The Low-Interest Debt Debate

A few days ago, I posted an article about our purchase of a 2009 Toyota Prius. One of the elements of the article that got quite a few readers angry was our decision to take out a 4% loan to cover much of the cost of the car, even though we had enough in our car savings to pay for the entire vehicle.

The argument against the loan is pretty simple: debt is bad. By having it, you’re indebted to someone else, condemned to make payments for quite a while or else risk wrecking your credit. Instead, pay cash for everything – no debts, no worries.

I agree with that philosophy to a large extent. Using credit to buy something you couldn’t otherwise afford is an extremely dangerous game. It can bite you hard if life doesn’t go as planned. I know this from experience – in April 2006, I let easy credit almost bankrupt my family due to overspending.

But what if you’ve done things the right way and saved up for a major expense before buying? Is it always the correct choice to make a major purchase simply by writing a check? When you write a check for a major purchase, you’re taking a large amount of liquid cash and investing it in a material item. The ability to use that cash for anything else is now gone (excepting, of course, equity loans, which usually don’t have great interest rates).

Now, at first glance, you seem to gain quite a bit from that exchange. After all, you’re not paying interest on the loan and you’re not required to make a payment every month.

But compare that to the situation where you have all of the money to pay off the debt sitting in a savings account. You can easily earn 2-3% interest on that money just by allowing it to sit there, doing nothing. Thus, the advantage of simply writing a check for your purchase isn’t quite as strong as simply not having to pay the interest on the debt. If you can write a check, for example, to cover a 5% debt, but you can earn 3% by holding onto the money in cash, your dollars and cents benefit is only approximately 2%.

Another factor worth considering is that having extra cash on hand always serves as a supplemental emergency fund. While savings intended for a major purchase should never be juxtaposed with a true emergency fund. having more cash on hand in the event of a major crisis does have value.

There’s also the opportunities that cash provides. If you put all of that money into your purchase and deplete your savings, you no longer have cash available to take advantage of exceptional opportunities.

Here are two examples of what I’m talking about. In late 2006, I made some extra money flipping Nintendo Wiis. I had a good run finding them in stores and I was able to buy them new for $250 and sell them in just a few days for $325. The only problem is that I didn’t have a lot of excess cash to do this – I actually had to do it on credit cards. Because of that, I didn’t want to take a big risk when doing it, so I only flipped one at a time – I’d get the $325 (or so), use it to pay off the debt in full (and use the extra $75 to pay a little more on my debts), then buy another one.

If I had a large bankroll at the time, I could have been flipping these by the armload. I knew where and when to go to get the systems and I also knew where to sell as many as I could get my hands on. I simply didn’t have the capital to do this. If I had, I would have been able to earn a very good return on my money.

Another example: in 2005, I had the chance to buy 72 packs of Magic: the Gathering cards for about $1,500. It was actually part of a much larger lot of trading cards from a shop going out of business. Here’s the catch – these particular packs could be flipped for $200 a pop. Those packs alone would have earned me over $10,000. Unfortunately, money was so tight at the time that I had to pass on the opportunity, even though I knew I could make very good money on the sale.

Exceptional opportunities do come along, and the rewards of those opportunities go to the people who can take advantage of them. Most of the time, that means the people who have easy access to liquid cash.

In the end, my feeling is this: having cash, even if it just sits in a savings account or a CD, is advantageous over putting that cash into a material item. Thus, if you do have the cash to buy an item in full, it’s worth considering keeping the cash and getting a low interest loan for the item.

The key here is low interest. If you cannot secure a loan that’s less than 2% or 3% higher than what you can get in a savings account, you’re better off paying for the item in cash.

That’s my stand on the subject. What do you think?

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  1. Wendy says:

    I think it makes sense for some people to take out loans under these circumstances. We had the money to pay off our car loan 1 year early, but we didn’t, and when we needed a new roof, i was really happy we had the cash on hand. Yes, we have an emergency fund, but in this economy, I’d prefer to save it for my husband loosing his job or something equally traumatic. The interest rate on the car loan is much more reasonable than the rate on a credit card or unsecured loan that we could have gotten for the roof.

  2. Mike says:

    I’ve done this exact thing on occasion. Took out a loan for an item when I had cash on hand. In my opinion its only debt if you don’t have liquid assets on hand to cover the full amount you owe. The difference in interest rates is what you’re spending to retain liquidity. Sometimes it works in your favor.

    Taking out loans without cash reserves is a risky venture.

  3. scott says:

    I did the same thing with my latest vehicle purchase. Even though we had a nice safety net, I had a certain amount in my head that I wanted to keep in the bank. A few dollars in interest is what I had to pay for a peace of mind.

  4. Lis says:

    This is one of those areas where my husband I have financial disagreements. He subscribes wholeheartedly to this philosphy, sometimes to excess. I agree in theory – it certainly works out nicely on paper. However, having seen my parents eaten alive by “good investments” they took out loans to cover, I have a visceral aversion to debt. For other, responsible people who have carefully thought through the situation (Trent) it’s fine. For me, it’s a struggle. I can do it (we recently purchased and renovated a rental house), but it’s hard and scary. This is a situation that should only be considered by those who have their financial house in order and are very financially disciplined. Which we are, so I am working every day to approach finances and debt in a more rational, less emtional way.
    This is why I like TSD, it gives me different perspectives to think about.

  5. Arvin says:

    If you’re one of the people that choose to pay cash, and have enough reward-bearing credit cards to cover the expense of the entire car, consider buying the entire car using your credit cards, and get some cash back for your purchase (of course, you have to pay the whole thing off immediately), and you get one extra month of savings interest for your cash.

    And of course, if you were paying cash (using credit cards), especially in this economic climate, you should be able to negotiate an even lower price for the car.

    Just remember to call your CC company ahead of time before you make that purchase.

  6. Tizzle says:

    How much interest would you be willing to pay to improve your credit? I would like to buy a 6000 car. I can save up 2000 before my other car completely dies. I could buy another 2K car off craigslist, and I might do that. But I have bad credit, and would like to take out a loan for 4K.

    The purpose: 1)to drive a nicer car, and spend less on repairs, and less on gas (I have a V6 now). and 2) To help build my credit. I only have one credit card, and would like to have more credit out there, working for me.

    *I probably won’t be able to get this loan…but if I could get one for 10-13%, I’d have low monthly payments and I could get a 24-month loan, which is the most I’ll do.

  7. Matt says:

    I think this is the perfectly appropriate decision making process and is a great use of leveraged capital. A similar question comes up with you have a No Payments For A Year option (such as with living room furniture from Rooms To Go). These seem like a great idea – you actually make money on your cash in the bank and you get to use the stuff in the meantime.

    One word of caution which I’ve not seen in your recent blogs about using low interest debt. This one just bit me in the butt so I’m glad I can share. If you have a low interest loan, especially a No Payments For A Year variety, that debt load can impact your credit score. In my case I replaced my home’s entire HVAC system nearly a year ago when my old one completely failed. I was doubly fortunate that I not only had the cash in my emergency fund, I also was able to earn an extra couple of hundred dollars in interest while taking advantage of the No Payments For A Year special. However, this loan was actually in the form of a credit card (I didn’t realize that) and when I went to refinance my home I was not able to qualify for the lowest rate b/c it appeared that I was carrying a HUGE balance on a credit card. This was despite the fact that I had no other debts and I had more than enough cash to pay the loan off.

    So that’s it – just a word of warning that even intelligent use of debt (which I believe the car loan is) can have consequences.

  8. I always go back to this – it’s all about Net Present Value. In this case, because the spread on your loan for the car and what you’re earning is very small, the NPV (NPC in this case) is relatively small. If your car loan were say, 6% and not deductible different story. I just saw Home Equity Loans for 3.25% – and the interest is deductible, so there are good opportunities to do this.

    I did a post a few months back on how we bought a Honda Odyssey. Similarly, we had the cash to pay in full, but what I did was put the 27K in a 3 year CD earning 4.5%, took out a loan from the dealer at 0.9% for the full amount, and at the end of 3 years – boom, a few thousand dollars in my pocket at their expense. We needed the car either way since our family outgrew a car that only held 2 car seats, but in this case, I could have paid outright and lost the opportunity cost to capture an annual spread of 3.6% on 27K.

    I also agree with your “cushion” thinking. You can’t put a price on that. In my case, I could always break a CD and forgo some interest in an emergency, not the end of the world, so cushion still intact.

  9. Nick says:

    I recently had to make this decision and I wonder if I make the correct one. I decided to pay off my student loans, which is the last debt I had (car paid off, no mortgage, no CC debt).

    My loan was at a fairly low interest rate (4%) although kind of high for a student loan.

    While I do have a decent emergency fund, it is dawning on me that it may have made more financial sense to save the 6K that i used to pay of my student loans in case I need it for some other opportunity to generate income.

    I’m not losing sleep over it, but if in a month an opportunity comes up where I could make a decent return, but I don’t have the capital, I’m gonna be kicking myself.

    That said, it is water under the bridge and it did feel good to get the student loan off my back.

  10. CathyG says:

    @Arvin – we tried to do exactly that, but the dealership refused to accept a credit card for a car purchase – the merchant fees that the credit card company would charge to the dealership were way too high for the dealershipt to accept it.

    It’s kind of funny, really – normally in a car purchase, the dealership makes money off the fact that you need to borrow. But with credit cards, they have to actually pay more. Can’t think of any dealership that would do that.

    We wrote a check instead.

  11. SJ says:

    I think I read about the idea of an “opportunity fund” a while back, just for cases like the Magic cards. But to keep it separate from your other debts/etc.

