Smart Car Buying: Financial Tips for Maximizing Wealth

Smart Car Buying: Financial Tips for Maximizing Wealth

In this episode of Retire Early Retire Now, Hunter Kelly, a certified financial planner, discusses essential financial strategies for car purchasing. He covers how to avoid lifestyle creep and over-purchasing, setting guidelines like the 20-4-10 rule—putting 20% down, financing for under four years, and keeping total car expenses under 10% of monthly income. Hunter addresses paying cash vs. financing and highlights the importance of maintaining liquidity and saving for investments. Real-life examples and practical advice help viewers make informed decisions about buying cars while continuing to build wealth.

00:00 Introduction to Smart Car Buying
01:06 Determining Your Car Budget
03:42 Financing vs. Paying Cash
05:21 Depreciation and Car Value
09:33 Real-Life Client Example
12:21 Pros and Cons of Financing
14:49 Final Takeaways and Advice

 This Podcast is for educational purposes only. . It's not meant to be financial insurance or tax advice. Please seek a financial professional  when thinking about your own situation and do not make decisions solely based on this podcast.

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Transcript

0:00

Welcome back to retire early retire. Now I'm hunter Kelly certified financial planner, and today we're tackling a topic that everyone deals with at some point, and that is purchasing a car. Uh, last week we talked about, um, five things that you can do to destroy your wealth, especially if you're high income earner. And that's, uh, one of the things we talked about. His lifestyle creep and in lifestyle creep. Uh, one of the worst decisions I can see people make is over purchased four vehicles. So today I just wanted to talk about. Um, couple of things. One, how much car should you be buying? Should you be paying cash or financing? And what factors should you should consider when making those smart financial decisions? Around purchasing those vehicles. Um, but before we do that, go ahead and like, and subscribe to this YouTube channel hunter, Kelly CFP, we're all have videos every week covering array of different topics to help you make sound financial decisions. If you're listening to this on apple or Spotify, go ahead and leave a five star review on your favorite podcasting app, but we'll jump right into it. So how much car should you buy? What should you buy? Um, what are some general guidelines that you should abide by so that you can continue building wealth? Um, but also kind of balancing that. Hey, I, I work real hard. I make a good income. I want to enjoy some of that income now. And maybe your thing is cars, right? You want to be able to, to drive around and, uh, enjoy your ride and not necessarily ride in a beater, uh, your entire life. Right. And so what are some general guidelines? So generally speaking, we want to put. Uh, 20% down. Uh, if you're financing that vehicle. So if the car is$50,000, we want to make sure that we're at least putting down$10,000. Now, if you have a existing car that you can trade in, And you have equity within that car. Obviously some of that cash that you'll get for that trade in can go down towards this 20%. And then we want to keep financing terms again, if you're financing. Under four years. Uh, because we want to stay positive in our equity. Uh, we don't want to get upside down, which we'll talk about here in just a little bit. And then keep the total car expenses. That means the loan payments of principal and interest on that loan insurance and other maintenance like oil changes, tires, things of that nature. Under 10% of your monthly income. And there's a caveat to this. This is assuming that you have no other, uh, consumer consumer debt or very little consumer debt. So credit cards. Other personal loans, student loan debt. Um, if you have. A higher student loan debt or higher credit card bills. Uh, we would want to tailor this down. Uh, to where we're meeting that 10% rule for all of your debt. Right so that we can still have a large percentage of our income going to other things like saving, investing, uh, our needs, like, uh, our fixed expenses, mortgages, rents, things of that nature. Um, and give us flexibility there. If we have too much consumer debt or too much of our income going to consumer debt that will constrain our ability to, uh, save, invest and do the things that we want to do. So. That is the general rule. We call it the twenty four ten rule. Uh, again, 20% down. Finance for under four years and make sure that less than 10% of your monthly income is going toward, uh, that loan insurance and other maintenance costs. Now. Like I mentioned earlier, and in the last podcast, one of the things that will erode your wealth, especially a high income earner, is that. Uh, you can over purchase on things, especially like cars. So just because you can afford a$10 or a hundred thousand dollars car. It doesn't mean you should naturally go out and necessarily go out and buy a hundred thousand dollar car. You have to remember. What are your goals? What do you want to achieve? Also, what is your liquidity like? Right. And so if you're just starting out as an attending physician or graduating college and getting your first time. Associate attorney, uh, position. Things of that nature. Um, Should you be really going out and buying a hundred thousand dollar car or putting them in$20,000 down because you could be eroding that liquidity for. Your emergency fallen and things of that nature. So rule of thumb again, we don't want to exceed. One 10th of our annual income. Uh, when we buy. Uh, these particular types of vehicles, right? So if you're making.