Never ever ever finance a car

Lets get straight to the point. Cars should only be bought with cash. Financing is for wimps. Ok I’m glad I got that off my chest. Now let’s elaborate.

I can hear you now “But I only have $5,000 in savings and that nice BMW I want is $35,000…” Well my friend in that case look for a nice $5,000 used Corolla. That’s what I did. Actually I bought it from my sister but still I’ve paid cash for my last two cars.

So whats the harm in financing? That if have to finance it then YOU CANNOT AFFORD IT! First of all simple math will show you that you end up paying almost double financing than if you paid it cash. However, that is not even then real damage. The real damage is the opportunity cost. You cannot afford to eat that cash flow now and sacrifice future returns.

Lets do some simple math. $3,000 down on a $35,000 car financed at 6% for 5 years yields a $618.65 a month payment (ignoring insurance, registration, etc). Instead, lets invest that $618 a month and lets say it earns 8% return, at the end of five years you’d have $45,408.69! Lets say you keep that up for another 20 years and you’d have a nice $364,014.61 in your bank account.

That nice $35,0000 car actually cost you $360,000 in the future. And that’s why my friends you cannot afford it!