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wealthy people often have a number of options for investing their money and they have good credit worthiness. So a wealthy person is often offered very low interest rates on new vehicles. Meanwhile, they have options to invest the money into a more productive asset than a car. Let's say you have a good credit worthiness and high income. You want to buy a $50,000 car. You could pay cash and be burdened with a rapidly depreciating asset. Or you could put down $10k take a super low interest loan at 1-2% (on the total balance) for 60 months and take the remaining $40k and invest that at the same rate for 3 years at compounding interest and outperform your car loan. With $40k you could probably do a lot better than 1-2% depending on the asset class.
I will say, however, gap insurance is for assholes. Do not buy a car if you cannot pay the the lot depreciation on the car. You can't afford the car. Sorry.
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You know, because there is no shame in begging for money online. You don't actually have to look someone in the face and ask them for a few pennies of spare change.
The bottom line is $1 invested is worth far more in 10, 20, 30 years than 1$ tied up in a property when your payment is fixed in a mortgage (other than the tax/insurance portion which you have regardless of whether you pay cash or get a mortgage). In 10, 20, 30 years you are left with the fruits of your cash investment and the appreciation on your property. It is double dipping using the bank's money.
This formula only works when mortgage rates are lower than what you can earn in the market with inflation. When mortgage rates are higher, the interest outpaces earnings from your investments. But, when rates go up, the market usually does also.
I can absolutely afford to pay cash for a new car, but why the hell would I when rates are so freaking low? Would I want my investment accounts to be 20, 30, 40k lower or would I rather pay a few hundred a month for a long period of time with some interest each month while that cash sits and earns WAY more money for me in the stock market? I can pay a significant portion of my car payment using money I earn in the market. Unless my interest rate is obscene on the car, I am paying significant principal using investment earnings. Same shit with a house except for the difference between my wealth if I bought with cash or borrowed and invested the cash is far greater in the cash of borrowing to buy a house in a 30yr fixed rate note.
The real key here to borrowing is understanding what you can afford, what you are borrowing, what is the end game, what to do with money left in your pocket when you borrow (INVEST IT, DON'T SPEND IT ON BS!), etc. Yea, I do not agree with Dave Ramsey other than the fact that he brainwashes people into getting out of stupid debt. He does not really educate people about good debt and the power of good debt if you are well behaved with what you do with the excess cash you are left with after taking good debt.
Last little tidbit that I like to tell folks regardless of the argument above is that wealth in a liquid form (an investment) is a great thing to have. Liquidity of wealth gives you insurance if you suddenly need money, or if you need to borrow, buy a rental property, etc. Wealth gives you earning power, the in the world of wealth, liquid wealth is king. It is time-consuming and more difficult to leverage wealth that is tied up in properties as equity.
To the original post, financing a toy is f***ing stupid unless the rates are close to zero, you got a good price, you have the cash to buy it should you have wanted to pay cash, and you invest the cash that you would have used to buy it if you decide to finance it instead. Financing, to me, is a path by which I actually end up with way more money in the end.
Rant over.
Also got a sams club credit card to eat a shit ton of chili dogs and Mac and cheese. Paid it too. At 19 I was able to buy my first house because I had decent credit. Guess I did it all wrong.
I have never had a car payment, so I had to build credit somehow...
In the end, I usually tell people to look around on bikefinds.com and see what you can afford. There are people (quite a few surprisingly) that will go out and buy a brand new bike and put maybe 15 to 30hrs on it. They'll usually put all the accessories on it and then sell it after a year for a big loss. Case in point, I wanted to try out a 250FX this year to race and picked up a 2015 with ~17hrs on it for 4k. Already had the IMS quickfill tank, and a few other necessities for off road racing. Had to put a bit of money into it as the fuel pump needed to be replaced, but overall a great deal.
Now I'll be looking for crazy guys selling their 17 450XC-F's for ~6500 when the 18's start rolling out!
What is likely identical is the abundance of organizations willing to take advantage of financially niave individuals.
One of the worst we have at the moment are "pay day lenders": Short term loans designed to "help you out" until your next pay packet. The interest rate, including all the fees, works out around 95% per annum. Its legal loan sharking.
There should be less poetry and "gender and sexual minority" lessons and more math taught in school.
