All of these "calculations" of if you should be able to afford it or not are meaningless if you just save the cash to write a check for it--assuming you can pay to put gas in it and keep it on the road.

With that said, once you save the ~$25000, I'd suggest against spending it on a depreciating asset.

This... invest the 25k in something to get some return... even if it is a crappy CD. Then pay off the car over time. Unless you get a cheap car, or one you can't get a loan on, never pay full cash for a vehicle if you care about being smart with your money.

IMO I'd say wait until you can buy it with cash and then some. You should leave some slack for life's surprise moments.

Personally I've grown to much prefer the feeling of being able to buy something I want more than buying the "thing". Having money in the bank grants you a certain amount of freedom and breathing room. That said, I love cars, and I'm sure if you're reading this you love them too--especially the twins!

My suggestion is to save as much money as you can stand to throw at the car. If after a few months you still really think it's worth parting with the cash to own this car, then do it.

LOL yea, lotta paranoid people and the sad thing is after all that trouble of keeping the car spotless someone backs into their car because its too shiney (all those bad luck threads)
i like how that other guy comes in and bashes ur saturn:bellyroll: really? thats just sad

i say put money aside every month, about 400-500 for 6 months to a year. see how that works out for u, if u could make it without any problems then get the car. keep the money u saved in the bank for the rainy day

I'm really impressed with the sense and wisdom of many of these responses (on both sides of the issue). I'd add two points. First, it's not just whether you can afford it, but how you value what you'd otherwise spend the money on. For example, if you want to buy a house as soon as possible (and not everyone does) and that's more important, don't buy the car. Second, if you're serious enough about living with a significant other, this is a decision you should be making with them, even if the money and car are yours.

I actually haven't ever heard it expressed that way, but it turns out that was pretty close to what I did...a lot easier to remember though :)

.02
Think about what you will need for when you are not working...when do you want to stop working? 65? How long do you think you'll live? 80? 85?....go with 85. You're going to need 20 years worth of money then....how much a year though, how about $60k? Medical needs, world travel, place in Florida with friendly neighbors. So right now, that's going to be $1,200,000 in today's money. Over a long time, inflation is around 3%, so in 35 years, today's $1.2 mil will be $3,914,445.

Starting with $5k, and using the historical 7% S&P 500 index gain for investment returns, you'll need to save $1725/mo.

How much is that $500 car payment worth in 40 years in such an index fund? $7487

...and the same argument goes out to everybody who says to always pay cash for a car. Since May of last year, the S&P 500 has gained 10.88%...car loans are like 2-3% with good credit. With $32k in an index fund you would already have enough gains for some wheels and brakes.

Most financial advice tries to maximize gains at the old end of the spectrum, and most Americans seem to maximize gains at the now end of the spectrum. Everybody who writes a book or gets on TV telling you to maximize gains at the old end of the spectrum most likely already has an 8+ figure net worth. They didn't get there by following the advice they are giving you. They took more risk than that (or they started out with/married money). It's possible to live well in the present without sacrificing your retirement. You can take into account that what you make now will probably be one of the lowest salaries you will ever have, and up until you are in your 30s there will still be time to catch up.

TL;DR...don't buy the car now, but don't wait around until you can pay cash or have x months living expenses either.

Also, maybe start looking for another job. Just going by the degrees that you have, you should be making at least 75% more than you are now. Don't become a boiled frog.

Personally, I figure out how much I need for fulfilling everything I have to pay for in a month, add in a healthy food/entertainment budget, use two net paychecks as my figure for "monthly pay", and target $1k leftover for saving/investing/paying debt/hookers. During a 3 paycheck month, dump like 80% of that straight into savings.
It could be awhile before you can afford a new car with that calculation, but you'll still be young enough to enjoy it and not living paycheck to paycheck in the interim.

cars are NOT worth getting your panties all in a twist,and ruining your financial
life,cuz remember!..in the final analysis, they are designed to get you from point a to point b period..seriously,if you lose sight of this fact,then you WILL
have a very expensive trip in life..been there, done that, hence,the civic...just sayin'

not to mention the fact,that if you do,you will get the shit kicked out of ya in taxes,UNLESS ya can "draw" down the money in smaller amounts,say over 3,or 4 years to KEEP ya in a "lower" tax bracket..just thought i would throw that out there.

