Should I pay cash for a car or finance it?

AI meeting summary:
Reid Trego hosts the Money Pig podcast and is joined by Ray Brown, an associate wealth advisor, to discuss ways to buy a car. They explore paying cash versus financing or leasing. Ray recommends paying cash as it's cheaper and encourages individuals to build up their savings over time. However, for those who can't save enough money upfront, they suggest putting 20% down and not financing for more than three years using the 20-3-8 Rule. Financing makes it easier to say "yes" to extras like warranties and upgraded features that increase the cost of the car in the long run.
Ray and the host of The Money Pig podcast discuss the pros and cons of buying, leasing, or financing cars. They suggest buying a used car to avoid depreciation costs, but acknowledge that there are instances where leasing may make sense for short-term use or business purposes. They also emphasize the importance of understanding one's personal goals when making financial decisions. Goodwin Investment Advisory does not offer personalized investment or tax advice through the podcast. 
Keywords:Car, transportation, financing, leasing, budgeting, investments.

Outline:
Chapter 1: Introduction
Timestamp: 00:08 - 00:19
Reid Trego introduces the Money Pig podcast, sponsored by Goodwininvestment.com Advisory, with the aim of leading people to financial peace, independence, and generosity. Ray Brown, an associate wealth advisor, is a guest on the show to discuss transportation.
Chapter 2: Paying for Transportation
Timestamp: 01:25 - 05:26
Ray Brown and Reed TreeGo discuss the different ways of paying for transportation, including paying cash, financing, or taking a loan. Ray suggests paying cash, as it is the cheapest option and makes people think twice before making a purchase. He also recommends setting money aside in a sinking fund to save for future purchases.
Chapter 3: Financing Transportation
Timestamp: 06:30 - 10:02
The hosts discuss financing transportation and the emotional side of the process that can lead people to overspend. They recommend following the 23 eight rule, which means putting 20% down, not financing for more than three years, and not letting payments exceed 8% of income.
Chapter 4: Leasing Transportation
Timestamp: 10:08 - 14:47
Ray and Reed talk about leasing transportation, which can be a good option for short-term commitments or for people who want to avoid upfront costs. However, there are added fees and paperwork to consider, and the hosts suggest buying things that appreciate in value.
Chapter 5: Upgrading Transportation
Timestamp: 15:05 - 17:04
The hosts discuss the benefits of upgrading transportation over time, as people can reward themselves along the journey and avoid feeling like they have finished. They also highlight how financial advisors can help people manage and rebalance their portfolios of assets.
Chapter 6: Conclusion
Timestamp: 17:19 - 17:29
The hosts remind listeners that the information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.

Notes:
Reed TreeGo is the host of the show and Ray Brown is the guest.
They are discussing transportation and ways to buy a car.
Ray suggests that paying cash for the car is the best idea.
He recommends using the 23 eight rule for financing a car.
They also discuss leasing a car and the hidden costs associated with it.
Upgrading to a used car is also suggested as an option.
The podcast is called "The Money Pig" hosted by Reed TreeGo. 
The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

Action items:
Based on the transcript, it appears that the main topic of discussion is different ways to buy a car. The follow-ups and action items are:
1. Discussing ways to buy a car: The podcast is c

Transcript

Welcome to the Money Pig podcast, brought to you Rtrego Goodwininvestment.com Advisory, where our mission is to lead people to financial peace, independence and generosity. I'm your host, Reed TreeGo. And today on the show, we're joined by Ray Brown, associate wealth advisor and candidate for or CFP certification. 



Wow. 



For discussion about ways to buy a. 



Car, I love it. 



We're going to talk about transportation today. 



Ray, thank you for having me. 



Yeah, sure. Have you here. 



Super great topic to talk about and yeah, I think it's going to be great. Let's jump into it. 



All right. Cars are great investments, Ray. 



You got to have it. Oh, investments. I don't know about an investment. 



Okay, you're right. 



Have you ever had someone at the dealership walk in, it's like, Mr. Brown thought you were smarter than this. This is a true story. This happened. This man come in, he's like, Mr. Brown thought you were smarter than this. You don't want to protect your investment with this. Trying to sell a warranty package. Nice investment. This is a depreciating asset. Is that what you meant to say? 



That's exactly right. 



They did not like me. 



No. Did you call them out? No investments. Appreciate it's. 



Very true. 