Following the edict:
"Rules are for the guidance of the wise, and blind obedience of the fools"
Rules are
"Only borrow for something"
1. If you live in it.
2. If it makes you money.
3. If you really can't live without it. (Personally, though I can't really live without bikes, I prefer to save for them.)
When I was a young wage earning tradesmen. (Too long ago) to buy our first house, we would sell any fancy cars we had, probably our motorbike, then buy an old house. Eventually we would buy another bike. Often upgrade to a better home when we could afford it.
Now, many young people seem to own new cars, and live in mansions with jet skis and caravans parked in the drive.
A recent report stated that "despite record low interest rate, 30% of people in Australia are not 1 month in front of their mortgage."
We are looking down the barrel of a disaster when interest rates rise.
Here's another one very very few know about the Act of 1871
This one is the killer... you were never taught this one in your 12 years of indoctrination for good reason.
I had way more fun than the kids with nice cars and no bike.... especially when I skipped school to go to the track with a bs birthdate on the waiver.
https://www.missionfed.com/Calculators/Home/MortgageCalculator
Let's look at buying a $340,000 home with $25k down, and a $300,000 loan over 30 years at 4.25% APR.
This is the monthly breakdown:
$ 1,476 Principle and interest
$ 100 Property Tax
$ 67 Property Insurance
$ 147 Mortgage Insurance (until your balance is less than 80% of the home's value. Then you can drop it). If you have a 20% down payment, then mortgage insurance is also unnecessary.
$ 1,789 Total monthly payment.
$ 413.32 Principle each month in the beginning. Increases as the balance goes down.
$ 1,062.50 Interest each month in the beginning. Decreases as the balance goes down.
So, each month, your gaining $413.32 equity in your home. Increases as the balance decreases.
This is the same as putting that money in the bank each month. Your mortgage is really costing you just:
$1,789 - $413.32 = 1375.68 before the tax benefits.
On your taxes you're able to deduct the interest on your loan from your taxable income.
So: 1062.50 * 12 months = 12,750 you can deduct from your taxable income.
If you're at the 28% tax rate that deduction will save you $3,570 on your taxes.
12,750 * 28% = $3,570.
Divide that by 12 months, and your gaining another $297 / month in tax savings on just your federal taxes.
If you're in California, the tax rate is somewhere around 8% at this income.
So you'll gain another $1,020 annually from your CA state taxes or another $85 / month.
So, with your mortgage payment and all property taxes and insurance - the tax savings and the equity you gain each month looks like this:
1,789 Payment
- 413 Equity you gain each month.
- 297 Federal tax benefit each month.
- 85 State (CA) tax benefit each month.
----------------------------------------------------------------
$ 994 Net mortgage cost per month after tax benefits and equity gained.
When your balance is less than 80% of the value of your home, you can drop the $147/month in mortgage insurance.
I believe property taxes are also fully tax deductible. I'm not going to look it up right now, but that's even more incentive.
And, over the next 20 years, your home will most likely increase in value by 50-100% and that's yours as well.
On a 340,000 home, that's another $170 - 340k that you'll gain over 20 years.
To me, it's a no brainer. Own your own home if you can make it happen (and get a decent price, and a decent interest rate).
When I did the math for the first time years ago, I found that all things considered, I could afford to buy a house that I could not afford to rent. Think about that one for a second.
As for financing a bike, be careful, but sometimes you just have to do what you have to do.
Pit Row
My 2005 RM 250 and 2001 RM500 (kx500 engine)
are both worth more than my maybe $1800 1/2 ton chevy. At 32 now I won't finance anything unless it makes money. I would like to retire someday asap, so no diesel truck or fancy toy hauler for me.
The mortgage calculator I used set the rate insanely low.
In California property taxes would be $3400 annually or $283 / month.
So, payment increases by $183 to $1972 / month before tax benefits.
The additional $183 is tax deductible on federal taxes so the net cost for the mortgage increases by $131.76.
So, in California your net cost per month for the house is just over $1000. That's a lot better than renting.
I mean, I once dated a chick who knowingly paid $10K more for the same exact model car just because it was a year newer and a different color than one with almost identical mileage. There was no talking sense into her about it. Only thing that drove the point home were the subsequent car payments that stretched her already nonexistent budget to the limit.
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