    This is perfectly fine on paper but you are making some assumptions. I think it’s fine to do if your loan is cheap interest rate wise; but is this really any different than credit card/interest arbitrage?

    I think for most people it’s easier and safer to just pay off the things in cash.

    Basically you are leveraging your money =D. So be careful.

  12. I think people were waaaay too critical of you on this issue. I think you thought out every detail and explained yourself adequately.

  13. Stephen says:

    I couldn’t agree more. There is nothing inherently wrong with debt. Debt only becomes problematic when you don’t pay off your credit cards monthly and pay high interest rates that prevent you from paying down the debt.

    The other problem with paying cash, as you pointed out very effectively, is opportunity loss. Every decisions necessarily entails that there will be something else we now cannot do. Like you said, by drastically depleting your cash reserves, you face the potential of lost opportunity.

    Four percent interest is extremely reasonable. If I had that kind of cash kicking around, you could easily earn a much higher return, probably seven to eight percent, in the market or in a combination of high interest accounts, the market, and business ventures like you mentioned.

    Very smart choice!

  14. Adam says:

    I think as long as you go into these things with your eyes open and make an informed decision with your goals in mind you have the moral high ground. When we encounter people who make impulse buys, usually on credit, and they are unable to afford them we think about advising them of the true cost. The look of panic, disgust, or fear in the eyes is the part that, I think, many of us are trying to avoid with our calculations here.

    When we can do out the math and say, “Yes, I am taking on a debt to purchase a depreciating asset. I understand the implications and am willing to make this deal.” When we can do that honestly then I think we’re on the right path here.

    As a personal anecdote, I have a substantial amount of fixed and variable rate debt and am lucky enough to have been able to save up the money to pay it off. Throughout the whole process I have been aware of my rates and fees and have managed to lock in rates on my savings that have been very near to the rates on my debts. At the present time my total cost of financing minus the interest I earn on my savings comes up with $45/year in the red. I could blast my savings out to pay these debts off and reduce that $45, but the cost would be my emergency fund, my ability to stay $1000 over my rent payments (in case of a bounced check) and other things of that sort. I accept that $45 cost as my “cost of doing business”. I am unwilling to make that deal and willing to let the debts continue at minimum payment levels.

    As an appeal to conventional wisdom let me add,
    “Decide what you want, decide what you are willing to exchange for it. Establish your priorities and go to work.” (HL Hunt)
    I am willing to trade $45 for that flexibility and opportunity and ultimately it appears Trent has made a similar deal.

  15. The reason I was personally surprised by your purchase was because it seemed you bought something that you couldn’t afford. For example, if having a pile of money for “opportunities” that you’ve stumbled upon is more important than purchases a brand new car, then you should have waited. If you didn’t have enough cash without dipping into your emergency fund, then you should have waited or bought a less expense option.
    Look to be honest it’s kind of crappy you’ve gotten as much heat as you have. In reality, though you’ve been successful enough that your actions are subject to public scrutiny. And this does seem to be a time when you’ve taken steps that weren’t completely in line with some of your other posts and the overall theme of your writing.
    Frankly, I think it takes guts to write about something honestly and openly that you know going in will cause some backlash. It provides for great, personal discussion which is why I’m attracted to the blog in the first place.

  16. I feel the same way, as long as the interest rate is low. My student loan is locked in at just under 3% and I see no point of paying it back early. I’d rather have the extra cash to put into savings or my Roth IRA.

  17. SteveJ says:

    I actually went the other way a few years ago and regretted it. I took a chunk of extra money and paid down on my mortgage because I’d get a 450% return (in avoided interest over the life of the loan, after adjusting for taxes). A no-brainer in my mind. Well, it didn’t raise my income to expenses ratio, which I could have done if I paid off my wife’s car loan instead (a meager 9% saved). Then we had a couple of “life happens” emergencies and all of a sudden things were looking pretty tight.

    So yes, a low-interest loan that you can cover could be seen as peace-of-mind insurance. Not much different than buying flood insurance or picking up an extra flashlight, just in case.

  18. Courtney says:

    In times like these when we have so little we can control about the future, emergency savings are very important. While I think it is important to have both an emergency savings AND a savings toward a future vehicle purchase, I am not against financing a car at a low interest rate instead of using emergency savings. However, I’d want to assure it was a car we could actually afford – meaning we could pay it off within at least three years. For us, our vehicles are paid for, but we know one day we will need to replace one of them. We have a separate savings account for this very purpose. Nice post!

  19. Susan says:

    I can appreciate what you’re saying. But why not put aside what you would spend on a monthly car payment and put that into savings? Why have debt if you don’t have to?

    If you have a financial emergency tomorrow without that healthy cash reserve, your car would be one of the first things to go anyway. And b/c you don’t outright own it, it would be harder to sell it for a realistic price and buy something cheaper. Unless you’re turning a substantial profit off the reserve of money you choose not to spend on a car, what’s the point?

  20. Jim says:

    I don’t think Trent made a bad choice. I don’t know if I’d done the same thing but that doesn’t mean his choice was wrong. This is more a matter of opinion frankly IMHO. Its not clearly a right or wrong choice here.

    Preserving capital is a good idea. I think it can certainly be worth paying 1-2% interest on a loan to do so. Especially considering that inflation should more than make up for that.

    Still, if your emergency fund is sufficient then I’d buy the car with cash since you’ll come out ahead on the interest. But how you define a ‘sufficient’ emergency fund will depend on your individual risk tolerance. Some people might feel safe with 3 months pay in the bank, others might want 12 months, etc.

    Now if the car loan was higher in the >6% range then it might be a different matter.

    Jim

  21. Joseph Tanner says:

    Here’s another thing to consider. Having a car loan can help your credit. If two people had identical credit reports with the exception of a car loan, the person with the car loan (assuming they’ve paid on time, though a late payment or two may still be ok) will have a higher credit score. Why? It’s one of several types of credit that’s scored. To have a high credit score you pretty much need a mortgage, car payment, a few credit cards, and possibly even some charge cards (the kind that you can’t carry a balance on).

    Unfortunately we just had to buy a car with cash instead of getting a loan Our last financed car was totaled last year and paid off. Current car could blow at any moment. If we were home now we might have been able to go to our local bank and get a decent deal. We’re in another state for the next several months (wife is doing travel nursing now), and I figure the combination of a new job and the fact we live in another state would keep us from getting a decent rate.

    On the bright side, at least we had the money to get another vehicle when we needed it. We’ll just keep an eye on our credit reports and figure the rest out later.

  22. Aaron says:

    OMG.

    72 packs of unlimited??? Man there was a time when I would have bought all 72 and just KEPT them.

    With two boxes of unlimited, you’ve got a pretty good shot of landing a mint condition mox or lotus… that’s 200 for the former, 500+ for the latter. (Should you choose to sell them and not play competitive vintage magic…that would be a hard choice for me… I miss Type I tourneys…)

  23. SP says:

    My husband and I made the opposite decision years ago; we paid off a $16K car loan (at 4% interest) because we had $20K in savings, and at the time, it seemed like a good idea to turn the monthly car payments into monthly savings payments. I think we made a mistake, and I wouldn’t do it again. It’s been great not to have car payments since then, but I wish we’d just accelerated the payments as much as possible and paid the car off quickly, and had kept the savings where they were. So, from where I stand, you made the right call.

  24. Zannie says:

    I think your decision to finance was fine, but I wonder where you are getting a 3% interest rate on your savings. You often mention ING Direct, but ING hasn’t offered a 3% APY for savings since early October. They are currently offering 1.5% on their regular savings, and the same for most of their CDs (their 6 and 9 month CDs are actually at 1.25%).

    Perhaps you have much of your money in CDs from before the rates dropped, but if that’s the case you’d be paying penalties for early withdrawal, to the tune of six months worth of interest, so using that to pay for the car wouldn’t make much sense anyway.

  25. The Personal Finance Playbook says:

    I have never used debt to buy a car, personally, but 4% is a very low interest rate. When money is that cheap, it creates an incentive to take advantage of it. I think a smart consumer has to take advantage of those opportunities. Borrow money when you can do so cheaply and lend when interest rates are high. It’s the lending equivalent of buy low and sell high. Leverage can be a valuable business tool if used properly.

  26. Huck says:

    I can see your point. My thinking was that by taking the loan you are assured of paying interest but have no assurance that an opportunity or emergency will arise. Instead, I pay cash being assured of paying no interest and still have no assurance that an opportunity or emergency will arise. In the unlikely event an emergency occurs I use my emergency fund. If the emergency is bigger than my fund can cover or a killer opportunity arises I make use of my HELOC and keep interest low or zero by paycheck parking and spending changes. In the end I might pay more interest than I would have if I had taken original loan…but the key word is “might”…its probably more likely that no emergency or opportunity will arise that can’t be covered by regular means and that I pay no interest and have no lender with my name on a list. Anyhow, I think its up to the individual and their risk/comfort level. I think we can still be friends!! I do enjoy your posts, even when I might disagree…thanks!!

  27. Jessica says:

    I agree with this post, but something mentioned in it bothered me. The business with the Wii’s was not “flipping”…that would mean there was some added value or work done to the item being resold. All that Trent did there was *scalping*.

  28. briang says:

    Debt is not inherently bad. It depends on the type of debt and what you’re using the money for.

    It also depends on the rate of inflation. If inflation again reaches high levels (like the early 80s), then it becomes a good thing to be a debtor, since you get to pay off old debts with the newer, less valuable money.

    Some economists and also Warren Buffet in his last shareholder letter have said that one of the costs of getting out of this recession is going to be inflation. You probably made the correct choice to finance at 4%.

