Thursday, March 26, 2009

When you can afford to make the "wrong"choice

Trent at The Simple Dollar recently bought a new 2009 Prius, and took out a loan at 4% to cover the majority of the purchase price. Those who have been reading Trent's blog over the years know him as an advocate of frugality and paying cash, so this decision to finance the purchase has generated a lot of discussion among his readers. He addressed these concerns in a post today justifying his decision.

A lot of the thinking behind the pay-cash-don't-finance argument follows the line of "Won't it feel great when you walk into the dealership, write a cheque for the negotiated price of the car, and drive off the lot without a new loan hanging over your head?" The planning and discipline that it takes to save up enough cold, hard cash to pay for a new (to you) car are the same traits that help people get out of debt, plan for retirement, and become financially independent. When you look at the number of people who still live well beyond their means, spending more each month than they earn and mortgaging their future for today's wants, it's not hard to see that "save up and pay cash" is well-needed advice.

The difference here, though, is that Trent had saved up enough to pay for the car, and chose to finance the purchase (at a very low rate) in order to keep cash on hand for emergencies and any other opportunities that might come up along the way. This is very different than someone living paycheque-to-paycheque signing on for a 7-year loan at 12%. The interest on the loan may well cost him in the long run, but he's worked to put himself in a position where he can find a compromise rather than needing to make the perfect, by-the-numbers decision.

Much like the idea of getting ahead of the treadmill as opposed to getting off it, the message here is that, when you plan and save, you put yourself in a position of choice, and it can be surprising just how many options become available to you.

1 comment:

MEG said...

I completely agree that this was the wrong decision - or even the "wrong" decision.

He got a loan at 4%! That is going to be less than the rate of inflation over the next few years. It would be stupid not to take the loan - even before you consider that he'll ALSO continue to earn interest on the money he didn't use to pay for it outright.

BESIDES which he'll have the added peace of mind that comes from having more cash in the bank - which is the exact same reason I keep a balance on my 0% credit card but could easily pay it off 5 times over.

I think the only thing wrong with his decision was that he bought a brand new car - you can save 20% - 30% just for buying a dealer demo with 500 miles on it.