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Finance vs. Cash?

Cheshire

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Everyone is a GENIUS in a rising market!

Offsetting a fixed liability (monthly payment) with a variable asset return (risky stock investment) doesn't make much sense. We have been in a bull market for a long time, so many people don't remember or have never experienced what a bear market feels like. Believe me, we will have another bear market, but when?

I am a former portfolio manager and started managing my first portfolio on December 31, 1999. Attitudes at that time were much like they are today. Everyone (the geniuses) was making money in the market and thought it would go up forever. Then came March 2000, the top of the market. Equity investors lost about 75% in the NASDAQ over the next 2.5 years. The SP500 was down about 35% during that time.

If you think you're going to make 20% a year on your Bronco money, you should consider the position you'll be in if the market goes down 20%. The probability of losing money during your loan period is real and higher than you think. The somewhat clueless guy in the video doesn't tell you what he'll do if the $40,000 he puts in stocks turns into $35,000. What will happen is he'll have to sell stock that has gone down to make his payments. This leaves less in stock if and when it goes back up. There is a very real possibility that he'll have to find more money to pay off his loan later down the line. This is why people reduce their exposure to stocks in their retirement accounts as they get older. They have less ability to absorb losses.

The video guy underestimates peace of mind by being debt free. I've been debt free for 20 years and it feels great. I don't worry about paying debt, ever. Financial problems are the leading cause of stress for most people. I agree that interest rates are low and I suggest people take advantage of this by purchasing a home, not a car. If you don't have enough money to buy a home, you maybe shouldn't afford a new Bronco?

I'm a cash buyer.
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deanfromkelowna

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Good question. The Wrangler depreciates very slower. The Bronco will be the same if not better. Zero down lease is the best use of cash flow. ;)
 

BR0NCO

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I agree. Financial competency has to play into the decision. Not everyone knows how to throw their money into an index fund or invest it through other means. Nonetheless, I like talking money/finance which is why I shared the video. When I was in my 20's I wish I had been smarter with my money.
This. I would have no idea where to even begin
 

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Basically....if you can MAKE more money with YOUR money, then finance....if you are sitting on your cash in the bank at half a percent, unless finance is ZERO....pay cash! If you invest your money into the stock market and are getting a 10-20 percent return and finance rate is 5 percent, finance.
 

Gamecock

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If you have cash, why would you want to pay interest to the banks?
...because based on historical averages, you can make WAY more money staying invested than pulling your cash to buy the car. You pay the bank 3%, and make 9-10%...so net 6-7% all the while also having access to that cash should the need arise. It has been explained many times on this thread and others though. I would never pull cash and pay for a vehicle when rates are this low; but I am also always invested 95-100% in equities and take a long term approach. Market downturns are not that concerning, as I stay invested through them and the averages are the averages...I will do better and have done better for decades by staying invested and using cheap financing for purchases. If I hadn't saved and invested 100% in stocks until it hurt when I was in my 20s, I would be in much worse shape. If you're young, it is even more important....don't burn your cash on things like cars; invest it in the markets and stay in those investments long-term.
 

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SevenT

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NotApplicable

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I find it interesting that these types of discussion seem to forget one key point. I'm sure there areany folks on this board that have money bursting from their pockets, buy for many, we had to save (and possibly for a long time)

My point being, that yes borrowing at 3% and investing at 9% the choice seems obvious. However where is that $1,000 per month payment clming from? Are you selling some of that investment each month, regardless if you are on the up or down curve to make that payment?

IF you can afford to swing the car payment and leave all that money invested for the 5 years... Chances are very high you would come out better. But if you are being forced to Continually cash out to subsidize the payment, then you risk of loss has gone up a ton.

Higher return is a good financial choice, but one time money vs 5 year liability does also has advantages.
If you’re not in retirement and you’re selling any long term holdings to cover debts on a regular basis, something is wrong.

I think we can assume that for everyone arguing that the loan is the way to go, they’re assuming that the purchaser’s debt payments all combined (including the new Bronco) should total under something like 25-35% of their gross income. This is a reasonable assumption to start with.
 

NotApplicable

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underestimates peace of mind by being debt free. I've been debt free for 20 years and it feels great
This is the touchy-feely part that makes universal advice impossible. Some people value being debt free, despite the fact that objective math and statistics shows they would in all likelihood come out ahead otherwise.

Similarly, as others have mentioned on the thread, there’s a question of will power and individual ability to control behavior.

I understand why some don’t trust themselves or the stock market (although the job market would have a bigger impact here; if you lose your job, servicing debt becomes difficult. If the stock market goes down, you don’t care on the short term because you should never be forced to liquidate/realize a loss by short-term market conditions).

As is always the case, the “right” decision depends on many other factors including one’s ability to control their spending and budget properly.
 

shimmy825

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I agree. Financial competency has to play into the decision. Not everyone knows how to throw their money into an index fund or invest it through other means. Nonetheless, I like talking money/finance which is why I shared the video. When I was in my 20's I wish I had been smarter with my money.
THIS! I feel exactly the same way. It wasn't until I was in my early 30's that I learned about the wonder of compound interest. Ho hum. Still early enough to be on track for a retirement.

And I generally agree with the video - I think the problem is also having the discipline to regularly dollar cost average your investments and not panic when the market dips. Not something easy to do. And, not that you or anyone else here asked. Learning to budget for me was the number one thing that has absolutely changed my life.
 

MorgansRun

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Great video!
Anyone else think of George McFly when they watch Doug’s videos?
I see and hear a young Jay Leno.
 

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rgalvinmi

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If you put money into the stock market mid march of 2020, you should have made OVER 100 PERCENT return. I am up nearly 200 PERCENT since what I put into the market in March of 2020. Bought GM at 16.62 on 3/18/20, now 62.00 bought TOL at 16.65 on 3/17/20, now 58.00 bought USFD on 3/16 for 15.03, now 38.00, bought SSL on 4/16/20 for 4.16, now 17.00 It was SHOOTING fish in a barrel when the stock market was 30k, went down to under 20k, now at 34k... why would I pay cash if you can make returns like that....? or even returns of 15-20 percent vs finance cost of 3-5 percent..
 

da_jokker

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If you’re not in retirement and you’re selling any long term holdings to cover debts on a regular basis, something is wrong.

I think we can assume that for everyone arguing that the loan is the way to go, they’re assuming that the purchaser’s debt payments all combined (including the new Bronco) should total under something like 25-35% of their gross income. This is a reasonable assumption to start with.
30% of income for a car payment seems high to me, but maybe not. I just can't imagine spending $800+ car payment monthly no matter how much I make. But then I'm a saver not a borrower so thats just my mentality.

I guess the norm today is to basically spend what you make.
 

PartyMarty

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I’m kind of a mix in this situation. By the time I get my Bronco, yeah I could afford to drop all cash (with not much left for a rainy day), but I also don’t have the monthly income for a $1000+/month payment for one car if I finance most of it. So I’m thinking put half down on my $57k purchase (after TTL) to have swallowable $500 monthly payments for 5 years and invest the other $28k.
 

NotApplicable

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30% of income for a car payment seems high to me, but maybe not. I just can't imagine spending $800+ car payment monthly no matter how much I make. But then I'm a saver not a borrower so thats just my mentality.

I guess the norm today is to basically spend what you make.
Yeah I said all debts combined which normally includes housing. So servicing of all debts + housing is generally considered to be “acceptable” below 30ish% of gross income by the actuaries and creditworthiness mathematicians ;p
 
 


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