  29. Buffalo says:

    Jessica,

    I agree with you on this one. The “flipping Wii” story gave me an uneasy feeling in my stomach. But that was 3 years ago and I’d like to think Trent wouldn’t do that again.

    May Trent, you’ve got guts telling all your personal financial stories to the world.

  30. Faculties says:

    But wait a minute. By buying the car with a loan, you’re paying more or less 2.6% extra for the car (4% minus the tax deduction). Or to put it another way, by buying the car with cash, you’d be gaining approximately 2.6% interest on that money — tax free. If instead you put that money in a credit-union interest-paying account at 3%, which is what my credit union is paying right now, after taxes of 25%, you’d be earning 2.25%. So you’re paying 2.6% to earn 2.25%. The idea that you can make money by investing the cash you would have used to pay for the car won’t hold water.

  31. Joseph Tanner says:

    I think many people who think this is a bad idea aren’t looking at it the same way Trent is. You’re probably looking at a $20k car, $20k in savings, and saying that unless you end up making more in interest on the savings account than the APR of the car loan, anyone would be stupid to NOT pay cash for the car.

    The way I see it, until that $20k car is paid off, I don’t HAVE to pay it off. So let’s say in a couple months I’ve paid maybe a thousand on the car, and still have my $20k in savings. I lose my job as does my wife, we can’t find work, economy is heading for another Great Depression, etc. I’ll let them come repossess that car, then I’ll take the $20k and use it for the bare necessities (food and shelter). Now if I had paid for that $20k car in cash, I’ve only built my savings up by that thousand I would have paid toward the car. Great, so I’ve got a car but no house or food. Sell the car, but since no one has money I can only get a thousand for it. So now I have $2k to go towards food and shelter whereas before I would have had $20k.

    Of course there’s less dire scenarios that would still benefit from having the extra money in savings. Say you have a 3 month emergency fund but are out of work for 6 months or more. Use that $20k in savings to make up the difference. Keep making that car payment. Now you’ve weathered a bad storm, and haven’t lost anything (or as much as you would have).

    It’s just playing the odds. At a point or two percentage rate difference, it’s probably worth keeping the money in savings “just in case.” At 15%, you’re probably safer just paying cash and putting the much larger amount of money you’re now saving back in your savings account.

  32. creed of apollo says:

    I liked the logic behind today’s blog, and must say that i fully agree.

    it was also mentioned in the book rich dad, poor dad, but he gave poor reasoning in comparison to yours on why cash at hand now is better than cash at hand later.

    now if only we could figure out what the best course of action to take would be for us in this state of economy…

  33. ChrisD says:

    The idea of choosing to have a debt, when you could pay cash does seem counterintuitive.
    I guess the main point is that the car loan is at a significantly lower interest rate than anything you could borrow if you had an emergency beyond the scope of your emergency fund. Thus rather than pay (say) 10,000 now, then having an emergency and having to get a bank loan for 8,000 at 7 or 8%, you are borrowing ahead of time at 4%. This seems like a strategy more suitable for people who are still building their emergency fund than for someone with ‘mature’ finances. Of course having children rightly makes you more risk averse and means you need a much bigger emergency fund.

  34. J Brown says:

    So do you factor in the time of the loan? Hey it’s only 4%, let’s take that baby out to 84 months!

    What happens when you change the item from a car to a house? Can the above reasons still be valid? If not, then why?

    So if you took out the loan and are living on a budget, does that mean you are NOT going to pay down the debt faster than the time on the loan? If you are, then why not just take out less from the beginning?

    What about the reason for putting down just $5k vs $10k or more? I can understand the trade-off factor. I understand that life is not just about the numbers and math.

    Could you then just use the same logic to use a HEL for debt consolidation?

    Since I am waist deep in debt, but working on Baby Step 2 – I see the loan as a risk not a safety net. I would have purchased a less expensive car.

  35. Stacey says:

    Like Zannie, I’d like to know where you are making 3% on your savings. I used to get that at Emigrant Direct, but now it’s at 1.25.

  36. wanzman says:

    I think this is BS, along with the previous 33 commenters who seem to be eating out of you hand….all in one big debt justification party.

    If the whole point of saving for something is to avoid financing it, why save up, then still finance?

    If you did in fact have the cash free to pay for the car you should have. But you say that doing so would have dipped into your emergency fund…so obviously you did not have enough money for the car. You had the cash…but not enough car savings specifically in cash.

    You should have saved enough cash ABOVE AND BEYOND your emergency fund in order to buy the car.

    You lied to yourself and your readers…you really couldn’t afford the car. You bought more car than you could afford to pay cash for because you wanted to.

    Not to say financing a car is wrong…but telling yourself you could buy a certain car just because had the cash (but really didn’t)…..thats BS…..just admit that you couldn’t wait long enough to save up for it, so you financed it.

    And also, let’s all get real….we don’t have opportunities knocking on the door all the time that we just must have cash to invest in….admit it…..this is a BS reason for holding on to cash.

    If everyone here had that many good opportunities to invest in, you would have piles of cash from those investments….enough to buy 5 BMW’s with cash.

  37. J says:

    What do I think?

    Trent, I think you are going to get burned and dig yourself a big giant debt hole again. The part that worries me the worst are:

    “having extra cash on hand always serves as a supplemental emergency fund. While savings intended for a major purchase should never be juxtaposed with a true emergency fund.”

    It’s very akin to walking into a casino with all the CASH you feel comfortable losing. When the money is spent, it’s spent. End of story. Otherwise, I’m siding with the people who are saying you bought too much car. You should have bought a cheaper car and left more money in the bank — your emergency fund isn’t truly big enough for you to feel secure.

    And the second part that worries me:
    “There’s also the opportunities that cash provides. If you put all of that money into your purchase and deplete your savings, you no longer have cash available to take advantage of exceptional opportunities.”

    You were saving money for a car. Which is fine. If you want to save up money for “exceptional opportunities”, then save up money for them and spend less on a car.

    Otherwise, I think you are going to play too fast and too loose and end up too broke when something goes bad.

    I’ve been reading you for a while and I feel like you are losing the trail here a bit, on one hand you write a post about using less toilet paper, then you write an elaborate justification for why you took out a loan. They really don’t jibe.

    Please note that I do find it courageous how you lay things out there for all to read. And I certainly don’t judge you for the act of buying a new car — it’s just that the practice and the preaching don’t seem to be adding up lately.

  38. Jon says:

    Scalping is illegal. What Trent did was exploit supply and demand with the Wiis.

  39. Goal Hunter says:

    Forget the car and debt. The more interesting thing is your ability to find Wiis and Magic cards that could be resold for such a high margin. If you ever need money like that again, find INVESTORS! Drop me a note and I’ll set you up.

    BTW, I think 4% is too high an interest rate, but still low enough to justify a loan. Money in the market right now is going to make more than 4%. If you have the money somewhere then there isn’t a need to specifically put it in the car versus a savings account versus the market. You have to manage risk, but allocating the money from the car when you have a low interest loan and keep the cash working is no problem.

  40. Troy says:

    What you are describing is arbitrage. In your case, triangular arbitrage. You, the interest you earn, and the interest you pay.

    Arbitrage is nothing new. It is the backbone of modern banking. Which brings me to my first point.

    Why do you suppose multi million and billion dollar banking institutions with teams of finance professionals decided to loan you and others money at these low 4% ish rates? Get to that later

    You say in your original post that although you had sufficient cash to pay for the car in full, it would have depleted that account if you had.

    You then state in the same paragraph that you have upcoming obligations for the remainder of your emergency fund for the repair/replacement of your other vehicle. So which is it?

    If you have obligations for the money, then do you really “have” it? It seems to me you have it obligated elsewhere.

    I think you financed the car because you couldn’t comfortably afford it with the issue of your other vehicle looming. But instead of planning to pay cash for both transactions, you justify through arbitrage your decision to finance one of them…a want no less.

    And if that argument held water, why put the 5K down. Why not arbitrate the full purchase price and get the maximum “bang for the buck”?

    Because your arbitration reason is weak justification for your illusion of a cushion. A cushion you admit will be depleted when the other vehicle is replaced in the very near future.

    And because depletion is likely soon according to your statements, the interest you can earn on it really doesn’t matter because it’s temporary.

    You are wise to be planning for both vehicles replacement, but foolish to account the same money twice, for both financing justification (we had the cash) and future obligations (Truck needs relacing in the near future). Can’t do that. You can’t spend that money twice, but that is what you are doing in your head.

    The other issue is you left little room for error. What if your return rates continue downward? Or income? Or the other vehicle needs replacing much sooner. Or both at the same time. Or an actual emergency regarding a true need instead of a want shows up. What then?

    Banks lend money at 4% because that is the best risk/reward investment for them. If holding cash and waiting for inflation, or the market, or negative arbitrage in CD ladders actually worked better, don’t you think that is what they would be doing.

    Conventional wisdom became conventional wisdom for a reason.

  41. Stephen says:

    At least admit that by financing the car you took on additional risk.

    It is silly to suggest that borrowing the money for the car was a safer bet, by using the cushion example.

    Another way of thinking about it is that you just borrowed the money to establish an emergency fund that was depleted by purchasing the car.

    Imagine you had a $20k car that was paid for. Would you then go out and get a loan, so that you would have a cushion?

  42. JT says:

    I don’t think financing the car at 4% was a bad choice, but for me personally – I would have paid cash. Maybe I would have bit on financing if the rate were less than 2% but no higher than that.

    My logic is, I consider my car necessary. I don’t live in a place where public transportation is workable, and if I lost my job I would absolutely need my car to look for another job and to get me there after I found one. So to me, having a paid off, well maintained car IS the same as having the cash sitting in a bank account.