Yeah. All right. So one of the questions we get a lot of times is, hey, I'm going to get a car. I need transportation. Should I pay cash for this? Should I finance it? Take a loan? Should I lease? I've done all three of these. So I wanted to just get your take and find out what you think about this. So let's start with is it a great idea to go in and just pay cash for a car? What do you think, Ray? 



The short answer, I say yes. That's the best way. I think it's the best way. It's the cheapest way, and it's just giving you man, there truly is a right brain, left brain response to so much that we talk about in this personal finance world. And buying a car, I think is the exact same. And like you said, read, there's three ways to buy a car, right? You've got to do one of these three, you're paying cash for the entire thing. If you don't do that well, then you're going to finance it, which means you're borrowing money from a bank or credit union in order to pull this off. Or the third is that you're leasing it direct from the dealership. And so when it comes to paying cash, you've worked hard to save up this cash. 



The cash is sitting in your account and it has a pain sensor that's associated with you letting go of that money. So when it comes time to buy the car, are we spending 25,000 on the car? Are we spending 30,000? Well, Dang, would I rather have that five grand? Do I really need this $30,000 car? There's a thought process that activates and it just makes you think twice before you quote, sign, and drive. When you go into a dealership and you're pushing financing, well, what difference does it make? The payment is $16 more a month. If I spend, oh, okay, I deserve this extra $16, I can do that. Yeah, I can get the BMW with the next step up the line. 



But you figure that over seven years. 



Yeah. Who asks how many years it is? And I think that's the number one question when you walk into a dealership is what are you trying to get to a month? And when you start thinking in those terms, that takes everything to a completely different level. 



Although that is a very normal way that people think about things, right? This is how we live. We do everything in $4.99 or $200 a month. 



Yeah, absolutely. So, yeah, to answer your question, that was my long approach. My short answer there at the beginning was, yes, pay cash. And like you, I've done it both ways. I've never leased a car, but I know a lot about it, and I know I have financed in the past, and I've also paid cash. And it's one of those things where if you can get ahead of the system right, because this is the other big question is who in the world can stack up that much cash to drop it? It's like you can do that if you have no payments, right? You have to be ahead of the curve. And so you already own the car you're driving. You have no car payment. Therefore, you now have a car payment every single month you're setting aside. And before you know it, boom. 



The cash is there, it's growing, and it's ready to roll. And then you've got it. And you can say, hey, do I want to let go of this on this car? Do I dial back my desires a little bit and get a little bit less of a car to keep some cash or put a little bit towards the next one? And these things are going down in value by the day. So it's like, do we really want to how do you swing it? 



Yeah, it's amazing. And just like you were talking about, ideally out of our monthly budget, we're putting money aside in a sinking fund, which we would call it, where it's saving. And the way I kind of phrase it to people when I'm talking to them is I say normal people go buy a car at the dealership and then they make payments, right, over time. If we want to be weird or maybe financially ahead of the game, we would make payments to ourselves ahead of time, put it in Savs account, earn a little interest, and then go buy the car. And just because now you bought that car, keep making that payment to yourself, because in a few years, you're going to trade out that car, right? And the sooner you can get there, the sooner you can trade it out if you want to. 



So it's sort of like that idea that there's two kinds of people, the ones who understand interest and those who don't. Some people pay it and some people earn it. 



Right? Yeah. And if you were to truly compare, going back to the initial question, do you pay cash for it? The answer is yes. And it's just because that's the cheapest way to do it. 



Fair point. 



And of course, to give it just full devil's advocate here, the full disclosure is, well, that doesn't factor in opportunity cost, right? You're going to have those people that say, well, why would I let this money go out of my account? I could keep that invested at 10%. It's like, well, not if it was 2020, would have gone down 20%. You would have actually saved money by pulling your invest, by letting go of the cash to buy this car. And so, yeah, I think when we're looking at that, obviously my advice is always to encourage folks to, if you've got a loan, get it paid off quick, but then pretend like it's back on. It's game on. 



You're setting aside you're building that sinking fund like you mentioned reading, just stirring up the cash so that it's there when you need it, the car will die. What you're driving right now will crap out on you and it will be time to purchase a new car. That's a fact. 



Prepare now, unless it's a Toyota Tacoma, which I have, which is going to last me forever. Of course, I love it. Okay. So option number two, you can finance it. You can go to the dealership, get a loan from a bank or their crediting organization. 



