An elderly client of mine recently met me and casually spoke about wanting to buy a car, so I asked him what he planned to buy and how. He said he was looking at something in the $40,000 range and wanted to pay for it from his savings because he just did not believe in debt. And while I understood where he was coming from and the generation he represented, I just knew that I had to talk him out of the idea of plunking down $40,000 cash when debt was so cheap and abundant.
So, I pulled out my iPad and ran a few numbers for him even though I knew the math and the answer in my head. I knew that the smart thing to do in these low interest rate times was to finance... not buy all at once. It's an idea in this debt averse times that needs to be addressed.
I ran a few numbers and showed him how most of his liquid assets were tied up in retirement accounts and nicely invested, and from which pulling out $40K would incur a harsh income tax bite. So it was best to let go of the idea of taking it out of his IRA and look for other sources of cash. He said he could take the $40K out of the roughly $44K he had sitting around in the bank, but that brought on some other issues.
Fundamentally, I wanted him to have enough cash on hand to tide him over a rainy day... and while $44K was way more than he needed to keep liquid, leaving $4K that would remain after he spent $40K on a car would be way too little given his health, family obligations, etc. I showed him how he could get low-cost financing with rates as low as 2.5% at certain institutions which would result in very manageable monthly interest payments. I also told him to not just go straight to his major commercial bank but to use auto loan calculators freely available at sites such as bankrate.com to do a little research before buying.
I also cautioned him against going in for too short a financing period because at such low interest rates, he'd be better off picking at least a 48-month payment plan. I told him he could make a down-payment of $10,000 because I knew he was concerned about taking on too much debt, and could finance the rest. He could then invest some of his capital to earn more than the 2.5% he was paying on the car. Rates are low, but it's not that hard to beat a 2.5% rate and you don't have to take a lot of risk to do so. In cases like this it is usually better to use other people's money if you use common sense.
I also suggested consider buying a used car with low miles directly from a dealer or other legitimate source so he'd have the peace of mind of buying a certified pre-owned car that had a clean title.
A few other tips I gave him... which apply to just about any big-ticket item you want to buy...
Get on the Internet and look at prices on sites like Kelly Blue Book and at other sellers of the product you want to buy.
Use handy on-line calculators to figure out things like monthly payments and fees.
Do not reveal your monthly payment capacity to the seller because they will find ways to hook you up with an expensive purchase that still meets your monthly payment capacity... instead, focus on price first even though the seller will keep pushing you for a monthly payment amount.
Do not get sold into buying more than your budget... see, you could well buy a $50,000 car for just a slightly higher monthly payment but remember, at the end of the day, you're putting your hard earned cash into something that depreciates in value the instant you buy it... it just does not make sense to throw money into depreciating assets especially when you have bigger things to worry about such as home loans, college expenses and so on.
Remember, you can either raise the bridge... or lower the water... Raising the bridge is about earning more to afford an expanded lifestyle, perhaps a dubious choice just to own a fancy car -or lower the water - voluntarily cutting back on your expenses to fit your income.
At the same time, if you have money, be smart about weighing your options and consider using loans in this low-interest rate environment so you can invest your cash somewhere else and have it deliver more than the interest rate you'd pay on your loans. So, be smart about how you manage your finances and keep all your options on the table.