There is an old debate about buying a car in cash vs. having a car payment with a low interest rate and investing in the stock market instead. Two of my favorite financial experts disagree on this topic. The first is Dave Ramsey, who believes in having no debt whatsoever. The second is my father-in-law, who I’ve written about before.
My father-in-law is fine carrying debt but only if the math is working in his favor. Earlier this month, I flew home to Louisiana and was talking about money with my father-in-law. He and I are BFFs, two peas in a pod if you will, and I was asking him about paying for my next car in cash since both my vehicles have over 200,000 miles on them.
He surprised me when he said I didn’t have to pay for one in cash, as long as I was actively investing. This is the man who paid cash for his house, so I didn’t expect this advice from him, and it goes directly against Dave Ramsey’s advice, who I listen to every day. Cue a major internal conflict.
I want to be clear. The main problem with the idea of making more in the market and having a car payment is that people spew this idea all the time but then never, ever actually invest.
They think they sound smart when they say they can get a better return in the market which is why they don’t mind having a two percent interest rate on their car and yet they never invest the extra cash in a brokerage account.
If you think the same thing, here’s our list of the best online brokerages to find one that works for you.
My father-in-law is totally different because he’s the type of person who actually tracks every penny. He even tracks his mileage and gas after every fill up. He loves lists and charts and graphs.
This is his thing. He told me a story about buying a van when he and my mother-in-law had their 4th child 25 years ago.
They saved $13,000 to buy a van in cash but then got such a great interest rate he decided to have a car payment and put the $13,000 in cash in a mutual fund instead. That mutual fund is worth over $100,000 now and the van’s monthly payment was minimal. It was a decision that made a big impact.
One could argue, though, that if you can save up $13,000 in cash then you can do it again and again and just decide to use some of it to purchase your needs and some of it to invest, but I just love the story and the example.
What I Think Now
So, I have to say my resolve is cracking in terms of buying a car in cash; however, it’s still a big goal of mine. The car buying statistics lately aren’t looking good. In fact, a recent article in Fortune mentions it might be the next bubble.
They said, “The average duration of a new-car loan rose to a record 66 months and a record 62 months for used cars, as lenders wrote more five-year, six-year and seven-year loans so that buyers could afford the monthly payments.”
That’s also not to mention the fact that the average car payment is now over $500 per month – ouch!
*Related: Not certain if you should buy or lease? Check out our leasing a car vs. buying a car guide to learn which is best for you.*
This is definitely a slippery slope. I find that when people focus way too much on the monthly payment, it’s a detriment as they can get caught in a payment mentality.
Cars decrease in value rapidly, and when you have a loan as long as six or seven years, you can easily get underwater on your loan – a serious problem if the car is wrecked or totaled.
It’s Up to You, Not Dave Ramsey or Anyone Else
After thinking more about this debate, doing my research and talking to my father-in-law, I’m definitely less judgmental about people who have car loans and realize that if someone is smart with their finances, they could come out on top by investing the money instead.
However, I have so much debt already with my husband’s medical school loans that I hate the idea of adding to the pile. So, I will continue adding to my car savings fund each month and when one of our cars decides to croak, I’ll hopefully have enough to pay for one in cash.
*Related: Want to cut the cord? Read our review of the Amazon Fire Stick to see how it can help you save $50+ per month on cable.*
I’ve found the best way to start saving to pay cash for a car is to put what you figure a car payment you can handle away in a savings account each month.
This allows you to build up the savings needed to buy a car in cash. The key is to find an institution that has no minimum balance requirements and pays a decent interest.
Chime® is a mobile-first financial app that has no minimum balance request, and they round up each purchase to the nearest dollar and places that amount in your savings account
If you’re like me and you want to save up for a car in cash but aren’t sure if you can save up enough by the time you’ll need to actually buy the car, start tracking your expenses and income fastidiously.
If you need ideas to save extra money, read our list of 35 ways to save money fast to give you some ideas.
You’ll know where every nickel is going and will be able to accurately predict how long it will take you (and what you’ll have to sacrifice) to save up for that new to you car. And if you don’t like Excel, there are many other tools that make it easy to see exactly what you’re spending and saving.
Additional resource: If you’re in a similar situation trying to determine if you should buy a car in cash or take on a car payment, then check out my favorite tool – Personal Capital. Completely free, it allows you to track your spending, monitor your bank and investment accounts so you can make informed decisions that are right for your specific situation.
What do you think is better – paying for a car in cash or taking the lower rate loan and invest in the market instead? Have you ever paid for a car in cash? When was the last time you intended to invest but didn’t follow through on your intentions?
*Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC.