I get all that.

            In the 0-1% interest, I say you finance.
            In the > 2.5% interest, I say you pay in cash.

            It's in this 1-2.5% range where it suddenly got really complicated, really fast in my brain. Which in the grand scheme of things sounds pretty silly.
             
            • TheDouglas78

              TheDouglas78 Well-Known Member
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              A dollar in your pocket today is worth more than a future dollar, anything less than 2.5-3% (average inflation amount) is usually a better deal over the term of a loan that paying 100% outright just from a value of the dollar perspective.
               
            • bradgator2

              bradgator2 Rioting
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              So interesting info... this Toyota dealership will only let you charge $5000. I dont know if that is the norm in the industry.
               
            • BMF

              BMF Bad Mother....
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              That's what we did - we charged $5000 to get the points, I wrote a check for $6500 at the dealership, and financed $10k. I paid off the $5000 when the bill came. I'm going to pay off the $10K over the next year.
               
              • sharkbite

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                I would and have financed both house and cars. Everything else unless it is 0% gets paid in cash. I like keeping my money invested and seeing it there for the oh sh*t moments. We keep our payments well below our monthly income so we have plenty of cash flow.
                 
              • bradgator2

                bradgator2 Rioting
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                Well, not that it really matters to the discussion.... but we simply paid cash. Actually, charged the max of $5000 for the CC points then the rest cash. Toyota had 1.9% financing for every term length, which just seem strange to me. Usually they'll give you a decrease if you go with a 3 or 4 year note. It's the 1st time (besides my very 1st junker car as a teenager) that I have not financed. Kinda weird feeling actually.

                We even had the dealership in Orlando hand deliver to my driveway and take the trade back.
                 
                • 78

                  78 Dazed and Confused
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                  Unless it’s a 959 Porsche, a car is not an asset. It’s a cost item. Take the float, invest the rest and fund the payment through systematic withdrawals.

                  [​IMG][​IMG][​IMG]
                   
                  • FireFoley

                    FireFoley Senior Member
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                    @78, I totally agree with you regarding autos I have always said unless it is an antique or collectible a car is not an asset, but a liability, LOL. I know it is not really a liability but they all have the same value when they don;t run (ZERO), regardless of initial cost. One of those necessary evils that gets us from point A to point B
                     

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