For folks that do that, I've always recommended taking a private credit union route. So you're walking in, you've got your own financing. And this is something to consider now is that you and I have mentioned this in the past, but in years prior interest rates were incredibly low and you could negotiate a 0% interest on a loan or a 0.9% interest on a loan. And that's a little bit of a different conversation because then it does become a thought process of, well, why would I pull the money out of the investments now? It's so cheap to borrow money. And you could easily pull that off. But now things have shifted. We're now in this very high interest rate environment where car loans are. I looked at this morning, they're going 6%. 



So just right there on a $30,000 car, that's two grand in the first year. And so when you're really looking at total cost, is it worth it to finance it? And then the one thing that is just the back of the pocket, right brain, left brain, thought process here is the emotional side of financing. And it is easier to say yes to things like warranties. Do you want the leather protection. It's just $8 more a month. Well, times twelve months in a year, times blah, blah. What is the true cost of the car? And we know that it costs a whole lot more. When you do finance it's easier to say yes to things. It's easier to have that lifestyle creep. Or you say, I do deserve that upgraded trim package, or I want the better wheels. 



And if you're just signing your name, there's no emotion. You've not exchanged any money, and so there's no pain sensor in the brain that's activated it's monopoly money. 



It's why I like to carry cash and use it at the grocery store a lot. I like to feel it leaving my hands every once in while. A and if you are going to finance, look, we got to be honest. A lot of people, especially early young folks, 2030 years old, it's hard to save up 25 or $30,000. Go pay cash for a car, but save up some. And hopefully on your second car, you can put 50% down. And on your third car, maybe by then, you can put 100% down or 75%. Just finance a little bit, you're going to save a lot of money. But if you are going to finance when you're in your early 20s, you're probably not saving up that 25, $30,000. 



So we recommend the 23 eight Rule, and that just says put 20% down, don't finance it for more than three years, and don't let the payments exceed 8% of your income. And there's also another version of this out there. It's called the 24 ten Rule, which is a little looser. 20% down, not more than four years. And don't let it exceed 10% of your income, but 23 eight, keep it on the conservative side because this is the kind of thing you don't want to mess with, but it'll help you figure out where your payment needs to be. 



Run through those numbers again. 



So you said 20% down, don't finance for more than three years. 



Three years. So that's a short time span. And then keeping the payment at 8% of your take home pay for your net or your gross income okay. Per month. Some good budgeting restrictions there because there's so many things today that demand our attention. We've talked about the subscriptions and the Netflix. This is only 999. The more things you say yes to, it's like, wow, now I'm actually in a pinch. And if you gosh, so many things can happen. If there's a layoff, it just creates so much unnecessary risk and pressure. And if you've stacked yourself so tight that it's just, man, there's no room to breathe in this whole thing. 



That's right. So then the third option number three oh, let me go back to this. Can you finance a fancy car? What do you think? If you wanted to buy, let's say define fancy, let's say fancier than my Tacoma. But I'm going to upgrade to maybe that luxury car. I don't need a Mercedes to get around, but it just feels good to drive. 



I'm sure that they would love you to walk in the door and ask and yeah, we'll get you a great deal, Mr. Sir. 



Yeah, because I can do it for $500 a month or $800 a month. Sure. 



Can you do 700 a month? Yeah, sure. We'll get you in it. I went into the back and I did some talking and my manager we got it down for you. You said you could do 700. I got it down to 690. What do you say? Yeah, it's an eight year loan, but it's your budget. You can do that. 



So I think when you get to an extra car, like if you want an extra car, a Corvette or something like that, we're not probably financing those things. And if you are, it's got to be same as cash over twelve months. That's it. 



I would certainly discourage it because then it's just like maybe you got people going out financing mattresses that they think that they need, and do you really need the Corvette? And again, when you've got to pull your cash out of your investments or out of your bank account and you've worked hard and you've seen those numbers go up over time, it just changes the entire way you think. You start to really question, do I actually need do I actually want this? Would I rather have this. Do XYZ for me. Absolutely. Instead of dropping in value daily. What's? The old Dave Ramsay quote. He calls it like a rock because it goes down in value. That's why they call it like a rock. It drops in value like a rock. 



The old ads for the pickup truck, the Chevy commercial. 



Yeah. 



All right. And then the third way is you can lease it, or some people call fleece it. But I will say there are circumstances where leasing might make sense for people. 



Yeah. What are your thoughts on that? 