sound logic! live today,and "forget" tomorrow! this way,won't have to be concerned about a bread line,you WILL be in one every day!..just sayin'

Absolutely! look for a cheap loan with a credit union or your bank, because dealerships SUCK!!! Also, take your time and wait for the BRZ (if you order) well worth it. Insurance cheaper than FRS even though its more expensive and more rare. Subie has a better rep w/ safety thats for sure. Plus if you decide to sell, you'll get more $$$ because there are very few.

this is ''dead nuts" accurate! listen up! pearls of wisdom!..be very careful when f**king around with cars! too expensive these days,IF you do NOT know what you are doing!
in addendum: the video doesn't even mention the fact that you get "ZERO" tax deduction for your $475.00 car payment over the course of the year. this was taken away
in 1986 when reagan reformed the tax code.

Question: Why would you borrow $25,000 at 2.9% so that you can buy a CD at 1.25%? If your answer is liquidity, I can understand. If you are saying you're getting ahead by borrowing at a higher rate than the rate of return you can get on your cash, I'm interested in hearing the logic...

Edumacate me.

lawlz at everyone freaking out about car loans. Taking out a loan on a brand new car isn't the end of the world.

First tell me where you can get a cd rate that high haha. i think in order to do that and still have the possibility of it being liquid would be to strecth it out about 5 years through a broker dealer.

I agree though, I would rather finance a car for below what the average inflation price is and sit on my cash (invest it) versus paying cash for it. The value of a dollar folds over time and so you would be paying less in the long run.

urine....teehee

My local Bank is offering a rate of 1.35% on a 5 year CD. I was using that number to be fair;using a rate from a shorter term would make my point even stronger.

Unless you're truly happy at your current job, you need to go on monster and search for a new one. I also have a BS in Computer Engineering and my first job out of college at 21 years old paid 52k/yr (gross). When I was 26 I had doubled that and was making 6 figures.

For my first car, I was in a similar situation - I had no debt (although I did have student loans) and had very little expenses. I bit the bullet and financed my first car at a whopping 9% interest rate (I had no established credit - "student loans don't count"). You know what you can (and can't) afford.

Go for it, why not? And also, shop around for financing - don't just take the rate the dealer gives you - I will never make that mistake again. Credit is cheap now a days. People are bragging about paying for their car in cash - what stupidity. You could borrow @ 1-2% (on 20-30k the interest accrued is negligible) and instead invest that huge lump sum (mix of stocks and corporate bonds).

TL;DR; If you don't love your job get a new one, shop around for financing, buy the car!

This is why I don't want to get the car. I'm torn between investing and having any reasonable amount of wealth in my lifetime and enjoying life right now. The way I see it now is, I haven't been able to save any money thus far, and I'd probably continue to dump my savings into old cars, so might as well dump it into a new car that will retain some measure of value in the next 5 years. As opposed to my '87 $#!tbox that isn't worth hardly anything. I do need to start a retirement account immediately, though. I've got a little put together but it ain't much.

dont make my mistake. i was making 2600 a month and that a 440$ a month payment was no biggie. which it wasnt, until i got laid off. then 440 became a shitload. plus the 200$ insurance and the 150-200$/month gas. then rent and eating, of course. i'm too upside down to be able to trade it in so now all i can do is work 50 hours a week in a lame ass minimum wage job until i find something better. while going to school.

There are multiple factors when it comes to this, but here are the basics.

Let's be generous and say that a car loses 50% of its value over 5 years. That $25k car, just became a $12,500 car (using time value of money @3% that is 10,785 in today's money). So that $25k isn't being used for you, it is being used against you. It is being invested in a depreciating asset. You lost over $14k in value putting your money there.

Now there is the time value of money. A low, but good estimate here would be about 3%. So every year that passes your money is worth 3% less than it was the year before. It is smart to use that to your advantage. A 60 month loan $25,000 loan @ 2.9% is about $448 a month. By the end of that 5 years, that payment will be the equivalent of $386 in today's dollars (after 1 year that payment is already down to $435). In essence, if the interest rate is less than the time value of money, you actually start saving money the longer you borrow it. In this case the normal 3% out paces the 2.9% and the interest paid is nullified by decreasing worth of the dollar (barely as the difference is pretty low, so I will ignore the difference for the rest of this - if it was 0% loan it would make a much larger difference).

