The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Heckler on November 22, 2015, 08:59:29 AM
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A friend posted this on another forum where leasing cars was being discussed by the unwashed masses. Debunk or support?
If you can manage to scrape together savings of $50k, and 0% auto loans are available then ...
1) Pay $10k down payment.
2) Put $40k into solid dividend-bearing investments. Diversify - 4 investments of $10k each. You can easily hit a 6% return on these investments.
3) $40k at 6% is $2400 in dividends per year = $200 per month. You can finance for 60 months at 0% so that's $2400 x 5 = $12,000. Add to the $10k down and you'll be able to get something that costs $22k.
4) At the end of 60 months you have a car (depreciated over 5 years) and still have $40k in the investment account (assuming no appreciation of the stock's valuation) earning $200 per month.
5) profit.
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Why dividend stocks. Just use normal ones
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Wait a second...
I can use MONEY to earn more money, and use THAT to pay my expenses?
And it'll pay for a car?
(https://media.giphy.com/media/piupi6AXoUgTe/giphy.gif)
What if I do that also to pay for my FOOD? And RENT?
What if I save enough to pay ALL my expenses?
I may not even have to work for money anymore and could... retire early?
(http://media.giphy.com/media/JeKLoVq2KzdpS/giphy.gif)
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Why not this?
Buy used car for <10k.
Put other +40k into investment.
At the end of 60 months you have a car that has depreciated, (but not nearly as much as that 22k car mentioned), plus the +40K and the earnings.
Continue to add the money that you would have used to pay the loan to the investment account. Earmark this for future repairs and replacement.
No hassle with a loan payment. No need to carry comprehensive coverage.
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As far as the actual plan, meh? I mean sure, it works, but poorly. You're still wasting money on a 22k car.
How about instead you buy a used 5k car, in cash, and save 45k into your stock accounts (and then you can put them in tax advantaged, rather than taxable, like this plan forces you to do).
Then you rebank those dividends, year after year, instead of throwing them at a loan (yes, even at 0%) on a depreciating asset?
EDIT: Rezdent beat me to it. What (s)he said, basically. ;)
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It doesn't matter. Sure, if you truly value a new car that much and you have the money/investments to support it, then sure, blow your money.
It doesn't change the fact that you'll always come out FAR better buying a used car.
Realistic sample scenario:
- New car is $25k. You can finance it at 0% for 5 years, no down payment! Amazing!
- Used car (same make/model) is 5 years old and is worth $13k now.
- You can pay cash for the used car (no loan required).
Here is how much "value" you'll have after 5 years buying the new car:
Investment portfolio will be worth $17,397 ($13k @ 6% for 5 years).
Total cost of car including opportunity costs are $29,877.
Value of car after 5 years is ~$13k.
Total value: $520.
Investment portfolio will be worth $29,877 ($416/mo @ 6% for 5 years).
Total cost of car including opportunity costs is $17,397.
Value of car after 5 years is ~$7k.
Total value: $19,480.
Unless you think that you're going to have over $18k in repairs on the used car, you're far better off with the used car.
Of course this example isn't perfect, nor conclusive. The new car may still theoretically last longer (but how much longer may not be relevant). And of course, there are subjective reasons to buying a new car vs a used one (maybe the brand new Tesla model just came out and there are no used versions of it...not Mustachian or financially smart though). The main point is that buying used is much more profitable than buying new overall. It's illogical to say that just because your investments will cover the payment and you have a large enough down payment that buying new in this scenario is the way to go.
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I knew this would get a rise out of you all. ;)
He drive a Tesla, so must have saved his new car buying for later years.
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I knew this would get a rise out of you all. ;)
He drive a Tesla, so must have saved his new car buying for later years.
Seriously though, my first reply.
Tell him if he likes that car hack, take it to the next level. Then introduce the concept of FI. :)