Cash or finance new truck

I guess I should also say that by paying cash I am not by any means draining my savings account.

 

Lets do a scenario, we'll look at buying a car for cash vs financing a car 5 years ago. We'll do this with a 2017 TRD Off-Road which in 2017 could be purchased pretty decked out for around $40,000 (rounded for the sake of ease). We'll also ignore insurance and all that jazz.

BUYING CASH:
This ones easy. If you bought the truck cash in 2017, you would pay $40,000 and be done with it.

Total Cost:
Truck: -$40,000​

FINANCING:
Now lets say that you financed instead (even though you could have paid cash).
Let's also say that you put a typical (for most people) down payment of 10% on your loan and didn't have a trade-in.
SO you will be financing $36,000 and taking that 36k you have in cash and investing it in JUST the SPY

LOAN COST:
We'll look at the federal reserves historical auto loan tables( https://www.federalreserve.gov/releases/g19/hist/cc_hist_tc_levels.html ) for what you could have paid if your credit score wasn't that great and you were too lazy to shop around. According to that you would be looking at roughly 4.6% APR. So $36k financed over 60 months at 4.6% brings you to $40,367.21 so about $4,400 in interest over the life of the loan.

SPY RETURNS:
Now I know what you're thinking...hold up if I paid cash I would have saved 10% on the overall cost of the vehicle! Well hold on there sport, don't forget you invested in the SPY. In 2017 the average share price of the SPY was 244.69 so your $36,000 investment would have gotten you 147 shares costing $35,969.43. TODAY the spy is at roughly $420 per share. That means your 147 shares are now worth $61,740 netting you $25,771

Total Cost:

Down Payment: -$4,000
Loan: -$40,400
Original Investment: +$36,000
Investment Returns: +$25,700

Total: +$17,340

​

past returns are not indicative of future performance, this is not financial advice

 

I can guarantee that you will come out ahead during a 72 month finance at 1.9-2.9%, placing $45K into an index spider mutual fund instead of paying cash. This is just simple finance. And the fact you have upwards of $100K just sitting in savings, and not invested and working for you, proves that you are not versed and educated on investing. What is that money in savings earning for you? Piece of mind? Congratulations on your participation award.

 

Agreed.

 

Nailed it! Finally, someone who gets it...

 

When I did the cash out refi I did get 100000 and yes it’s in my savings right now. I also invest 400 a month in two Roth IRAs for my kids. Then I have a 401 k and pension through carpenters union. So the money I got is for a truck for me and 40k is for my wife to go back to school to get her masters degree.
And no I never claimed to be verse in investing. I am just a dumb construction worker who has worked hard for the last 30 years to raise a family.

 

The point is, if you take that $40K and invest it instead of paying cash for the truck you'll have more money in a few years than you would if finance it.

 

I guess I should also add that I really can’t afford a 600+ monthly payment. Yes I am debt free but being in construction which can be seasonal ( I work pretty steady) I base my income on what my wife brings in and what I would make on unemployment. So if I can’t afford it on unemployment then it’s too much. I have been doing that for 30 years now and have never been in financial trouble. That way I am never living beyond my means. I did the cash out refi so I could buy a new truck and send my wife back to college.

 

The only way this isn't true is if you stash the cash in your mattress (or the fancy equivalent, your bank account) - have to make sure you get this in the market actually making a return, just something simple like VOO/VSTAX or equivalent and you you'll be golden.

 

Well you're already taking a loan on the money then (via mortgage), in which case do whatever makes you happy. Now a cash out refi into the market would still make more, with periodic withdrawls to pay the monthly rate- at least over the last 10 years of bull market, but do whatever you're comfortable with, makes figuring taxes out easier to pay cash I spose. But you are likely leaving money on the table paying cash. up to you if its a sum that matters.

EDIT: not going to get into sequence of returns risks - but it is a variable. So if you can't comfortably pay your loan out of cashflow, you should probably pay cash and not worry about the extra money

 

I bought my truck at the end of 2019 and put $12k cash down and financed with a 2.5% interest rate. I really considered investing the money I would be paying extra since the interest rate is so low but I really just hate debt. There is no logical reason why I wouldn’t invest the money into something but I just don’t like the feeling of not owning my personal property and being in debt to someone. I paid the remaining balance on my truck off after a year and a half in June 2021 and haven’t looked back. Plan on keeping this truck for at least 8-10 more years and will start saving for a new vehicle in the next 3-5 years and purchase with cash.

 

I went for financing on my new truck and kept some of the difference in an I-bond I-bonds are tied to inflation (7%+ yield currently), backed by the US treasury and can't go below zero. So I should be playing the spread 1.79% cost vs 7% return. Inflation could go down, but I doubt it. The only problem is you can only buy $10k a year worth and you need to hold them for at least a year. I am hesitant to recommend the stock market. We are in the 12th year of a bull market - the longest in the history of man. Shares in the S&P 500 bought in 2000 wouldn't have recovered to their purchase price until 2014. Having been highly leveraged in 2008 and watching my assets not recover until 2016, I am pretty risk adverse. See attached chart for S&P performance.

https://www.macrotrends.net/2324/sp-500-historical-chart-data

In the end, it depends on your risk tolerance and cash needs over the paydown period.

 

Okay, which one of you Warren Buffet financial geniuses wants to help me better manage my Roth IRA & Investment portfolio?

 

At the end of the day investing in the market is all speculation and like you said past performance does not indicate future success. Take the same example and invest it now in 2022 when we are on the verge of a bubble. In 5 years you could possibly turn that 36k into 22k? It’s possible and not many people are invested enough to actually watch market trends and do DD. Then you would be looking at a loss of over $18k on your investment and we all know most people won’t cut their losses and will likely hold longer and either lose even more money or have to wait double the length of time thought to break even.
I would much rather just own my truck outright and then diversify the equivalent monthly payment into the market for the next 5 years and average in and hold till looking to buy another vehicle.

 

Here ya go, made this for my friends a few years ago so they could get the basics down- links have all the info you need, some of the info is a bit dated, and it's more geared to personal finance and RE planning, but close enough.

The JL Collins Stock series in particular is fabulous

 

I just paid cash for a new Mazda CX5. Dealer preferred us financing because they could make more money off all the charges. They said it worked against me not financing my car. Thats not my problem. Didn't buy any of the other crap they try to sell you either. Never have. Never will.

 

I'm a dumb Construction worker too (HVAC), but inflation is eating you up parking cash right now. I strongly suggest looking into a safe investment to combat inflation at least. I Bonds are hot right now.

 

I know most people aren’t into crypto on here but you can always go on Voyager and invest in a stable coin such as USDC and get 9-10% APY on investment with little to no risk.

 

instructions unclear invested my 401k in beanie babies

 

Lots of good advice so far.