The Pros and Cons of Paying Cash for a Car
Tim Ulbrich and Tim Church debate the pros and cons of paying cash versus financing a car purchase.
Summary
Tim Ulbrich and Tim Church talk through several pros and cons of paying cash for a car on this week’s podcast episode. Tim Church recently purchased a used Honda CRV with cash and Tim Ulbrich has purchased several cars this way, including his current Honda Odyssey.
The pros they talk through of purchasing a car with cash include: buying a car within your means; saving a lump sum of money forces you to slow down as a buyer; never have to worry about paying interest; don’t have to worry about negative equity on your car; no monthly car payments which will open up your cash flow; get through the buying process quicker and with less paperwork; could have cheaper car insurance; and a sense of accomplishment.
The cons discussed are the opportunity cost of putting all of that cash elsewhere with a potentially better return; you might pay more when buying a car with cash depending on the person you are buying it from; may take a long time to save money; may dip into your emergency fund which is generally not a good idea; and a missed opportunity to help your credit score by making on-time payments.
Tim and Tim then discuss which move they think is best and the value of having a coach in your corner to help you navigate financial decisions like this such as one of YFP’s CERTIFIED FINANCIAL PLANNERS™.
Mentioned on the Show
- Take the Financial Fitness Test
- My Top 10 Financial Mistakes
- YFP 047: Best Practices for Buying a Car
- Edmunds.com
- Kelley Blue Book
- True Car
- Ramit Sethi
- Dave Ramsey
- Robert Kiyosaki
- YFP Planning
- Book a Free Discovery Call With One of YFP’s CERTIFIED FINANCIAL PLANNERS™
Episode Transcript
Tim Ulbrich: Tim Church, thank you for joining us. We’re going to talk all about car buying, pros and cons of paying cash for a vehicle versus finance a vehicle. And I thought it would be fun if we start by talking about the history of our vehicles, not only what are we currently driving, but have we been driving up to date as I know I’ve got some beaters in my history, and I’m guessing you’ve got some good stories as well. So Tim Church, give us some background. What’s been the vehicle story for Tim Church up until now?
Tim Church: You mean before the Lambo?
Tim Ulbrich: Yes, yes.
Tim Church: So I started out with a — what is it? — a 2001 Oldsmobile Alero. So this is a silver —
Tim Ulbrich: Hey, I had one of those!
Tim Church: You had one too?
Tim Ulbrich: Yeah. Yeah, I did.
Tim Church: Oh, nice. Obviously that Oldsmobile is no longer in business, is no longer there. But it was a pretty good car for the first couple years and then a lot of stuff just started to break down and there was some issues with it. But it was still, it was a good first car. And then really, I went on, personally went on to a Honda Accord, which I still have. Still have that, so when did we get that? 2011. So that’s, we’re going on almost 10 years with that car, but it’s been great. It’s been very reliable. And then I married into a 2009 Volkswagen Rabbit, which finally we got rid of.
Tim Ulbrich: Which is well documented in “Seven Figure,” right? We talked about that.
Tim Church: Right. We talked about how much cash we had to shell out to fix everything on it because it was so expensive. So that was one that I had married into, but finally — as I know we’ll jump into — it is no longer. It’s gone because we were able to upgrade.
Tim Ulbrich: And we’re going to come back to that upgrade and the decision that you made, why you made it, which will lead nicely into our discussion about pros and cons of buying cash, using cash to purchase a car versus financing a vehicle. So my history on vehicles starts in — passed down, actually, from my brother to me junior year of high school a Toyota Tercel. Do you remember the Toyota Tercels?
Tim Church: Yeah, isn’t there — there’s a song, there’s like a hip hop that well documents Tercels I think.