$200,000. We don't want to, uh, spend more than$40,000 on a car. Right? If you're making 300,400,000, we want to. Kind of work our way up there with that math. Right? So again, if you're making$500,000 consider purchasing a car under$50,000 or less, Uh, that, uh, unless it serves a specific purpose, maybe you own a business. You get tax deductions, things of that nature. Um, for that pitch. Specific vehicle that you may need for business, right. And so. The reason, a couple of reasons why one, this is a depreciating asset, right? Uh, new cars, you generally lose about 20% of their value in the first year. So as soon as you drive that new car off the lot. If you bought a$50,000 car. That thing is going to depreciate. Uh, rapidly. And within the first year it will be worth$40,000. Um, so that's one of the biggest reasons you want to put 20% down. And so that you can stay positive. Uh, on that equity within that car. Uh, because let's say you didn't put that 20% down, you stretch that financing term. Over five, six, potentially seven years. Um, and you're making those payments will early on. You'll actually have neg negative equity in that car. So if you needed to trade it in or you want it to get rid of it, whatever that case may be. Your loan balance will be higher than what that car is actually worth. So. Uh, generally speaking by year three, the car can lose up to 40, per 40 to 50% of that original value. And then after your five and average car's worth has only about 35 to 40% of what you paid for. Right. And so these things depreciate really quickly. So the last thing you want to be doing is pouring a lot of your wealth or a lot of your income into these vehicles because. Um, you're literally. Burning that, uh, That money away. Right? And so the luxury vehicles, BMWs, Mercedes, um, things of that nature, they will lose their value much quicker sometimes. Um, and so. We want to make sure. That again, we're not putting too much of our wealth into these vehicles because it's not like buying stock or buying mutual funds or where they have the potential or even real estate. Uh, the potential to. Um, Accumulate wealth over time or help you accumulate wealth over time. These things are going to depreciate. And so, uh, for example, you buy a hundred thousand dollars Mercedes S class and it might be worth$45,000 within three years. Right? Well, a Toyota 4runner at$50,000 could still be worth around$35,000 in that same timeframe. So. Um, You're going to lose a lot less wealth and some of these more dependable kind of middle grade cars. And so, uh, if cars are not your thing, um, and it's not a priority of yours. Uh, going for something like a tortilla for we're on our just toy our brand in general Honda. Uh, Ford, whatever the case may be and spending maybe a little bit less. Versus some of these luxury type brands. Uh, can help you gain wealth over the long-term right. And so a car is one of the worst financial decisions or investments that you can make. Um, from the standpoint of, uh, how fast they depreciate. Right. Um, And so. You instead of buying that a hundred thousand dollar luxury car, take that other$50,000 that you would've taken bias. A cheaper car. Um, and start investing that and you could grow that money. At, let's say a very conservative rate of six or 8% a year. Um, and that can be upwards of hundreds of thousands of dollars. To 20, 25, 30 years down the road. Um, versus spending that money now and having that money to appreciate. And so if you're really looking for the sweet spot on when you should purchase a car, Um, and things of that nature. If you don't necessarily feel that you need a brand new car. Um, buying that car within the window of it being two to three years old. Allows you to let someone take the biggest appreciation hit, but still by a fairly reliable. Uh, vehicles, and maybe you can find one that's two or three years old with relatively low miles on. That would be the desired outcome there. Um, so now maybe you can level up a little bit, buy a nicer car, but not have to get that depreciation hit, uh, so hard up front. If you like, when you would buy it new. Um, and so now I want to jump into more of a. An example of how I've helped. Um, clients. Uh, purchase cars in the past. So, um, I have a client. Uh, as a physician recently reach out in the last year or so. Uh, it was unsure about what car to buy. He just graduated residency. So we're fairly new into, uh, making that higher wage. Um, and so he was earning around$600,000 a year and he really wanted a brand new Tesla X, which is priced around a hundred thousand dollars, uh, for the vehicle while he technically could afford it. We ran the numbers and discuss his long-term goals. So he had other things that he wanted to accomplish. Had some student loan debt, things of that nature. Um, and so instead of purchasing, purchasing the a hundred thousand dollar, um, Tesla that would have depreciate it very quickly. Uh, I helped him evaluate other options. So we looked at a pre pre-owned, uh, Tesla S which was around$65,000 at the time. Um, which gave him kind of the same fill. He's still getting a Tesla, still a luxury vehicle. He still had the technology that he wanted. Um, but he's not going to get hit with that depreciation. So hard a front like we'd spoken about. Um, and so. Additionally instead of paying cash, you'd actually done a really good job of saving. And, uh, we're starting to build up some, some cash. Uh, we actually decided to, finance the car over four years. Right. And so he'll end up actually paying it off earlier. we just met about it not too long ago, but, um, he'll, uh, pay that off a little bit earlier, but he was able to finance it at the time. The interest rates were much lower, uh, right around 3%. Over four years. So now he gets to keep most of that cash and his bank account and his brokerage accounts, interest rates actually went up. So he's actually earning more interest on that cash. Then he would be, um, saving by paying that, that, uh, loan off quicker. Um, and so by taking this approach, he kept his money working for him, or is his money is still working for him. And this decision alone saved him about$35,000 up front. Uh, because of the liquidity need. Um, or they'll that he would need to pay for that car in cash. And then potentially more money in future investments and things of that nature. So take away just because you can afford the car doesn't necessarily. I mean, it's the best financial move to pay it, pay for it up in cash. But. Um, There are certainly things you can align with your goals, things that you can do, uh, to allow you to get where you want to go. Uh, as far as buying that car, and. still accumulating wealth. So lastly, I'd like to talk about cash versus financing. Um, kind of the pros and cons. So obviously paying cash, you would have no monthly payments, so less monthly, stressful. Making that car payment. There's no interest payments. And it's simple and straightforward. Uh, the cons, you're going to lose a lot of liquidity up front into a depreciating asset. Right. Um, and so. That is taking money away from potential investments and things of that nature. So there's opportunity costs there. So. Generally speaking. I like to see people finance within those guidelines that we talked about earlier. So finance for less than four years, put that 20% now. And keep an under 10% of your income. So. Uh, So paying cash has generally not. The best thing. I know Dave Ramsey talks about paying cash and things of that nature, but if your income allows you to keep that debt fairly low, Um, making sure that you have cash on hand for emergencies and things of that nature are more important to me. And you can, as long as you stay within a healthy. Uh, debt to income ratio. I have no problem. Uh, saying that you should finance the car. And what are the pros of the financing? Obviously you preserve that liquidity. The interest rates are not as low as they were a handful of years ago, but they're still fairly reasonable. And especially if you have good credit. Uh, maybe you're buying a new car and you can get some better, better deals to the dealership, um, or the manufacturer. And, uh, it helps you maintain financial flexibility again, because you're that liquidity cons obviously you have a payment, you got to make interest payments. Um, things of that nature and it can lead to the worst part about it is that it can lead to you purchasing more because you look at that payment and go, oh, it's only$600. I can afford that, or, oh, it's only$700. I can afford that. Um, but you're not necessarily looking at the long-term. Um, affects of what that's going to do to your wealth over time. So again, aim for a good interest rate. So go around and shop. You don't have to use the dealership every time. You can go to local credit unions, local banks, especially those smaller banks. They can sometimes have better rates than the large banks and, uh, the potential. Uh, dealerships there in town that you're looking at and then keep that loan under four years. So final takeaways. Spend smart. Uh, no more than one 10th of your annual income. Finance. If the interest rate is low, and if you have a better. Investment opportunities. So if you're one of those people that bought with the last two or three years, you may have gotten a low interest rate on that car. And now you can sit and cash making four, four and a half percent. And potentially making a spread on that money. So, uh, try to find a good interest rate, keeping that financing terms under four years. So you can avoid longterm debt and appreciating assets. And then factor in the total cost. Right? So insurance, maintenance, depreciation, um, how does that fit into your overall goal? Um, and so if it does. And then certainly, uh, go out and purchase that car again. It's all about a balancing act. Um, but you don't want to let that lifestyle creep or because you think you can afford this. Uh, take away from other goals that you may have. And so if you're confused on what type of car you should buy, or if this is going to affect your longterm outcome. Uh, things of that nature. Uh, you can always go to my website, Palm valley, wm.com. Um, I would love to help you, but thanks again for tuning in. We'll come out with another episode next Tuesday and, uh, look forward to doing that soon.