    But, 4% isn’t a terrible rate so if it gives you and your wife peace of mind to hold onto the cash, I think that’s fine. At the end of the day, there is what is right by the numbers but it is also important to do what gives you a good feeling of security (especially during these times).

  43. Actually, I believe the argument is that if you can’t comfortably write a check, you should buy a cheaper car.

  44. Troy says:

    Here is a story to illustrate my above post.

    Say the Trentster and I decide to take a cross country trip in the new Prius…break it in if you will. Trent calculates it will cost exactly $500 in fuel for the round trip so he withdraws precisely $500 in cash from his “Fuel” account at ING. Keeping our weight low to maximize fuel efficiency, that is all the money in any form he brings.

    Off we go through Iowa and into the Fine Cornhusker State, two 6’5 guys getting a stunning 49 mpg while we discuss the Husker-Cyclone lopsided football history and the surprisingamount of legroom in such a small automobile. It is awesome. Trent coasts down the hills to test the mpg limits of hypermiling he researched.

    After 1000 miles, the tank is empty and we pull into a gas station. Fill ‘er up and go inside to pay. Trent spots a king size Snickers for $2 and throws it on the counter.

    I pause him and ask “what are you doing” “Getting a snickers” he says.

    But you can’t afford that. You don’t have the money” I say.

    “Contraire” he says. “I have $500 in my pocket. I have plenty of money. Do you want one too?”

    “But” I say “the money in your pocket is accounted for. It is for gas, dude”

    “but I have the cash right here” as he pulls out his wallet. “I know you have the cash, but it is already accounted for gas. If you spend it on the candy bar, you will not have enough money for your future obligation…which is gas to get us home”

    Trent pulls out his well worn Mead pocket notebook, makes some quick notes and says I am right, we would run out of gas prematurely, puts the snickers back and then starts talking about the options for returning the Prius when we get back to Iowa.

    So, I buy him the Snickers and tell him we all sometimes make silly decisions.

    You can’t spend a dollar more than once. You can’t account for a dollar more than once, even if the account is in the future. It’s still accounted for.

    Always make sure you have enough to get home.

  45. J.D. says:

    Trent, you need to have some facility to mark “best answers”. Trent’s story in #43 is great! :)

  46. El Cheapo says:

    Did you report the ‘Wii scalping’ as income to the IRS?

  47. Em says:

    I just took out a loan that I can’t afford – and put the cash from the loan in my checking account. Strangely, my home equity LOC rate is 2.75%, while my “Green checking” is paying 3.5%. So, I am making .75% to borrow money! Go figure.

  48. Craig says:

    In essence you borrowed money to keep your emergency savings well funded. I have never heard of any financial planner advising someone to go into debt for their emergency fund, regardless of how low the interest rate was.

    Reminds me of something a great philosopher (George Strait) once said: “I ain’t got a dime, but what I got is mine. I ain’t rich, but Lord I’m free.”

    Nothing like country music to set you on the path to financial freedom! Thanks for your great blog, Trent.

  49. Trent, this is a well-thought out argument. Great post. It sounds like you have some good insight into making money with trends, also. Good for you, buddy.

  50. Dale says:

    If your new Prius was 100% paid for would you borrow against it to add the cushion to your emergency fund?

    Effectively that’s what you’ve done.

  51. Your rationale makes a lot of sense. It is just too bad that you weren’t able to find an interest free loan on a new car purchase. Having a savings account in case of opportunity is important and is something I recently wrote about on my website in an article called “The Importance of an Opportunity Fund.” If only you would have had the money saved for those Magic cards…that seems to haunt you to this day! ;)

  52. Barbara says:

    First, I would consider “flipping Wiis” to be not ethically sound and I would hope that at this point in your life you are still not doing it. Instead of making an either or assumption, why not make an opportunity account or sinking fund for more than one thing. Or better yet, how about settle for a more affordable car, bank what you estimate the monthly payments would be, and eventually put that towards the car. YOu seem to be whining that if you pay cash for the car, you wont have cash for (fill in the blank). Know what, thats the real world. Save more money before you buy a car, or buy a less expensive car. I agree with the poster who said it seems to me youre digging a hole. Telling people that they shouldnt consider an occasional dinner out a treat, and then buying a new car on credit kind of makes no sense. And really, it sets a terrible example.

  53. Shevy says:

    Okay, Troy’s comment was hilarious. I just have to say that before I get serious about interest rates.

    I realize that 4% is not extremely high in the scheme of things. I, myself, have paid 18% for a loan BUT that was back in the 80’s when rates were insanely high! As I said before on the other post, if I can qualify to finance a PT Cruiser for my choice of 0% or 0.9% with my less than stellar credit, Trent should have been able to find and qualify for those rates too. If they aren’t available for the Prius because it’s such a popular car that there are no incentives then that cost should have been factored into the cost of the car when Trent was looking at the various possibilities.

    If he had taken advantage of a 0% or close to zero deal then keeping the money in savings makes sense. Otherwise he’s losing money, not a lot, but definitely losing it.

  54. Rueben says:

    Wow… I did not like this post at all. I am casual observer of your posts but have never posted a comment.

    The thing I disliked about it was the lack of financial creativity displayed.

    Firstly, on the purchase of the vehicle. I was recently in the exactly same situation where we bought a 2008 Hyundai Santa Fe. I had enough cash but did not want to take a cash hit for cashflow reasons.

    My solution was to offer a deal to the car salesman. I paid 1/3 upfront, 1/3 in 6months, and a final 1/3 in 12 months, interest free and no fees. He happily accepted the deal and swallowed fees etc.

    Secondly, the Magic Cards deal seems ridiculous. If there truly was a $8,500 profit to be made on buying and selling the cards, then surely you could make it happen. There are 50 ways to get $1,500 on short notice, eg 4% loan, Credit Card, Mum and Dad, Wage advance, pre-sale of packs, etc.

    This lack of creativity asks questions about the rest of the advice provided in this blog

  55. Creedfan says:

    To Barbara #50:

    What’s wrong with flipping WIIs? There is nothing wrong, legally or morally, with buying something at one price and then selling it for a higher price. What’s the problem?

  56. Charles Cohn says:

    One hooker that nobody so far has noticed is that interest on a savings account is taxable while interest on a consumer loan is not deductible. So a deal that involves borrowing to preserve a savings account is not as good as it seems.

    If Warren Buffett is correct and getting out of the recession requires inflation, then I will be harmed by getting out of the recession and I would rather see it continue indefinitely than suffer inflation.

  57. Michael says:

    Great comments. I have to agree with the posters that say you’re using bad math to justify debt. One part of my financial journey has been to raise my right hand and say, “I will never borrow money again!” Now that I live on that principle, I have found it much more difficult to do the “fuzzy” math that I used to use to justify debt. Join in, brother! No debt means you’re less likely to have to use that emergency fund. Cash is king!

  58. deRuiter says:

    Dear Friends, please help me understand, I must be missing something! Flipping Wii’s? Trent bought an item at a price which suited the seller, and sold at a higher price to a buyer who bought freely. This is called “doing business” or “capitalism.” This is how a person earns extra money. Trent then put the “profit” in his pocket, or in his car fund or emergency fund. WHAT IS WRONG WITH THIS? Banks do not lend money at no interest, the grocery store or hardware stores do not sell to customers at cost. WHAT IS WRONG WITH BUYING AN ITEM FROM SOMONE WHO WISHES TO SELL AND THEN SELLING IT AT A HIGHER PRICE TO SOMEONE WHO WISHES TO BUY IT? Socialism doesn’t work folks. The American system of capitalism is what works! Scalping Jennifer? If selling at a profit is scalping then when you go to sell your house Jennifer, if the market price is higher than when you bought it, theoretically you should then sell your house for the same amount which you paid to avoid “scalping.” I know our universities are hotbeds of Socialism / Leftist doctrine, BUT I DON’T SEE THE PROFESSORS TEACHING “CAPITALISM IS BAD” for FREE (no salary)! The professors want to be paid for their efforts (make a profit on their time.) Same thing with a business person: buy low, sell high, do volume. Trent, next time you come upon some business deal like the cards or Wii’s, CONTACT ME, I’LL ADVANCE THE CASH FOR THE DEAL, AND WE’LL SPLIT THE PROFIT 50 / 50. (I’m fuzzy as to what a Wii is, but that would not stop me from buying and selling them!)

  59. deRuiter says:

    Now as to buying a car with a loan, while keeping the purchase price in CDs Trent, this is a classic Dave Ramsey / Rick Edelman clash of ideas. Neither one is wrong, it depends upon one’s philosophy. I’d also consider that the 2% interest on the Cd is BEFORE TAXES and will be considerably less AFTER taxes are paid on this income. The money saved by not paying the 4% interest strikes me as AFTER TAX income, so it is actually saving, depending upon on’s tax bracket, worth perhaps

  60. deRuiter says:

    Sorry! Comment above posted before it was done! The money saved on interest by buying car outright is perhaps 6% (not 4%) depending upon one’s tax bracket. To make a car payment of $200. (for example) a person might have to earn as much as $275. to get the $200. Trent mentioned you do have to keep in mind “opportunity cost” which means that if the money is spent on the car, and then someone offers you the cards or Wii’s which could be resold for a profit, you are unable to use the money paid for the car for the new business. On the other hand, I’d dip into the emergency fund for the cards and Wii’s and expand the emergency fund that way. I love these discussions! Trent, and all you commenters make me think and give me new ideas!

  61. JonFrance says:

    Clearly this is in the end a case of borrowing money to have it in the emergency fund, which does on the face of it seem a little strange, as others have pointed out.

