How much to spend on a nice first car?

[mmbt0ne]

Ok BP,

If you go guids route you end up with $89,356.20

If you go your route you end up with $89,339.71

How is that hard to understand?

[TheMetetron]

Ok, assume $20,000 car.

Option 1:

Purchase $20,000 car in cash. Invest $70,000 @ 5% compounded yearly for 5 years. After 5 years you have $89,340.

Option 2:

Purchase $20,000 car with financing. Invest $90,000 @ 5% compounded yearly for 5 years. Pay 6% compounded yearly over 5 years on $20,000 of that (Pay $4,000 principal + interest per year).

Worth by year via option 2 below...

After 0 years: $90,000 savings - $20,000 debt = $70,000
After 1 year: $89,300 savings - $16,000 debt = $73,800 ($4,500 earned & $5,200 paid)
After 2 years: $88,805 savings - $12,000 debt = $76,805 ($4,465 earned & $4,960 paid)
After 3 years: $88,525 savings - $8,000 debt = $80,525 ($4,440 earned & $4,720 paid)
After 4 years: $88,471 savings - $4,000 debt = $84,471 ($4,426 earned & $4,480 paid)
After 5 years: $88,488 savings - $0 debt = $88,488 ($4,423 earned & $4,240 debt)


Option 2 leaves you with $88,488 at the end of 5 years while Option 1 leaves you with $89,340. Inflation is the winner as your $90,000 in 2007 dollars now requires $104,842 in 2012 dollars to get the same purchase power.

Edit: I assumed you'd pay off the interest every year and it was only compounded yearly. If you made your payments an equal size for 5 years, you'd end up with even less money via option 2. Also, I assumed yearly compounding which is not entirely accurate but good enough for demonstration purposes.

[guids]

[ QUOTE ]
Ok, assume $20,000 car.

Option 1:

Purchase $20,000 car in cash. Invest $70,000 @ 5% compounded yearly for 5 years. After 5 years you have $89,340.

Option 2:

Purchase $20,000 car with financing. Invest $90,000 @ 5% compounded yearly for 5 years. Pay 6% compounded yearly over 5 years on $20,000 of that (Pay $4,000 principal + interest per year).

Worth by year via option 2 below...

After 0 years: $90,000 savings - $20,000 debt = $70,000
After 1 year: $89,300 savings - $16,000 debt = $73,800 ($4,500 earned & $5,200 paid)
After 2 years: $88,805 savings - $12,000 debt = $76,805 ($4,465 earned & $4,960 paid)
After 3 years: $88,525 savings - $8,000 debt = $80,525 ($4,440 earned & $4,720 paid)
After 4 years: $88,471 savings - $4,000 debt = $84,471 ($4,426 earned & $4,480 paid)
After 5 years: $88,488 savings - $0 debt = $88,488 ($4,423 earned & $4,240 debt)


Option 2 leaves you with $88,488 at the end of 5 years while Option 1 leaves you with $89,340. Inflation is the winner as your $90,000 in 2007 dollars now requires $104,842 in 2012 dollars to get the same purchase power.

Edit: I assumed you'd pay off the interest every year and it was only compounded yearly. If you made your payments an equal size for 5 years, you'd end up with even less money via option 2. Also, I assumed yearly compounding which is not entirely accurate but good enough for demonstration purposes.

[/ QUOTE ]

Yes, i did my math on 19k, not 20k, and did 70k compounded, not 71k. Option one is better at these numbers, but Im betting you can do better than 5% interest probably OP.

[mmbt0ne]

Also, doing a 6 year car loan (not possible everywhere) also drops your payments to below the monthly interest earned.

[guids]

[ QUOTE ]
Also, doing a 6 year car loan (not possible everywhere) also drops your payments to below the monthly interest earned.

[/ QUOTE ]


The other thing I was also assuming is that he isnt going to actually withdraw the interest from that account, so it stays in there and earns him more the next year etc. but in my mind he is still "using" that interest to pay for his car.

[BigPoppa]

[ QUOTE ]
[ QUOTE ]
Please tell me this a level.
You'd get 5% on 70k of that regardless.
How is that hard to understand?

[/ QUOTE ]

You can't be serious.

There is no way that financing is better than paying cash here. Don't make me do math please.

[/ QUOTE ]

?

I was saying that paying cash cost less than financing.

[TheMetetron]

[ QUOTE ]
Also, doing a 6 year car loan (not possible everywhere) also drops your payments to below the monthly interest earned.

[/ QUOTE ]

That won't make a difference. Don't make me prove it. It is still better to pay cash.

Edit: Please think about this before arguing. I thought the example would point this out, but clearly it didn't. It doesn't matter if the loan is 20 years you'd be better off paying cash.

[TheMetetron]

[ QUOTE ]
Im betting you can do better than 5% interest probably OP.

[/ QUOTE ]

This is an inappropriate assumption for this scenario.

[guids]

[ QUOTE ]
[ QUOTE ]
Im betting you can do better than 5% interest probably OP.

[/ QUOTE ]

This is an inappropriate assumption for this scenario.

[/ QUOTE ]

I dont care about the scenerio as much as I care about helping the OP out.

[TheMetetron]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Im betting you can do better than 5% interest probably OP.

[/ QUOTE ]

This is an inappropriate assumption for this scenario.

[/ QUOTE ]

I dont care about the scenerio as much as I care about helping the OP out.

[/ QUOTE ]

Right and for this moment in his life given the information he has given us it would be entirely inappropriate to advise him that he can "probably" make more than 5% by taking on riskier investments with his car payment money.