Tim Ulbrich: I got to look. So our vehicle, we named it, of course, because it had so many issues. Its name was Tercy the Tercel. And it did its job and then my upgrade was actually to an Oldsmobile Alero as I was in pharmacy school. And I am now a proud owner, of course, of the Swagger Wagon, a minivan, No. 2 minivan. You know, obviously we’ve got so many kids now we really don’t have many options but to have the minivan, about to need that rooftop carrier here pretty soon. And in between that, I’ll talk about the Lincoln MKX and Nissan Sentra, a couple other cars along the way and certainly some good stories that will come with those as well. Now, some of you may be thinking, wait a minute, paying cash for a car, why on earth would I ever do that instead of just getting a loan? And I know this may sound like a far-fetched idea, but hang with us for a minute and on the YFP blog, titled “My Top Ten Financial Mistakes,” really I should have called that “Things I’m Really Embarrassed About,” here’s the reality of all the decisions that we’ve made. And we’ll link to that in the show notes. I talked about how I bought a car I had no business buying back in 2014. And really, here’s the quick gist of it. Jess and I were nearing the end of paying off her student loans, almost at the finish line, I bought a used Lincoln MKX. And it was nice. It was really nice. Leather heated seats, moonroof, awesome sound system. I think it had one of those Bose systems. But the reality was I didn’t need the car. And I’m even getting a warm, fuzzy feeling just thinking back to riding in that car, to be honest. It was awesome. But I had a fully functioning, paid off!, paid off, Nissan Sentra with less than 50,000 miles on it. And so we ended up paying $12,000 for the Lincoln MKX and that was after turning in our Nissan Sentra, mind you. And while $12,000 may not seem like a lot of money, imagine what we could have used that money for: getting out of debt quicker — again, almost at the finish line — building up our emergency fund, saving for retirement, saving for real estate investment property, insert any other financial opportunity that outweighs the benefits of the car. But you get the point. So we ended up selling the Lincoln MKX six months after, talk about serious buyer’s remorse and purchased a Nissan Altima with 87,000 miles on it from my mother- and father-in-law. And the difference, which was significant, in that process, in that transaction, became our last student loan payment of the more than $200,000 in student loan debt that we paid off. So certainly good news, the outcome was good. But we paid for it, albeit not in a catastrophic way. We paid for it in the way of sales tax, delaying our debt payoff timeline, but the lesson learned was certainly priceless and one that hangs with me today. And I still have that Altima. It’s got a couple of quirks, I’m embarrassed to admit on the show, if anybody wants to know, shoot me now. But at 140,000 and no major issues, it No. 1 gets me from Point A to Point B and No. 2, it’s safe. And I think that second point is really important that we preface our conversation and before we get too far in this debate. Because I’m all about safety, and I’m not suggesting as we talk about what type of cars might provide the sweet spot in terms of the value and keeping that expense low, I’m not suggesting that you drive an unsafe vehicle to save money. And I really think that it’s fair to assume with few exceptions that here in 2020 whether we own a 2020 car or a 2008 car, we’re all driving what would be deemed safe vehicles. I think we’re often splitting hairs perhaps between the new safety features in 2020 and those of 2012. And that can be easy to convince ourselves is a part of justifying a purchase and we need a new vehicle. But not necessarily does, you know, an older vehicle necessarily mean it’s not safe. So the truth is most of us need a car for some reason or another, and maybe that’s not the case, maybe some people have been able to cut back their car situation. And while this isn’t an episode on best practices to buy a car, reference Episode 047 if you want to hear more about that, thinking through your strategy for purchasing a car is important to do. And buying a car, as with anything else that carries a dollar sign, is an important part of your financial plan. Edmond says that the average car payment for a new vehicle reached an all-time high in March 2020 of $569 per month. $569 per month. So doing a bit of research, thinking of some options outside of regular financing, is always a good idea. And I think this debate is really healthy. So Tim, talk to us about before we get into the weeds on the pros and cons — and we’ll go through each in detail — talk to us about what you and Andria just purchased and ultimately why you guys made that decision.
Tim Church: Yeah, I think before I jump right into that, I think you made such a great point is when you go through this whole process, I think you have to look at the perspective that you have. I think a lot of people, they think a car is a great asset potentially, but it doesn’t necessarily generate revenue unless it’s some collectable or something like that. So and our mentality is really something that’s safe, something that gets us from Point A to Point B. So I think you made a really good point there. And when you look at it, the opportunity to do so many other things, that has to be key in that type of decision. But I can understand, there’s a lot of people that are car enthusiasts, so they really enjoy that aspect of trying to get something that either looks good, that’s fast or has other intrinsic value. But for us in general, when we were looking, it was like OK, it’s a Point A to Point B. But one of the things that we really did is just figure out what were we going to actually buy and why? And for us, it was really just a midsize SUV. Talked to other friends and family who have vehicles kind of in that line. And we weren’t looking for anything luxury, just kind of middle-of-the-road, something that was safe, something that’s reliable. And so we essentially kind of landed on we wanted to go with a Honda CRV. So once we kind of made that decision, OK, what type of vehicle we wanted, then it was looking at the different models within that particular vehicle. So there’s actually, I think there’s like four different tiers of that, which is crazy. And what’s interesting is at one level, there’s actually the safety features that are present that aren’t on the lowest model. So that was really one of the key points that we looked for when we wanted to purchase and also from what I’ve heard, I didn’t know specifically, but it actually gets you a little bit cheaper insurance because of the safety features, so that was kind of one of the things. But I mean, what we did was once we kind of settled on what that model, what that vehicle was that we were going for, then we kind of looked at the Kelly Blue Books, the Truecar, the Edmonds, and just tried to get an idea of based upon that model — and what we were looking for was a certified pre-owned, so we wanted to get a little bit of a deal on that but still would be fairly new. So we got an idea of like what other people were paying for, what was a reasonable deal. So we kind of had a ballpark range. And then what we did was really look at the Honda certified pre-owned site and then from there, it kind of gives you all of the dealers that are in your particular area that have that make and model of the vehicle along with the features and the mileage on that. So that was kind of an easy way versus having to go on every single dealer website and trying to figure out who has what. So I think that kind of actually saved us quite a bit of time doing that. So from that point, once we had the vehicle inventory from the Honda site, then we were able to go to the individual dealers and not actually physically but I mean, call them, email them, and get an idea of what their quotes would be and in this particular case, we were trading in the Volkswagen Rabbit, which I was not anticipating we were going to get much for that thing. But eventually, we ended up getting $2,000 as a trade-in, which is really I thought quite generous to say. But one of the things is that the dealers obviously have a lot of — their main tactic is to get you on property, on site, get the emotions flying around, so that you’re not leaving without something. And what I did, what we did, was really try to get as close to an estimate on the quotes, really just via email. I tried not to even talk to anybody, didn’t want to give them my phone number, just because I didn’t want to get harassed. And I would say that if you have to give out a phone number, give out a Google Voice number, not your actual phone number, so that at least you can kind of screen those calls. But actually, I was pretty successful with getting quotes via email just saying with our trade-in and what we were looking for. And then once I got a couple of those estimates, then I was basically playing against each dealer and trying to figure out before I even stepped on the property, what was going to be the best option in terms of the deal so that when I even got there, at least I had some documentation, I knew an estimate of what we would pay. Obviously it would depend on the exact amount for the trade-in, but that was kind of our approach. And I think it actually worked out really well and because of the COVID situation, I think they were more willing to negotiate even via email before even going in there. And that really saved I think a lot of time and effort going that route.
Tim Ulbrich: Yeah, and I love what you said there, Tim, in terms of the emotion. Every sale is made from an emotional point of view or anything we buy, we buy from an emotional state of being. So I think, you know, what you just outlined there is that you really took advantage of doing a lot of your homework in advance and really trying to make it objective and analytical, you bought yourself a little bit of time, you don’t have that pressure in the moment, and all of those pieces add up to being your advantage as the buyer. So you know, if you’re going in uneducated, you’re going in — you know, it’s kind of like when you go to the bank and you just start a conversation about buying a home. Like, oh, let’s just talk about it, right? All of a sudden you’ve got like a preapproval letter for like, you guys can get a home for $700,000. You’re like, whoa, wait a minute, we just wanted to see what was going on. So you know, I think here, this is a good reminder too of the value of as a buyer, trying to put those advantages in your cord to give you the best shot. So let’s dig into some of the pros and cons of purchasing a car with cash. We’re going to go back and forth between you and I on these. We’ll talk pros, and then we’ll talk about cons. And I’ll kick us off from my experience. You know, I think perhaps the most overlooked, yet most important pro, in my opinion, is that paying cash gives you a better chance of buying within your means and stops you from putting your car buying priorities out of order with other priorities that you’re trying to work on. And I think it’s important we preface part of this conversation that we’re doing so under the assumption that other people listening to this are in a position like you and I, Tim, that they are also trying to balance other competing priorities and goals, whether that be paying down debt or buying a home, paying down a mortgage, saving for kids’ college, investing more for the future, whatever other goal, any money that’s put toward a car you could argue that yeah, there’s somewhere else I could potentially use that money. But if there’s folks listening that maybe don’t have other competing financial priorities and cars are their thing, are their jam, you know, Ramit Sethi from “I Will Teach You to Be Rich” would say, “Dial it up. Dial it up.” If that’s your thing and you certainly can control other parts if you don’t have those competing pressures. So buying within your means, what I mean by this is if Jess and I say, you know what, our next car we’re going to buy and we’re going to buy cash, and we determine, OK, we’re going to get another minivan and we’re going to look for — we’ve had good luck with Honda Odysseys and we want to look for one that has about 70,000-75,000 miles, we know that they hold their value, so anything we can do to find one at a lower price point but that will also live hopefully beyond 150,000-175,000 miles, let’s say we’re going to save up $13,000 cash to make that purchase. You know, taking the time to do that not only slows you down as a buyer and really makes you critically think about OK, where does this fit in with the rest of our plan? And that delayed timeline I think really helps you look at that purchase in an objective manner but just takes discipline, you know, to do that. So I think naturally, the conversation Jess and I will have is, alright, is there something else we can do? Can we downgrade to a different model? Can we look at a car that has a little bit more miles? We don’t want to wait that long to save up all that money. So I think it drives down the purchase price. Obviously you would compare that again, you walk into the dealership, you finance something new, you’re only worried about that next payment and even that next payment may not be due for three or six months if they give you some runway. Maybe you’ve got some money down, maybe you don’t. Obviously you don’t have to think about that lump sum purchase. So I think it really helps you or gives you the best chance of buying within your means and putting your car buying priorities in the right order as you look at the rest of your financial plan. So Tim, what are your thoughts on other pros?
Tim Church: Yeah, well I think too, like thinking about that, so many times people are buying things where they say, “I can afford that monthly payment. I can make that payment.” So I know Dave Ramsey talks about this a lot. He says, are you saying you can — if you’re saying you can make the payment, can you actually afford it? Meaning can you pay for it? And so I think that mentality is really important here when you think about that because as you mentioned, yeah, maybe you can afford a $500-600 payment for a car that’s $30,000+. But how long if you actually had to pay for it cash, how long would it take you to buy that? And I guess if the answer is it takes you years to save up enough to pay for it, then maybe you’re buying a little bit out of your budget range for where you want to be. But I think obviously the other big pro is that you never have to worry about paying interest.
Tim Ulbrich: Yeah. Yeah.
Tim Church: So even though a lot of times people will argue that car payments or car financing is pretty cheap and sometimes you can get close to 0%, maybe 1-2% interest rate on a car — and over the long term, even if it’s a standard term of five years or so, the interest may not be astronomical compared to what we would see with student loans or a mortgage or something like that. But obviously, that’s still money that you don’t have to pay for when you come to the table with cash.
Tim Ulbrich: Absolutely. And I think it reminds me of, similar to what we talk about on the mortgage of a 30 versus a 20 versus a 15, no mortgage, you’re obviously going to minimize the amount of interest that’s paid over the life of the loan, which can have an opportunity cost. And we’ll talk about that here in a little bit with the cons as I think that is worth considering. Tim, along that line, you know, obviously we know about financing, one of the things I also think about is you don’t have to worry about the negative equity position. And what I mean by negative equity is that you owe more on your car loan than the vehicle is worth. And this is also known as being upside down on your car loan, which is so common with new cars, right? Because especially if you fully finance it or have little down on that purchase, we all know that the second you drive a car off the lot, the value of that car goes down significantly in that moment but also quickly in those first few years. So many people, myself in previous vehicles, you’ll find yourself in a position where you likely owe more on the vehicle to pay it off than it is actually worth in terms of a market resale value from Kelly Blue Book or another source like that. So you know, I don’t really ever think of a car as an asset, although a paid off car is technically an asset. I think Robert Kiyosaki would fall over if he heard us talk about a car being an asset. But you know, I guess if we had to say it’s nice in the sense that even if my car is only worth $5,000 or $6,000 or $7,000, I’m not in a negative equity position. And if need be for whatever reason, perhaps I could sell that and free up some cash. So I think that’s certainly a pro as well.
Tim Church: Yeah, and I think obviously the next pro, so No. 4, means you don’t have any payments. So when you come and pay it off, you don’t have that monthly payment. So you’re really opening up your cash flow from that point forward. And I think for us, that was such a powerful thing to look at. So it ended up not taking us too many months to save up and pay cash because as we talked about not that long ago, we knocked out the student loans. So it was much easier and faster to kind of save up for it. But moving forward, really, when you think about those loan payments, you’re talking about $500+, like I don’t want that coming out of my budget. Like I’m trying to free up as much cash as possible moving forward to put towards things that are assets, so retirement accounts, other opportunities that may come about. So to me, that was like probably the No. 1 reason for wanting to pay cash for the car.
Tim Ulbrich: That’s good. And another pro, Tim, that I think of from previous experiences — the memory is coming alive as I’m even thinking about it — if anybody has financed a car before, you know what that feeling is like at the dealership. You know, you go to the back room, right? All the papers come out and you sit down with the finance guy and you’re signing a bunch of papers and the upsells start happening, one after one after one in terms of other things that might be tacked onto that. And so you know, obviously the pro here is that you can get through the overall buying process quicker with less paperwork if you’re paying cash. You write the check or if Joe Baker is listening, perhaps he’s showing up with the cash in envelope, and you move on and certainly you don’t have to deal with all that financing. And we’ll talk about some cons that could come from that as well. But certainly from a process standpoint, quicker and easier.
Tim Church: So the other potential pro — and I’ll say potential, I’ll preface it that — is you could have cheaper car insurance. Now if you look at just kind of on a one-to-one basis looking at what it costs to insure a car that has a loan on it versus not, usually that aspect alone is not going to make it cheaper. But when you have a lender and you have a loan on the vehicle, they may require certain coverage options that you may not necessarily want or need. So one of the things that a lender may require you to have is gap coverage, so that essentially covers the gap between the cost of a replacement for a new vehicle and the current value of the vehicle. So that’s something that you may not have to have on your policy along with maybe some other options that a lender is requiring you to have. So I would say that’s a potential.
Tim Ulbrich: And I want to wrap up the pros, Tim, by mentioning that you cannot overlook the sense of accomplishment and just the feeling and the behavioral aspect of this. And it’s hard to put a monetary value to that. We talk about that all the time on the show when we talk about the behavioral part of the financial plan. But feeling that sense of winning and not having a payment, whether it’s student loans, whether it’s a mortgage, whether here it’s a car, can be incredibly motivating towards achieving other goals. And so I think often, you’ll see folks that it’s not just the lack of payment but all of a sudden they have then been motivated to take those monies and put them to use for them in terms of investing, whether that be in the market or real estate or whatever it be to help get that growth side of it as well. So I think that sense of accomplishment is really important. Alright, let’s talk about the cons. What are your thoughts here in terms of the potential cons of paying cash for a car?
Tim Church: Yeah, so I think one of the biggest arguments is that there’s an opportunity cost versus throwing all that cash that you have at a car, especially if you can get a low interest rate. So one of the arguments could be let’s say you’re going to get a low interest rate, like 1-3% or something like that. Instead of putting that huge lump sum of money, could you get a better return in the stock market? Could you get a better return on putting a down payment for an investment property or some other investment where you may get a better return? So I think that’s usually one of the biggest arguments against paying cash for a car, especially in that situation.
Tim Ulbrich: I think, Tim, to that point, one of the common I guess debates is the right word that I have on this topic is that often, the point of comparison I hear is a new car that’s offering 0%, 0.9%, some low financing. But I don’t think that’s a comparison we’re talking about. I mean, I’m thinking of the mindset of a used car, 40,000, 50,000, 60,000, 70,000 miles on it, lot of the depreciation has already happened. So I think the financing on the new car, certainly. It’s great. The financing on a used car, not as competitive. Typically not anywhere near as competitive. So I think that point of comparison can even be off as folks are weighing those two options. Another con, Tim, that I think about and I’ve heard people talk about this is the thought that you can actually pay more when you’re paying cash for a car, especially if the sales associate gets commission on the financing. And I think that’s an important consideration. I mean, I think the traditional thought here is hey, if you’ve got a wad of cash and it’s the end of the month and they’re trying to meet quotas for the month, like you’re really in the best negotiation position. But that may not always be true. And I think this is certainly depends on the individual that you’re buying the car from. But I think it’s at least a consideration that paying cash may not necessarily mean a better deal and at some point may actually mean that you pay a little bit more.
Tim Church: Yeah, I think that one’s always interesting. I feel like I’ve always learned it as the opposite.
Tim Ulbrich: Correct.
Tim Church: That if you have cash, you have more negotiating power, but I feel like the more I’ve come across, especially depending on what kind of cut the sales associates are getting that it may be the opposite. The other thing I think as a con is that depending on what you’re looking at buying, I mean, it may take a long time to actually save up for that money. It really depends on obviously the type of car that you want but also your overall situation. So if you’re dead set on wanting to pay cash, whether that’s a new car or used car, it may take a lot of time. And maybe you’re not willing to wait that long, depending on the situation and how dire it is that you have to have a different vehicle, an upgraded vehicle. But that may be a big con if it’s going to take several months to maybe even a year or more.
Tim Ulbrich: Yeah, and I think building on that, Tim, I think saving up for a car, even if it’s used, I mean, I gave the example before of a used Honda Odyssey can easily $14,000, $15,000, $16,000, even with 70,000-80,000 miles on it. Saving that much, depending on your timeline, I’m trying to do that even within a year period, that’s going to be a big amount each and every month, and that could put other financial priorities on hold and that you might have to either pause other things or you are delaying other goals that you’re trying to achieve. So I think to this point, Tim, I’d love to hear from your perspective, you know, I know a little bit of the behind-the-curtain of the Churches, you know, in terms of other things that you guys are working on and other things, but regardless, any listener is usually working through multiple goals. So how did you guys reconcile this one in terms of paying cash despite having other goals that are on the horizon?
Tim Church: Yeah, that’s a great question. And I think for us, it was just being kind of crazy. It’s like we had the huge goal of knocking out the student loans. But then it was like, OK, these other life events and things just happened right after that. So the first thing was really bulking up and beefing up that emergency fund. So that was really the first thing that we did after paying off the student loans. So why I took a little bit longer than I anticipated to save up and pay cash is we wanted to beef that up first, really get that to a position — and then and only after that was done really kind of put most of our focus on saving for the car. And I mean, along the whole time, we were still putting money towards our HSA, maxing that out, getting our matches through our employer-sponsored plans. So we were doing multiple things but really just the main focus was beefing up that emergency fund and then really going right after saving up for the car.
Tim Ulbrich: And what I love, Tim, about what you guys did, which I think is easier said than done but I so value both for the listeners to hear, is if you have identified goals, not only just if you’re in the middle of student loans but if you know, OK, we want to plus up the emergency fund, we want to save this much for a down payment on a home, we want to do this much for retirement or whatever the goal would be, when you meet one of those goals, you instantly redirect those funds that were going towards whatever that goal was to the next goal that you’re working on or goals at the same time. Because with a pause or with time, that money can certainly evaporate quickly into different areas that are always surprising about where it goes. And being able to identify where you want that to go I think is so, so important and a cool part of the story in what you guys did. Tim, you mentioned emergency fund. What are your thoughts here in terms of a potential con that folks may end up dipping into an emergency fund? And is that a justifiable dip in that fund to be able to pay cash for a car?
Tim Church: Yeah, that’s a good one. I mean, I think it can be tempting when you — however you have your emergency fund set up, when you have a chunk of cash there, I think it can be so tempting to want to use that, break into it, to put towards a new or used vehicle but when you’re paying for cash. Even for us, just looking at it was tough because we knew the timeline was going to be stretched because of it. But I think some people may be tempted and may have even dipped into that emergency fund to want to pay cash. But you know, which may have worked out OK, but obviously the downside is that if something comes up in that interim period directly after the purchase or within that, you might be in a bad situation. And yeah, you may have a paid-for car, but you may not have enough savings and you may have to look at other means on how you’re going to get around that and make it work if you’re in a tough spot. So I think that is one thing that you really have to consider as you’re going through the process.
Tim Ulbrich: And the last con here — or at least the last one we’ll discuss, I think there’s probably more we’re not even touching on here — the last con in terms of paying cash for a car I think would be the missed opportunity to help the credit score in terms of making regular, on-time payments. Now, of course that assumes that somebody’s making on-time payments. So if you were to finance a car and you don’t or you’re overleveraging yourself, that can have the opposite impact. But for those that would be making on-time payments or perhaps even paying off some of that debt early, obviously paying cash for a car would remove that opportunity. But I think it’s safe to say most folks have multiple other areas in which they’re probably able to impact their credit score in a positive way that wouldn’t be dependent upon a car purchase. So there you have it, pros and cons of paying cash for a car versus financing a vehicle.
Tim Church: So Tim, what do you think the best thing to do is?
