This is part two on buying vs leasing cars. In the first installment we looked at getting a loan vs a lease. I recommend reading that post first if you haven’t as we’ll reference costs better explained in that article.
Rather than get a car loan or lease – a number of finance gurus think you should save up and buy cars in cash.
While the pain of writing a check for your dream car may temper your spending, with a bit of impulse control and math you’ll see buying a car in cash isn’t a great idea.
How Cash Buyers Work
The cash buyer saves up and combined with the equity of their trade in, buys the new car in cash, then starts saving for the next car. They do smartly avoid financing charges (though sometimes you can get 0% loans) but forget about opportunity cost of keeping their money tied up in a depreciating asset.
So for the sake of this discussion we’re going to assume this buyer has $27250 in cash and can afford to save $247/mo for the their next car.
For consistency we’re using the same car as my last post. That being the 2016 Chevy Equinox LT, a popular midsize SUV which just happens to be being replaced by a new and improved model – making the remaining models a great deal. I think this car is reasonably priced and fits the needs of a variety of buyers.
The Equinox LT has an MSRP of $27,345 but expect a dealer discount of at least $2000 (Truecar is my zip code says $2200). So take the discounted cost, add sales tax of 9%, you get a total cost of $27250. Just like last time we’re going to assume you keep the car the average 6 years and drive 15k miles per year.
The Saver/Cash Buyer
The saver is fairly straightforward – they buy cash, then save up for the next car. We’ll assume they save that $247/mo at the S&P average return of 7%. At the end of six years they have a vehicle worth about $8000 and spent $4500 in maintenance and repairs (see last post for details).
The leaser isn’t going to buy a car, they’re going to invest the $27250 in the same S&P fund on day one, then they’re going to lease cars for six years. In the last post I gave an example of the 2016 Equinox LT with 15k miles/year with an effective lease cost of $247/mo including fees and taxes.
Since both examples have the same monthly spend, we can ignore that aspect. What differs is the asset and maintenance costs.
The saver has a fund worth $22,686**, add the vehicle value and subtract the maintenance spend and its fair to say the combined net assets are worth about $26,000.
The leaser at the end has a fund worth $40,895**, no vehicle value, and spent about $222 on maintenance and repairs – meaning a net asset worth over 40k.
Bottom line, I’d rather have the $40k from my plan than $26k from the cash buyers plan.
Now the caveat with investments is, growth isn’t a straight line. If you were to look at this investment starting in 2003 and ending in 2009, you couldn’t have such great results. Averages are over longer periods than 6 years. The goal here however is to NOT take the money out of the fund in 6 years, keep it growing and keep getting cheap leases.
I’m also only looking at this from a viewpoint of personal cars, business vehicles are a whole different matter with taxes.
I’m also NOT a tax attorney, financial planner, etc – just a guy that likes math and critical thinking. Your situation may be different, talk to an expert with an open mind.
The Other Side
There are plenty of articles that will tell you the upside of ownership when times get tough, but I think they’re oversimplifying. Sure the repo guy isn’t going to take away your owned car if you lose your job, but having more liquid assets and low monthly bills I think is a better safety net.
Bottom line there’s no such thing as a free car – cars need fuel, repairs, maintenance, insurance, etc. Just having a car isn’t enough when times are tough – more assets means more safety net.