    The nuance is that as lines of credit go, some give better terms than others, and the low rate on the auto loan is better than what he’s likely to get if he needs to borrow for a real emergency because he has no emergency fund.

    That is, if someone in a similar situation skips the car loan here because he can pay cash, but depletes his emergency fund in doing so, then in six months when some major unforseen emergency arises, he won’t be able to borrow $10,000 at 4% because no one lends cash that cheap–he’ll probably end up having to put it on a credit card and pay double-digit interest.

    Taking the car loan instead, then, is a smart move if you are betting that you will need to go into debt anyway, since it’s grabbing an opportunity to get far better terms. Just be sure to keep the money saved and earning as much interest as possible until it’s needed!

  62. Dave says:

    I had something close to this, when I got married my mother gave me a $5000 5 year CD for a down payment on a house, three years later found a house, mortgage was 6% CD was paying 8%

  63. SteveJ says:

    I’m confused. With all the backlash against the car loan idea, I wonder, what’s the point of insurance? Why do we pay money that’s essentially lost, because lets face it, nothing ever goes wrong ;) I mean, I’ve paid tens of thousands of dollars in auto insurance and never made a claim. Guess that was pretty dumb, huh? I’ll cancel my coverage today, I’m glad you guys helped me see the light.

    Far too often I feel we go to extremes with ideas.

    And for those that are on arguing the practice what you preach…I know a number of clergymen that live comfortably while preaching to their constituents to be charitable. With the number of homeless on the streets, you’d think the intersections would be backed up as these pillars of the community give all their worldly possessions to those less fortunate. Charity is also a good idea, but those that talk the loudest understand what their limits are.

  64. Trent– One more thought, by effectively having the car note “funded” you can safely build your credit score up . . .

  65. Jack says:

    Using Trent’s ideas over the last couple of years we are in the position where we live on my income and my wife’s income is a monthly slush fund which is used for various things, including saving for major items. A while ago we bought new furniture, we had the money in savings from the slush fund however we qualified for 1 1/2 year no interest credit, which we took. I then took the amount owed, divided by 12 and every month put that amount in our HSBC savings account. At the end of the year the furniture was paid off, I had a years worth of savings interest, from not using the cash to begin with, and the amount put in the savings through the year earned me more interest. We too just bought a Prius (picking it up tonight) and are doing a similar process, a loan at a very good rate (Trent’s ideas has produced a very good credit score for us), and will be using part of the slush fund to pay it off early. We just finished this process with another car, paying off a 3 year loan in 10 months. By using our money this way it opens up lots of possibilities to take advantage of good deals as Trent has explained. Trent is right on in his thinking and is very clear that what worked for him may not work for everybody as all the comments show!!

  66. plonkee says:

    I am missing the ethical wrong-ness of the Wii reselling, sounds like exploiting an inefficient market to me. I suspect the work might have involved waiting for shipping etc – such opportunities do not last long usually.

  67. Chris H. says:

    Cash seems to be king in this economy, so I think the decision is a good one. I don’t buy a lot of stock, but the one thing I bought earlier this year has gone up 31% to date. Even after fees, that’s a far greater return than what paying a car off in-full would be.

  68. J says:

    @SteveJ — the point of insurance is very different from what Trent is doing here. By keeping his cash in the bank AND having a loan that’s not inherently bad — especially if the interest rates are comparable. Where the “bad” starts to happen is that Trent isn’t thinking of the money as “gone” — he’s thinking of it as some annex to his emergency fund, or a way to take advantage of “exceptional opportunities” — so there’s a less than zero chance that that cash will actually back the loan.

    Keep in mind that your auto insurance premium is “worth” considerably more than the premium. In my case, the policy not only covers repairs to my car if I hit something, but also if an uninsured motorist hits me, repairs to the other car if I hit it, property damage, protection from lawsuits, etc.

    For a concrete example, let’s say I drive a $1000 beater and have cash in the bank to buy another one if this one is wrecked. That covers my vehicle replacement. But if I hit some guy in a Porsche hard enough to total it and the lawyer driving it sues me for his medical bills, my insurance company pays up. Without insurance, the lawyer comes after me and my assets. In Trent’s case, if he depletes the savings he’s backing the loan with because of an “emergency”, then he’s going right down the debt hole he dug previously.

  69. Cash, live savings, gives you options not available to those without either.

  70. Chris O'Meally says:

    Suze Orman has changed her advice to pay down debt for the short term. She’s saying “emergency fund, emergency fund,” because credit card companies are closing out accounts left and right once people pay off their cards. So you use your savings to pay off your debt and you have neither the cushion of the savings nor the option of using a credit card to pay for something unexpected that comes up – like car or home repairs.

    I bought a used car 2-1/2 years ago – my 1995 Honda Civic conked out on me 3x in the prior year and although I had planned to save for a new car (or at least to put a healthy downpayment on one), I found myself in the position of needing a new car NOW. I wound up buying a used car and finding that interest rates for used car loans hovered around 8.5%. I received checks in the mail for 4.99% interest on a credit card on which I had a $0 balance. For the life of the debt. I bought the car for “cash,” which also improved my bargaining position. Yes, there was a $75 charge at the time but I decided I was still coming out ahead.

    Then a year later, I received a balance transfer offer for 2.99%, same deal, different company. Card also had a $0 balance. No transfer fee. I now have a car loan for 2.99%. The card sits in a drawer and isn’t being used. I’m paying on average more than I’d pay if I had a loan set up through the dealer – but when I can’t pay that much, I pay less (but always considerably over the minimum).

  71. money market trader says:

    flipping wii’s sounds good to me. kinda like nintendo buys them from a chinese factory for $3, sells them to best buy for $100. best buy in turn sells them to your kid at $200. sounds like flipping to me (aka capitalism).

  72. Ian P. says:

    My problem with the 4%, is that Trent could have bought a domestic car, Chevy, Ford or Chrysler, and got 0% financing.

  73. Bri says:

    Can you address the morality of buying up popular items at a lower price and then “flipping” them in order to make money? If you did that sort of thing with event tickets, then you’d just be a scalper, so how is doing it with a Wii any different?

  74. Precious says:

    I disagree with you 100%! Debt is never good especially when taken on an item that depreciates!

    I have been purchasing cars for years with cash since I put a certain amount away every month to buy a replacement car. That money is separate from an emergency fund. We always negotiate the lowest price for a new car and then let them know we are paying cash and want an even lower cash price. We almost always get it because it costs the dealer for all the paperwork. How do you know that you wouldn’t have been able to negotiate a lower price by paying cash?

    You may be justifying going into debt to yourself but you have not convinced me. If I did not have an emergency fund and a car fund, I would have made sure that I had 6-8 months of savings that I did not touch of that emergency money and used
    the rest to buy a used car that I could afford.

  75. Nick says:

    It’s posts like this that I wish Trent replied to comments. Not so much to defend himself or anything, but just to highlight important comments.

    It’s tough to wade through all of them.

    Trent, I know there is a wordpress plugin where you can highlight the best comments. That would be awesome if you started using it. I’m sure there are a lot of very thoughtful, relevant comments here that people took some time to write. It would be cool if you could highlight them.

  76. Tony says:

    Debt is bad, period. You make some decent points, but it sounds like you’re really reaching to justify a decision that goes against everything you preach, IMO.

  77. Karen says:

    Not sure if anyone else mentioned this since I did not read all the comments. It is good to have some credit so when companies look at your credit score you can get a good job, etc. Paying cash for everything gives you no credit scores and insurance companies and jobs check it.

  78. didi says:

    @ stevej

    Having worked in insurance for more that 10 years, before you cancel that insurance please think about it.. I have known many that decided to “opt” out and THEN had an accident where they are responsible.. nothing like injuring a bread winner of family where you are liable. How much do you think they will sue you for? I’m shocked that in the land of “SUE THY NEIGHBOR” that you would even think of getting rid of your insurance… better not to own a car or drive at all if it bothers you that much.

    As for Trent.. he’s a big boy and can make his own decisions about whether to have a loan or not. If anyone doesn’t like it… oh well.

    Lastly, as for the problem people may have with him buying an item then reselling it for more.. hello? That is THE backbone of a capitalist society…and the problem is? This happens every day and everytime you buy anything. Someone has bought it or made it for less than what you are paying for it and someone is making money.

    Seriously people.

  79. didi says:

    @stevej

    if you were being sarcastic.. sorry my bad lol.. I think you see the point already

  80. Des says:

    As others have said, keeping cash when you have debt IS NO DIFFERENT than taking out a loan to fund your savings. That doesn’t make it necessarily bad, but let’s just call it what it is. IMHO, this only makes sense if you’re earning MORE than you’re paying in interest. In this case, even factoring in taxes, you’re not.

  81. SteveJ says:

    @J,

    I do understand the worth of insurance. I’m just saying based on a very small sample size (me), I’ve never used it. Throwing interest at a bank is no different from a practical standpoint, in both cases I’m paying to keep my options open. I could self-cover (maybe, I don’t know state law here), but I’ll pay for flexibility. I’m increasing my periodic expenses rather than making a costly one-time (hopefully) expenditure.

    Doublecounting is a good point, and I loved Troy’s comment. Let’s try on a thought experiment:

    Steve has 30K in an emergency fund and 20K for a Prius. Steve has $500 left over each month after paying his other expenses.

    a. Buy prius with cash. 30K in bank. Prius in driveway. Incur 45K expense 6 months later. So 33K in the bank, and in this problem space Steve can sell the Prius for 16K. End result, 4K in bank, no car, no debt.

    b. Take out loan on Prius. Assume payments of $400 month. Same 45K expense 6 months later. So 33K in savings, 17.6K in car fund. End result, 5.6K in bank, car in driveway, 19K in debt.