Well, I thought it made sense, and I don't think it was a bad financial decision. In a few years ago, I guess probably seven years ago, my daughter turned 16. They had this big good deal going on, the electric cars, right. Tax credits, state, federal, all this stuff. And so we leased a Nissan Leaf. It was $300 a month for two years. This is the car my daughter drove. I think my wife drove it for a little while. We all liked it. It had some zip in it. I mean, the thing weighs about 22 pounds, so get up and go. But we did like it. And then they offered us a third year and like, yeah, we just did it for a third year, so I don't feel like we spent that much money on that car. 



Yeah. And this is where it truly gets into that. If you've got the crystal ball and you know exactly what's in the store for your future. Like, hey, I'm on work assignment. I'm in Atlanta, Georgia. I'm working here for two years. I don't want to deal with negotiating to buy a car. I don't want to then have to turn around and sell this car at the end of this term. And it's a short term. I think there's a lot of the sophisticated folks that feel like, oh, leasing a car is what fancy people do, and this is the right thing to do. Or I'm an executive, and I need to have the newest model, and I'm a real estate agent entertaining clients. 



And so if that's your business motive and you like to operate in terms where you work out of rental cars, I think it's acceptable. But you just got to know that comes with a risk or I'm sorry, a price premium. Right. So it is more expensive. But hey, I mean, so is going to a fancy gym, right? You could go to the Planet Fitness or you can go to the $50 a month gym, and neither is a right or wrong answer. It's just I know that one costs me more, but it satisfies an emotional. 



You can also go run out on the street. 



Exactly. 



And that's free. Interesting. Yeah. And I do think if people absolutely are driven to replace their car, upgrade their car every two years or whatever, maybe this makes sense. It's less hassle. Again, you can do about anything for $400 a month or $300 a month with those. 



We just have to be super aware of the hidden costs. There are so much upfront costs that are baked in. There's tons of horror stories for folks that have gone over in the mileage. The paperwork is tricky. It's just an all day fare at the dealership. And it's kind of do you really want to be in this spider web of dealing with all of the it's just a lot that goes into it, and there's fees. And let's be real. If the car company was giving you this car and charging you for it and you're giving it back to them at the end of your term, we know they're not losing money. They're not doing this for you. There is certainly something in it for them. They're in business to make money. 



And so do you have a one off transaction in and out with them? Or do you have relationship where you're a slave to the car for two to three years? And again, I think there could be a time and place for it, but with that comes some added costs. And it's not to say it's a bad thing or the wrong thing for. 



You, but just yeah, well, and sort of like we started talking out, talking about at the beginning is, I like to buy things that appreciate right. If I'm going to invest in something. Well, the car is not an investment. So I always think I want to buy things that appreciate and I want to rent things that depreciate. 



Right. 



But a car I tend to want to not have debt on, I don't want to pay that price premium you were just talking about. And I sort of think maybe it's different in this case because this is a use asset, right? It's something I don't know. 



So this would be my thought process. Just super simple math. Say we buy the car right now for 30,000. I'm going to sell it in just a year, a couple of years for 20,000. As a used vehicle. Say you would buy it used we didn't talk about this, but always recommend buying a used car. 



Great point. 



Because someone else has taken the depreciation hit, it loses so much in value instantly, the fact that it is now a used car means it's worth less. So, absolutely, I will buy a gently used car. It's new to me. So anyways, $30,000, we buy this used car, we're going to sell it for 20, even 15,000, a few years down the road. The cost of operating that car, ten to 15,000, you could not have leased it the same amount of time period for that low of a price. And so what is the most inexpensive way to operate a motor vehicle? It would be buying it, holding it for the sweet spot, selling it, and then you get your next one. And for folks that don't have the cash ahead of time, the best advice is always you buy what you can afford. 



That's right. 



There is no shame in buying a $5,000 Craigslist car. And it is not forever. It's doing its purpose for a short period of time. And then you're cashing out. You're upgrading. You're continuing to save on the side. Next thing you know, you're in a $10,000 car. Next thing it's 1520. And you're just playing the game. You're upgrading each step of the way and kind of rewarding yourself along the journey. So it's perfect. Never finished. 



Yeah, perfect. Love it. Thanks, Ray. You rock. 



Thanks for having me. Yeah. Super fun. 



And as financial advisors, we manage and rebalance people's portfolios of assets, right? But the real value is that we work to understand our clients individual goals so we can have these types of planning conversations that are so personal and unique to each individual. We'll see you next time. 



The Money Pig podcast is hosted by Retriego. Goodwin Investment Advisory is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with security laws and regulations. Goodwin Investment Advisory does not render or offer to render personalized investment or tax advice through the Money Pig Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.