So now that you haven't used that $25,000 on a depreciating asset, and the interest costs are nullified by the time value of money, you can starting having that $25k work for you instead. If you put the money in a CD, you are not going to get the value out of it that you should, but let's just say you can get 1.1% on a CD. You have 26,405, but in today's money that is actually 22,783. That is a bad investment, but you still gained 12k in value over just buying the car outright. If you take that money and invest in some semi liquid assets in some stocks and bonds. Being conservative that should gain over 5%. That 25,000 then becomes 31,907, in today's money that is 27,530. A gain in value of $17k in today's money. Now if you really want to be picky you can include the total interest costs (which IMO are nullified by time value of money), on that loan ~1,900... so you could take that and subtract that out of the numbers above and you still make 10 and 15k respectively.

Now those are rough numbers, but should give the idea of what is going on. Even a low rate CD is advantageous over putting your money in a depreciating asset. All payments on depreciating assets should be delayed as long as possible as long as the time value of money outpaces the interest rate and in some cases as long as the time value of money + depreciation rate out paces the interest rate.

Clear as mud right? :bonk:

I could agree with your logic if the question was "I have $25,000. Should I buy a car with it, or keep the one I have and invest the money in a CD?" To answer that question by saying that you'd be better off investing your money in a low yielding CD as opposed to a depreciating asset is perfectly sound reasoning.

The way I see it however, the question is "I'm buying a car. Should I borrow or pay cash?" It's a given that you're buying a car; the negative rate of return on that investment is what it is, regardless of whether you pay cash or finance it.
If you have the $25,000 and choose to invest it at 1.25%, but by doing this, it requires you to borrow $25,000 at 2.9%, your investment is yielding less than the cost of borrowing the money. The depreciation of the car doesn't factor in, since it's a constant in both equations.

To put it another way, here are the equations.
Rate of return for borrowing = ($25,000 @ 1.25%) - ($25,000 @ 2.9%).
Rate of return for paying cash = ($0 @ 1.25%) - ($0 @ 2.9%).

The depreciation of the car is constant in both equations, but where your money is tied up in (losing money) and how much it earns for you is different. With a car you are always losing money on it (unless you have a classic car). In other words that money you 'invest' will always lose money, and it is best to you somebody else's money to pay for it when you only have to pay a small amount of interest on the loan. Then use your money to work for you. I'm not saying that this is the way that anybody should be buying their cars (I could personally care less what anybody does), but that it is the smartest way to use your money (if that is your only concern). Invest in appreciating assets, borrow for depreciating assets.

Now if you want to get technical you could run something that shows takes out the car payment every month from that amount. Basically put 25k in some sort of savings, and pull the payment out of that bit by bit. You would still end out on top, by doing that. That would be far too long and boring that it would turn everybody off on the subject (it would be the ramblings of a mad accountant). So the basic theory is above, nobody really has to subscribe to it if they don't want to. I know from life experience that this sort of thing works, and works very well.

Or, you could spend the $25K now, save the interest over the two years, and dollar cost average what would have been the car payment into an investment and end up in relatively the same place, or better depending on market conditions, without the risk (and yes, there is one) of carrying a loan.

Also, on the investments in your example you are leaving out the taxes you would need to pay to realize your gain.

We've gone around this many times on the forums here. It's a polarizing issue (almost as much as AT vs MT). In the end, the OP just has to decide how they prefer to handle their money.

There are a lot of variables... too many to go through on here. The realized gains on those numbers above would likely be higher than the 5% if you were smart about your investment, and the tax rate is so low on capital gains that even with the taxes added on to it, it doesn't make a material difference in the calculation. 15% of the gain is at most on any of those ~1000.

Also 1900 + any interest is over 12* lower than 25000 + any interest.

Well, lets say I keep my current car and make pretend payments each month for $400 into a car savings account for the future. When I finally have enough to buy a brand new 20K car, I don't think I'll want to put it all down immediately, do I?
Let's say I was able to get a super-duper low interest rate at 0.95% for 3 years. What are better ways of stretching that saved up money for the next three years rather than using it all immediately on that car?

Something my father (depression era kid) always told me when I wanted to buy something: "Do you really need it"?