    For me, I’m fine with option a. I can buy a beater for $500 and spend my weekends working on it and being stranded is not the end of the world. For my wife, option b is the better choice, my marriage is much stabler if she’s not dealing with car issues on a daily basis. I’m assuming in both cases there is still the ability to make the car payment and still pay my other bills, so my emergency fund is refilling slowly. Now the interesting thing to me is that I’m ok with that scenario, but I’d be upset if someone bought a car once they’ve landed at the end of my thought experiment (with only 4K in the bank). I’m not sure what that means, I guess being able to afford something is good enough for my comfort level when I make a decision, since I can’t predict, only hedge.

    One last rambling point. Saving is addictive. I’ve got a few thousand set aside to pay off the new windows I put in. I’ve got 0 interest 0 payments for 12 months, so I took advantage of that as an opportunity to earn some interest on the money. But I’m going to be sad the day that comes due because it cuts my account balance down significantly. No change in net worth, but it’s hard to stop hoarding. I imagine I’ll have the same problem when it comes time to take my car savings fund and plop it down for a car.

  82. tw says:

    My thoughts (for what they are worth):

    – The Wii thing is not an issue, as someone else stated, that is how capitalism works. If you don’t like it then don’t buy a Wii from anyone but a store. It might be a Wii bundle since they are still keeping the supply low, you will pay more or a bundle, that means more revenue for the stores and Nintendo, seems a bit scandalous doesn’t it? They are doing what they can to increase revenue, so are people who are re-sellers. What is the stock market but a chance for people to buy something cheap and sell it at a higher cost?

    – Buying a car with debt, bad on many levels. The car depreciates in value so even if you pay it off early and save on interest payments it is still worth less than what you paid for it (maybe not sooo much so with a prius but what is the market going to be like if 4 years when newer models are out and solar energy has taken off? Will they still have high resell values.)

    I agree with the other posters, if you need a car and you are debt free, is that car really worth going back into debt? If you just have to have something for work etc and you don’t have the cash, then yes, I’d support debt.

    If you can wait another year or more with what you have and save up then why not do that? Why “talk yourself into debt” when you don’t have too? I think that leads down a slippery slope. You may talk yourself into a line of credit for accessories to that car or talk yourself into using a credit card to buy accessories. Studies have shown that once you make that first decision to buy then it becomes easier to continue the buying spree. For instance, your are in Best buy and you decide to buy the big screen tv, once you make that first decision it’s a lot easier to buy the cables and the new Blue Ray player etc……

    I think the same thing applies here, once you decide to go in debt for one thing you start telling yourself that it’s “OK” it’s “smart financially” to take on debt but what you are really doing is laying the groundwork to go back to over consuming through the use of debt.

    Thanks for the blog and for sharing, your openness allows us to have these conversations, conversations that are not occurring in too many places.

    TW

  83. Des says:

    @SteveJ

    Your hypothetical man does not have to sell his Prius if there is a 45k emergency. He can take a loan out on it at that time if need be. So option “A” would result in: 5.6K in bank, car in driveway, 13.6k in debt. Tit for tat, that’s better than option “B” by 5.4k.

  84. SteveJ says:

    @Des

    Great point! Hadn’t thought of that.

  85. Kenny says:

    I think one thing that’s missing here is what the purchase price of the car in cash would have been.

    With all the ‘low interest’ car loans (esp the 0-0.9% loans) the cost of that lower rate would be added into the purchase price. They’re not going to lose money lending it to you on a depreciating asset.

    If you’d looked up the factory invoice price with all the dealer rebates (might cost $30 online), you can then walk in and offer 5% more then their cost.

    This completely changes the 1% difference in interest per month.

  86. wanzman says:

    @ Des & SteveJ:

    Would you honestly consider a cash out loan on an automobile a likely option at this juncture?

    That’s laughable. Just try to find a financial institution to bite on that.

    Best case scenario you get a loan in the 10% to 12% range.

  87. kitty says:

    I admit, I have no idea how much money Trent has or if he can afford to play arbitrage with this money believing he’ll get more after taxes.

    I think most posters who criticize Trent come from position of not having enough money in savings or are in debt. It’s difficult for them to imagine how can someone with money borrow when they can just pay cash. It’s probably a good thing because someone who doesn’t have enough money shouldn’t borrow to buy something they cannot afford or even spend large part of their savings on something they don’t need. Nor should someone with insufficient liquid savings risk money he or she can’t afford to lose.

    However, when you have a nice amount of savings, when you are sure you can afford premiums even if you lose a job, there is nothing wrong in taking a loan when you think it could bring you more money. The loans can be part of an investment strategy like, for example, trading stocks on margin or shorting stocks or even borrowing to open a business. Now trading stocks on margin is not something I’d do, and I saw people get burned by the practice, but as long as you are aware of a risks and can afford to lose money, there is nothing wrong with it. You are risking money every time you invest in stocks, as we all found out.

    Sure, at this point in time CDs are paying much less than 4% especially if you consider taxes. There is little inflation now, there is a risk of deflation near term, but as soon as economy starts to recover, all the money that are being printed now may come back to haunt us. The government will need to take this money out of circulation quickly to prevent runaway inflation. I.e. they will have to raise interest rates. If they don’t do it, we’ll end up with huge inflation. We may also end up with inflation and higher interest rates if Chinese start selling our government’s bonds or if fewer people start buying government bonds. Either way at some point interest rates will go up.

    I don’t know what we’ll happen with the economy nor do I know how soon we’ll have higher interest rates. So yes, taking a 4% loan now believing in higher interest rates 2 years from now carries some risk – what if we get 10-year deflation? – but so is buying gold or any type of investment for inflation. As with any investment, you should be able to afford the losses due to your bad decision, but as long as you have money to repay the loan in full at any point, the risk is not that great.

    @Faculties @ 5:11 pm March 25th, 2009 (comment #30)

    You are looking at current rate. But (if you have money) you need to consider two possibilities:
    1) you may have “legacy” CDs that you locked for over 5% and you don’t want to break them in to buy a car
    2) see my comment about inflation

    @wanzman @ 7:03 pm March 25th, 2009 (comment #35)
    “if the whole point of saving for something is to avoid financing it, why save up, then still finance?”

    Wanzman, I have a near seven-digit net worth with over 100K in cash/CDs and no debt, but if I needed or wanted to buy a new 18K car now, I’d I would consider taking a low interest loan as a possible hedge for future inflation.
    I also have friends whose net worth is around 3-4 million, who have 900K in only one of their investment, non-retirement accounts. They have other investments too as well as cash. They took 300K mortgage on their vacation home and they also took a loan for their new Honda Civic Hybrid. Their reason – they strongly believe in future inflation. I don’t necessarily agree with them about inflation – I just don’t know, but given that these people moved all their money out of stocks in 2006 and also 2001; bought gold when it was still under $600 an ounce, I don’t think they are ignorant or stupid.

  88. J says:

    @SteveJ

    The thing about insurance is, you never know WHEN you are going to use it, so I think there’s a fundamental difference in paying back a debt and paying insurance. You know exactly to the cent what you are getting into with a loan. Just because you haven’t used it doesn’t mean it’s the same as debt.

    Your analysis also neglects the flip-side of the interest thing: Your car fund could be making you money while you are growing it. You deplete it to pay for a car, but it grows back. You never have to pay anyone for the money, it pays you.

    But then again, I’m digging out of a debt hole my wife and I dug based on assumptions about the future. Perhaps if you have the discipline to keep your hedge money hedged this kind of thing may work — but for many, many people that hedge money to cover the loan would get frittered away somehow.

    I really like the simplicity of paid-for stuff. No one owns it but me, and I have a lot more freedom in my budgeting since I don’t have to devote a monthly chunk of cash flow to paying off a debt.

  89. Virgil says:

    I can see many of the sheeple (sheep + people) who posted here bought the justification for going in debt.

    I still disagree with it.

    I also enjoyed listening to some of the comments on “building your credit” and “you need credit”. If you can’t learn to become self-sufficient and stop letting the bank be your provider, and instead, YOU become your provider, you’ll never move out of middle class – at least not to the extent as someone who has the integrity to say, “I’m not going into debt, no ifs ands or buts about it!”

    People being so accepting of debt tells me two things: it’s easy for them to be judgmental when they’re judging someone else’s bad decisions and choosing to ignore their own; and, now I know why most people struggle with debt and never completely eliminate it their entire lives.

    I may be unwavering on this issue, but my philosophy is, if you can’t afford to pay for it, you can’t afford it. It’s not worth 3-5 years of bondage for me to buy a car on credit.

  90. Diane says:

    I totally agree with your decision, given the present economic circumstances.

    The fact is, you DO have the money to pay cash for the car, and you have the ability to take that cash & pay off the loan, if needed.

    I am currently holding cash in savings that I was using to pay on the principal of my mortgage. I have an emergency fund, but at this point I figure bigger is better. I can always use the savings to pay down the principal later, but in the meantime I have an additional cushion in my e-fund.

    I don’t believe in debt (having been there & done that with a painful recovery) but I DO take advantage of low interest or NO interest offers, while keeping the money in my savings that could have been used for the purchase.

    I will say that had the interest been higher than 4% my answer would likely be different~!

  91. Des says:

    @wanzman

    “Would you honestly consider a cash out loan on an automobile a likely option at this juncture?

    That’s laughable. Just try to find a financial institution to bite on that.

    Best case scenario you get a loan in the 10% to 12% range.”

    I work for a financial institution. We do this all the time. It doesn’t matter why you’re taking a loan out on your car. It only matters that your car is worth what you’re taking out. The rate is the same as for a car purchase.

