“You should never finance a depreciating asset,” say the people who finance plenty of depreciating assets.
Cars are depreciating assets. How should you buy one?
“Because cars are a depreciating asset!”
You Finance Depreciating Assets All the Time
You probably finance depreciating assets all the time. I’d venture so far to say that you do it every day.
Let’s talk a little bit about opportunity costs. Opportunity costs are something you forego in exchange for something else.
Say you have a $100,000 mortgage. You want to buy a sofa. You buy one at Big Lots for $500 like a self-proclaimed frugal maniac and feel good about it.
You just financed a depreciating asset. That sofa will lose value. Even if you pay cash for the couch, call it a “divan” and use it mercilessly for the next decade, there was an alternative: paying off existing debt.
Therefore, you financed the sofa.
Unbudget Your Budgets
Here at Money Mamba, we believe that balance sheets have two things: assets and liabilities. If you build assets faster than liabilities, you’re winning. If you build liabilities faster than assets, you’re losing.
This is pretty simple, really–though it does create some non-linear cause and effect sequences.
So then why does everyone say you should pay cash for a car? I have no idea. But if I had to guess, I would say it’s because they’d want you to pay cash for everything, no matter how impractical.
Also, because they’re delusional.
I’ll never understand why you’d forego 0% financing on a car yet sign a 15-year mortgage (people who buy cars with cash don’t believe in 30-year mortgages) with a rate of 3.5%. Net-net, auto financing at 0% is clearly better than a home mortgage at 3.5%, assuming you’re going to buy comp and collision coverage anyway.
Really, I think the phrase “depreciating assets” is thrown around for the purpose of stopping critical thought right in its tracks. Big words are a sure way to get people to stop asking questions, even if their definitions are relatively mundane.
Photo by: TJC