I think I speak for all millennials; "No, but I want it and I want it faster"

You have to answer that question for yourself. For me, if that is the reason I have been putting the money in savings, yes, I would write the check and be done with it. It's how I'm wired.

It depends on how you look at "having" money. From a pure net worth prospective, you don't "have" the money if you owe it to the bank. To me, it's the same logic as "you have to have a mortgage so you have a tax deduction". I'd rather give $25 to Uncle Sam than give $100 to Bank Of America to avoid giving Uncle Sam the $25. I'll keep the $75 and do something with it.

I know I'm wired differently than most Americans when it comes to my view on this, and I'm OK with it. Finance is as much a personal decision as it is math. You have to go with what works for you.

I agree with this 100%. It is all in how you view it, and how much effort you want to put into it. With more risk comes more reward, but not everybody wants to take risk (understandably so).

I really needed mine! Male menopause cure.:bonk:

I'm with you Brother!

I had also hoped it would cure baldness, but that didn't happen. Might have needed an LSA for that.

Hey, I'm not trying to beat you up here (sometimes it's hard to not come off as rude when rebutting), but...
In both situations, you own the depreciating asset. The car is going to drop say $15,000 over the next 5 years, regardless of whether you borrowed on it or not. If you borrow the money, you'll pay $1,886 in interest on the loan, and your $25,000 will earn you $1,612. Can you explain precisely where you're picking up the $274 difference, plus whatever additional return that makes borrowing the money the smart thing to do? Granted, the difference isn't all that great, but I still don't follow your math...

Reading this really struck close to home.

My advice, if you don't have a spare 500 dollars coming in to the bank each month...don't do it. That being said, you can probably figure out a good way to do it lol. Priorities.

It is all in time value of money. A 3% inflation rate (slightly below average historically) makes your money worth less and less as time goes on. So in effect, a ~3% interest rate is offset by the fact that the present value of the car payment is nearly 16% lower 5 years in the future. Investing that money protects against the inflationary drop (CDs are ripoffs, there are better ways to invest your money that are extremely safe, liquid, and can still get a 4-6% return).

Don't get stuck on CDs here. That is the wrong way to look at the issue. The issue is sticking your money in something that loses 10% a year or putting your money in something that gains __% a year and pay off a loan that costs $X in interest per year. There is a crossover point where one is more advantageous than the other. It can vary greatly through the percentages and the years involved. So one person that gets a 1% interest rate on the loan for the car and can get 4% return on investment has a different answer than a person who gets a 6% interest rate on a loans, but can only get a return of 2%.

This is getting pretty far off topic here, I have thread jacked enough. I will quit discussing this publicly for the sake of this thread and OP. The theory is out there, if people want to absorb it and use it that is their choice. If they want to ignore it that is there choice. I don't care either way, not my life. If any of you want to continue discussing this with me, PM me.

Agreed, if you can get a return on your money that's higher than the rate at which you're borrowing, it's a no-brainer. I thought the original question was phrased based on crappy CD rates... If you've got a safe place (FDIC insured) to stick money that will yield better than 4%, go for it!!

I still don't see what the rate of inflation has to do with this calculus though... Can you show me the actual mathematical formula that shows where you're money ahead? I understand that the payment will be relatively less in 5 years due to inflation, but how it actually impacts your return is beyond me.

For example, here are my formulas (I used the 1.25% return, just to keep it simple). Perhaps you could add in the missing variables.

Option 1: I purchase the car with cash and every month, instead of making a payment, I deposit an equivalent amount into an account yielding 1.25%. At the end of the 5 years, I have a car worth say, $10,000, and I have $27,728 in cash.
Option 2: I borrow on the car, and invest my $25,000 at 1.25%. At the end of the 5 years, I have a car worth $10,000, and I have $26,608 in cash.

Add the inflation to my #'s, so I can see what I'm missing...

Don't do it. You have living expenses that seem to outstrip more than you can save. Adding the car will only make you that much more in debt.

I like the car but didn't buy it strictly because I didn't want more than 50% of my after tax income to be eaten by expenses.

Seriously, don't do it OP.

+1 please do yourself a favor,and don't buy this car.
it's just a car.you car is fine for you,and you own it! you are way ahead of many,many
people,why would you f**k this up! stay out of debt as much as you can,because you do NOT know to a certainty WHAT lies ahead! don't f**k up your life over a car! think this through!..ok?