    And you’re right, the IDEA of taking a loan out on your car to put money in the bank is laughable. That’s exactly my point. That’s what Trent is doing here.

  92. wanzman says:

    @ Des

    I work for a financial institution as well…

    Perhaps I should have said…

    “Just try to find a SOLVENT financial institution to bite on that.”

    I would assume a bank making those kind of loans would most certainly be owned (as least some %) by the taxpayers at this moment, no?

    You should realize that a car repossessed is worth nothing to a bank.

    “It only matters that your car is worth what you’re taking out.”

    If I were analyzing a car cash out loan, I would assume the car (any car) was worth nothing.

    But then again, what do I know. My bank does not do car cash out loans. Any my bank just happens to be the largest bank in the US to REJECT THE FEDERAL BAILOUT MONEY…..we must being looking at something correctly.

  93. lindsay says:

    I think I generally agree with Trent on this, but I didn’t read any mention in his article about the taxes he has to pay on the interest he earns on the money he leaves invested, rather than paying off the full price of the car. It wouldn’t be a lot of tax, but I think it should still be in the calculations, or am I missing something there?

  94. Troy says:

    The most profitable profession in the history of the world is banking. If you want to manage your finances the correct way, manage them like a bank.

    No bank in the history of the world ever became profitable by borrowing at a high rate and lending at a lower one. Not one.

    Yet that is the basis of the reasoning behind this post and the agreement with it.

    Being in debt is debatable. I disagree with it, but it is debatable. Investing at 3% pre tax and borrowing at 4% after tax is financially backward and not debatable. No bank would do that.

    This financial move that Trent did is not making him money. It is costing him money.

    It really is that simple. Regardless of the opinion or comfort level with cash, the effective similarity of borrowing on a paid for asset to replenish an emergency fund, or arbitration to capture possible future rates, this example in this situation is poor financial management.

    The simple fact is low interest debt arbitrage only works with a equal or lesser risk higher interest return. That is NOT what exists here.

    Spin it all you want. Agree with it all you want. Fuzzy math it all you want. It is still wrong.

  95. ChrisD says:

    Another point is that Trent said that the new Prius was worth it IN THE LONG RUN. Suggesting, that buying a new car now as opposed to buying two old cars over the same time period will save money (covering the 4% interest), but that they can’t actually afford it now.
    This is analogous to when Terry Pratchett said that the rich spend less than the poor. They would spend 10x as much on a pair of boots that would then last 20x as long. Thus borrowing to buy the 10x as expensive shoes, then paying it off in 10 installments over the years, and an extra few installments to cover interest, still leaves you in profit for the remaining lifetime of the boots. i.e. paying interest on a ‘too expensive’ car my be worth it in terms of saved maintenance and greater fuel efficiency. Plus I assume Trent will overpay the car loan and only have that 4% debt for a shortish time.

  96. Saagar says:

    You always keep forgetting the taxes you have to pay on the CD/Savings account. So unless you have huge deductions, out of the 3% you make on a CD/Savings you actually “realize” probably 2%. So the difference is in fact more than 2% that you mentioned..

  97. almost there says:

    Ian P.#66, you need to read the original post on Why Trent bought the Prius. More bang for the buck (cheapest cost to own). I can see why one borrows vs using cash. I just borrowed 21K (share secured earning .4% and can go higher when rates rise) at 2.4% fixed for 10 years. Why? Because the value of the money when paid back is less than the amount borrowed now when one considers inflation. I had a 2.99% for life of loan cc debt but min payments were 2% of balance. This way I pay less than $200 per month. No brainer.

  98. Des says:

    @wanzman

    I should have been more specific. I work for a credit union. No, we have not received (or needed) bailout money. Maybe you should call around and do some research before resorting to insults to make your point. There are many institutions that will finance a car you already own.

    A vehicle loan is a secured loan, it makes no difference if it is for a purchase or refinance. Both are equally risky, both have the same collateral, same driver, same purpose.

  99. wanzman says:

    @ Des

    I was almost certain you worked for a credit union. I must admit, most are financially sound….but they compete in a vastly different competitive landscape….and also do not pay taxes.

    Check in to what credit unions were originally designed to do….compared to what they actually do today.

    They were designed to serve groups of people with a common bond (same employer, for instance). But today, anyone who lives in a city, ever went to that city, has an aunt in that city, has a cat who’s mother’s aunt once dreamed of that city etc. can qualify for membership in that credit union. It is a joke, really.

    Plus credit unions don’t just serve individuals anymore…they compete for commercial business…not at all what they were designed to do.

    I am proud to work for a sound financial institution with sound lending practices…and an institution that actually pays income taxes.

  100. wanzman says:

    @ Des

    And I disagree about car purchase loans and car cash out loans being equally as risky.

    The need for an auto loan only demonstrates that the person was not able to save up $15 to $20K…pretty much on par with most people in the US.

    A car cash out loan indicates that the person at one point was very financially sound (was able to save up $15 to $20k or more in cash). The need for a cash out indicates a severely declining financial condition, or the tendency to overspend and need backup liquidity.

    I am waiting for the day when we hear about people cash out financing a washing machine, lawn mower or whatever else it is people can finance these days…

    “Yes, I would like to refinance my Dell computer and cash out.”

    Who knows.

    Honestly, I think taking cash out of a house is risky…but an auto, I honestly have never heard of this until this blog post. What could be next,

    Has anyone ever cash out refinanced other consumer items?

  101. Mike says:

    I agree, having cash on hand is very advantageous.

    Last summer, one local couple was moving away from our town. They had their car listed for $2000. This was a Friday, and they were leaving in 3 days on the Monday.

    We took the car for a test drive, and liked it. We went to the bank and withdrew the cash. We then went to pay for it and by the time the seller was home the banks had closed for the weekend. The couple hummed and hawed about selling it, since the banks were closed and couldn’t process the cheque by the time they left. I pulled out the cash, and his eyes brightened up and we got the car.

    A few days later someone else who was interested in the car, who didn’t have the cash and was working to get a fast loan from the bank, was angry with us because we got the car and they didn’t. Sorry, but it’s not our fault. Blame the seller if anyone.

  102. almost there says:

    wanzman, yes, I have cashed out home equity loans for lower interest debt to pay off cars, cc and other things. I have always cashed out debt for lower interest debt. Perhaps you are not remembering that money is fungible.

    fungible:

    adjective
    1. of goods or commodities; freely exchangeable for or replaceable by another of like nature or kind in the satisfaction of an obligation

    noun
    1. a commodity that is freely interchangeable with another in satisfying an obligation.

    And, whenever one takes loans to pay off higher interest loans it can be the sound thing to do.

  103. wanzman says:

    @ almost there:

    Trading high interest credit card or card debt for lower interest HELOC debt might seem like a good idea..

    But what if…

    You default on the HELOC….then they can take your house.

    If you default on an auto loan, they can take there…ok. If you default on a credit card…they can’t really do anything.

    Trading unsecured debt for debt secured by your house is dangerous at best…and disastrous at worst.

    “And, whenever one takes loans to pay off higher interest loans it can be the sound thing to do.”

    Here is another idea, instead of trading debt for debt, how about just working to pay them off completely.

    People spend so much time shuffling their debt around….if I could get a lower rate I could do x…or if I refinanced I could do x…yea, yea, the truth of the matter is, it’s still debt.

    If you owe $40 grand at 10% and refince your house at 4%, YOU STILL OWE $40 grand!!! No matter how sweet of a rate you got….you still owe it.

  104. wanzman says:

    You all might be surprised from my comments, but…

    As I mentioned I work for a bank. I would actually prefer that everyone have absolutely as much debt as they could afford to service each month. It’s better for my bank, and in turn, better for me.

    I know how much money debt wastes though…but I do not feel sorry for people. They have just as much opportunity to learn about money and finanace as I do.

    They either choose not to learn, or they choose to ignore what they have learned in order to pursue the lifestyle they have always dreamed about.

    They try to obtain in 5 years what it took their parents a lifetime to obtain.

  105. almost there says:

    wanzman, I agree debt is evil most times. But if one uses it wisely it can save one money. I always have cash in reserve to pay off any debt I incure. I could pay off all my debts and still have cash left over. I learned as an enlisted and officer navyman averaging income of 10K per year over 21 years how to be frugal and not get caught short. One must just satisfy the needs and decide if the wants justify the expense. Please explain how low interest rate debt below inflation is not worth taking when the money paid back in the future is worth less than what was borrowed.

  106. Nelson says:

    @ Virgil comment #78- Dude, you nailed it.

    I love how this doucher has justified going into debt. This is the same guy who counts his toilet paper sheets, makes his own laundry detergent, and who won’t let anyone go to starbucks or out for lunch because all those things cost precious money. Even though I think those arguments are incredibly unrealistic, I’ll admit that from a purely dollar and cent view, they make sense.

    But then Trent goes and finances a new car, justifying it with some crap about having money around for “opportunity costs” and other related b.s. The fact remains that he’s paying interest every single day to finance this car. This is personal finance 101- DON’T PAY INTEREST FOR A LIABILITY!

    As for having the extra cash on hand to have an extra emergency fund, that’s just garbage too. How much of an emergency fund do you need? Assuming the car cost 30k, do you really need an emergency fund of 30k PLUS whatever else you’ve set aside? How much do you spend every month?

    Besides, isn’t the easier decision to take the GUARANTEED return of 4% by paying off the car? Remember, this 4% is paid for by after tax dollars, so the actual return approaches the 5% range. Also note that the 2.5% that can be earned by savings is taxable, and therefore has an after tax return in the 2% range. The spread isn’t 2%, it’s more like 3%. That’s 50% more for all of you math challenged readers.

