Car Financing

Before buying a car let us go back and highlight one of our investment principles: Live beneath your means. This is meant to encourage you to think if you really need to buy a new car or if what you currently have or a model several years older would do just as good. Cars are a rapidly depreciating asset, meaning they quickly decline in price soon after you buy them and steadily decline in value over time. Thus they (like other items in their same category including clothes, furniture, jewelry and electronics) should go through extra scrutiny to determine if you really want and/or need them!

Again, you don’t want to not enjoy your hard earned money … and if cars are what you really enjoy then you should enjoy them! But you should know that this enjoyment is a terrible investment decision. If you can avoid it then it is very wise to do so – take the money and instead increase your 401(k) contribution or increase the amount you send to your personal brokerage account. That way your money has a chance to grow instead of getting a guaranteed loss through a car purchase!

Leasing a car is an even worse option since you can’t keep the car at the end of the lease term and then boost your savings to your portfolio once the payment ends. Look for dealer financing incentives in the form of low-interest rates on a 3-5 year car loan. Rates will be lower on shorter-term loans, but the payments will be much higher. Do not put an excessive amount of money down since auto loans these days carry very low-interest rates.  

Your best bet would be to buy used cars in order to avoid a huge immediate price drop on a new vehicle … and avoid any new and fancy cars until later in life when you can actually afford one. Maybe buy one gently used or an affordable new car with a five-year loan term, keep it for 10 years and then pay cash for the second purchase.