Tim Ulbrich: Gees, million dollar question, right? You know, obviously I’m biased. We’ve paid cash for most, not all, of our cars. And I honestly, I struggle with this one. I think that because we’re purchasing used vehicle and I’m not comparing new vehicles as even an option, if anybody’s looked at what a new Honda Odyssey costs, my gosh, crazy. So you know, we’re looking at used vehicles. For us, it’s kind of a get to Point A to Point B, doesn’t need to be fancy, needs to do the job, got to have the DVD for the kids so they keep quiet somewhat in the back of the car. So for us, I have that bias. But I think it really depends on the situation and other financial priorities. I do think there’s a real opportunity cost that people need to consider saving up a wad of cash. Now, if you can convince yourself that a $5,000 car is an option for you, which I would argue I think it is for many people that are listening, maybe not all, but for many people, then I think you’re obviously minimizing the negative impact of what that opportunity cost could be of the time that’s delayed and the monies that are needed to save for that. But I really believe, back to one of the pros we talked about, I really believe for most cases and most situation, never in all, most cases and most situation, saving up and paying cash for a used car, I think the benefit of forcing you to slow down, further evaluate the purchase, think about how it fits into the financial plan, and ultimately probably driving down the purchase price a little bit is really going to have a net positive effect on the rest of your financial plan. Certainly other benefits that are there as well. So I think if somebody is talking about buying a $30,000 car, could I justify saving cash and paying cash for it? Probably not. But I’m not looking at a $30,000 purchase. I think best case scenario in my mind is you think about other competing priorities and putting your money into assets that are going up, not going down, would be to try to minimize as much as you can the purchase price of a depreciable asset. And here we’re talking about one while we’re talking about cars. So Tim, other factors we need to keep in mind when talking about buying a used car. What have we not talked about that folks should consider?
Tim Church: I think we covered most of the common things to consider. I mean, I would just kind of reiterate the point, like I’m looking at our situation right now. You know, we have a paid-for Honda CRV, it’s not brand new, I think it’s almost about three years old now, which is much, much cheaper than a brand new one. And that feeling, No. 1, that it’s paid off, that there’s no payments, I mean, that feeling is just pretty awesome. And then moving forward from this point, there’s not going to be any car payments. And to me, I didn’t realize how powerful that was going to be because my first car was financed. And it was like a $400+ payment every month. And I mean, I remember the pain of that. And so I think that at this point, just moving forward and that feeling is more powerful than I anticipated. And for me, personally, I’m OK with that opportunity cost knowing that we had to save up and pay for it. I know a lot of other people, it really depends on what your risk tolerance situation is and how aggressive you want to be with investments. But I think for us, like I feel that it was a great decision.
Tim Ulbrich: That’s great stuff. And I think the question I would leave our listeners to reflect upon is, there’s not a right answer here. How important is a car to you? And how important is it relative to other parts of your financial plan? You know, I’ve determined, Jess and I have determined, that a car is pretty darn low on the totem pole as I’ve put it in the context of other areas that money could be going towards. But that does not mean that’s true for everyone. Nor does it mean there’s a right or a wrong here. So if a car means a lot to you, as I mentioned, awesome. Make sure you appropriately prioritize that and fund it accordingly. Ramit Sethi would say, “Figure that out.” Figure out how you can prioritize that and turn down, dial down anything else that doesn’t matter. But if not, my question is, why are you spending so much money on a car at the expense of other goals? And what adjustments might you be able to make to help get you towards those other goals if you determine that those matter a little bit more. I think that connects so well, Tim, to our financial planning services that we offer, comprehensive financial planning, over at Your Financial Pharmacist. You know, like anything else that carries a dollar sign in your life, we believe that here as we’re talking about car buying, this is one part of the financial plan. And I talk often about not looking at the financial plan — any part of the financial plan — in a silo. And I think here, it’s a great reminder. As you’re looking at your car, how does your car fit with your debt, with your savings goals, with every other part of your financial plan? And having a coach, having a planner, that can work with you to identify those goals, to prioritize those goals, to fund those goals, is critically important. And that really is what we believe is the value of comprehensive financial planning and what our planners do so well over at YFP Planning. So for those that are interested in working one-on-one with a financial planner, certified financial planner at YFP Planning, head on over to YFPPlanning.com, where you can book a free discovery call to learn more about our services. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please leave us a rating and review on Apple podcasts or wherever you listen to your show each and every week. Have a great rest of your day.
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