    3% of 30k is $900 a year! I saved you $900 in 2 minutes! You make your own laundry detergent to save some stupid small amount of money. The hypocrisy of the situation boggles the mind.

    As for the credit report crap, let’s kill that garbage right now. I have one (count it, one!) credit card and my fico score is 792. You know what really helps your credit? Paying your bills on time. People overcomplicate credit reports big time.

    To borrow a line from the Simpsons- I can’t believe you people are swallowing this tripe.

  107. Diane says:

    Whoa – All I can say is this certainly is a hot-button issue! Loads of response…

    Whether you agree with Trent’s decision or not, discussion is good and hearing other people’s views is educational.

    Still, it would be better if everyone could maintain a bit of respect in expressing their opinions…

  108. Zannie says:

    Dude, people are uptight.

    Look–financing the car is a reversible decision. If one day Trent and his wife decide that they want to be rid of the debt, then they take that vehicle savings account of theirs and they pay the rest of the loan off.

    Personally I am debt-free and generally cringe at the idea of loans, but this scenario honestly doesn’t bother me at all. As long as they don’t go underwater on it and always retain enough in their vehicle savings account that they could pay it off if they decided it was best to, big friggin’ deal.

    I think perhaps the people who think this decision will be his utter ruin are the people who are still deeply in debt and can’t see past the evils it has brought to their lives. The reason debt is slavery is because it reduces the choices you have available to you–but that’s only if you cannot meet the obligation. Trent and his wife have the money with which to meet the obligation, so it’s not slavery to them. It may be a different choice than you think you would make if you had the cash, but that doesn’t make it a harbinger of disaster.

    But I do still want to know where this 3% interest rate on savings comes from.

  109. Stacey says:

    So, do you hear that Trent? Zannie and I want to know where you’re getting the 3%. Please add our question to your next mailbag. Thanks!

  110. Sharon says:

    Folks, Trent has BOTH an emergency fund AND a car savings fund. He has the money to cover the car and the emergencies, but wants some in reserve to pay for a replacement for a dying truck.

    Lay off, ok? He makes decisions for himself, not for you. You aren’t obligated to make the same decision. And Virgil, calling Trent a “doucher” is a) offensive and b) uncalled for. When you do that, you make YOU look like an immature person incapable of rational and reasonable discourse.

  111. wanzman says:

    @ Sharon:

    But he also chooses to write about his decisions in detail on a public blog with a comments feature. The point of a blog is not to write about something and have 100 robots immediately write a comment agreeing with you.

    The point is to learn from different perspectives.

    “Folks, Trent has BOTH an emergency fund AND a car savings fund. He has the money to cover the car and the emergencies, but wants some in reserve to pay for a replacement for a dying truck.”

    You are wrong. If he had enough car savings, he would have paid for this car, still had an emergency fund, and still been able to meet future needs.

    Based upon what we have all read here, it seems that he had car savings to replace his truck, but not pay for this prius, which is the vehicle he just pulled the trigger on.

    Lay off, ok?

  112. reulte says:

    What a diatribe of discordant voices! And how very interesting, too.

    I’m debt-free and have a general fund (ie for future house purchase, vacations, expensive whatevers, cars and additional emergency if requred), an emergency fund, a savings accout as well as enough credit on those empty credit cards to buy anything I need.

    Under the circumstances of the economy as they now stand I can fully understand why Trent purchased (1) new and (2) financed. I also believe he has explained it sufficiently clearly. In fact, he has explained it to my satisfaction that I am likely to do the same thing later this year (when I will be in the car market) if conditions are similiar. In fact, he may have saved me hours of my own research.

    Wanzman and other people who work at a bank — I don’t work at a bank and your conversation is over my head even as conversationally as you are writing (no, please don’t explain further– I get the gist – “debt-evil, Trent-bad”) but his point is that with the cash he didn’t spend on the vehicle (using a loan, instead) he has the freedom to do with that cash whatever he needs/wants to do … including pay off the loan instantly or incrementally if the future is not as expected. He is paying (in interest) a fee he feels is fair for having the cash in hand — which is more valuable to him. He has a schedule of payments and how it (probably) affects each monthly budget he sets up. Further, its not as if he plans to spend the money he didn’t use on the car on an immediate first-class trip to Paris with a side jaunt thru Spain. I suspect Trent will continue on his frugal way, making decisions based, not on some dogmatic approach to personal finance, but with careful consideration and thought.

    Its what I like best about TheSimpleDollar.

  113. Informer says:

    I didn’t have time to read every comment, so forgive if mentioned, but there’s a key reason *not* to pay a car in full: it’s a depreciating asset. Yes, it’s good to have the money out there, earning interest and at the ready for hot financial prospects. But you miss the much more obvious reality – you put your $28k into that car and it’s all gone and depreciating, plus you are paying that interest on the loan. Why do this? First, I’d not buy the car brand-spanking new. You can buy a certified used or a nearly new vehicle with some depreciation in there. If you have to have new, try fleet pricing via outlets like Costco. But to plunk down the full bank on it smells funny to me. Yes, you could earn money on it. But think, will you be driving it in five years – a Prius? I doubt it. Something new will be out there. Think 3 years, sell, recapture what you can of its value and move along to the next ‘nused’ vehicle.

  114. Erin says:

    I used to think this way. But now I think that the more monthly payments you have, the fewer choices you have in life when you want to make a chance. Yes, this car savings could be viewed as a supplemental emergency fund. But say that something serious happens, say your wife gets laid off, and can’t get a new job for quite a long time. You go through your emergency fund, your “supplemental” fund, and then you are still left with $x a month in a car payment. If you hadn’t financed the car you wouldn’t have to worry about that car payment.

    I can see your reasoning, but I still think you would have been better off not incurring debt.

  115. Dariaclone says:

    I am late to follow this story and thread, but the way I look at it is that “something debt is the less risky option.”

    We did a similar thing earlier this year. I just like having extra cash on hand, especially in this economy.

    Smart choice.

  116. Sharon says:

    Wanzman, try reading the original post. Trent has BOTH funds.

  117. Sharon says:

    I mean the original post on buying the Prius in the first place.

  118. Lynne says:

    While I can appreciate the reasons some of you have on the loan option, I tend to operate on the “can’t stand having debt over my head” mode. We didn’t have a lot when I was growing up and being in debt is particularly scary for me. My husband and I were overwhelmed when we got out of college and started a business. I hated being that far in debt and I never want to feel like that again! Now, I make an extra monthly payment on the house debt. We never carry a balance on a credit card, yet we use 2. We worked hard on paying off our cars and worked our way up to new ones. While some think there are good reasons for taking out a loan, I just sleep better at night knowing that ours are paid. To each his own, but this is me. If my emergency fund is not enough, I can sell or take out a loan on them at such a time so that I won’t have to touch the home equity. I have an asset and extra money sitting in the bank is not a temptation.

  119. suzanne says:

    Debt= principal payment and interest payment
    Interest payment= money you are “shredding”

    I believe interest payments are in order if you are purchasing
    something that appreciates in value. A vehicle is not an asset
    as is it falls in value as time goes on.

  120. Karen says:

    I feel as though financing items that depreciate is a bad idea. If it depletes your savings, then I guess you have no choice but to finance the auto. At least you bought a reliable brand that should hold some of it’s value.

  121. Janet says:

    I do not agree with any argument that going into debt on a new car is a good idea if you do not have to. My husband and I recently bought a newer vehicle. Our van was paid off but the parts were getting hard to find and we decided to upgrade. We went around and found a 2003 Dodge Caravan with only 100,000 km (about 55,000 miles) on it and was in perfect condition. We negotiated it to $6,500.00 (about 3,000 off). We then wrote a cheque on it and bought it. In the meantime, we arranged with the Bank to take the money from our savings and arranged a pay-back of $300.00 a month on it (the same as if we had borrowed the Bank’s money). The benefits are that first you pay back any money you took from savings so the money is replenished, second every time you put money back you are again earning rather than paying interest on it, and third if you do get into a tight situation with extra bills, there is one payment you don’t have to make and there is credit available if you absolutely have to have emergency funds available. Another benefit too is that if my husband gets sick and is unable to work that is a payment we will never have to worry about.

  122. The Bear says:

    Excellent dialogue, everyone! Being able to take part in debates like this is what makes America great.

    Based on my philosophy of handling money (which many of you will recognize as being closely aligned with Dave Ramsey), Trent made the following errors in judgment by going into debt to purchase a new vehicle:

    1) Purchasing a new vehicle. Based on the average depreciation of a new vehicle the money wasted is like rolling down your window and throwing out a $100 bill every week. Used cars that are 3-5 years in age are your best bet. I purchased a used Taurus in that range six years ago for $2,000 and have driven it to/from work 40 miles a day with no added expenses other than regular maintenance and new tires. During that time I’ve taken the $300/month average vehicle payment and saved it towards my next vehicle purchase. Based on the large hit against your net worth that a new vehicle causes, I don’t believe anyone should purchase a new vehicle unless they have at least a million dollars cash in the bank.

    2) Going against God’s advice about debt – many places in scripture (ie-Proverbs 22:7) God advises against going into debt. Not that it’s a sin, but it’s just good solid advice. God is a very smart being, smarter than the rest of the world put together and then some. Heed his advice and you will prosper and have financial peace like no other!

    Trent, thank you for being wiling to share.

  123. vit quay says:

    Hello! I’ve been following your blog for a long time now and finally got the
    courage to go ahead and give you a shout out from
    Houston Tx! Just wanted to mention keep up the fantastic job!

  124. roulure xxx says:

    Une fois de plus un sublime post : je compte en parler dans la journée avec des collègues

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