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Cash vs. Finance from a Financial Perspective

MRBXXXFVVS1

Brilliant_Rock
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Dec 5, 2019
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1,297
I've been thinking about this more lately. While I prefer to pay cash to not have any payments and own outright, I am beginning to wonder if it's better to finance from an economic perspective. What are your preferences and rationale?

Ex: The stock I sold to buy my car has more than doubled since I sold it. I could have instead gotten a very low interest rate and doubled my stock/cash.

Some of my very financially savvy friends (that work at hedge funds) actually do interest only mortgages and lease cars even though they could afford to pay cash, because the opportunity cost of investing the money is significant. Of course, there is market and other risks associated with this strategy. Thoughts?
 
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m-cubed

Shiny_Rock
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Jun 20, 2020
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134
I think there are things that may make sense from a strictly finance perspective that may not make sense from an emotional perspective. I am paying my mortgage down well ahead of schedule. My interest rate is less than 3%, so from a finance perspective, I should pay only the minimum and stick the rest in the market. From an emotional perspective, I want to be done with this mortgage (and the terrible credit union who has made so many mistakes with it) in 3 years rather than 10 years.

For a car, if I got a really good interest rate (less than 1%, say), I’d probably be fine paying it down over time and using extra money in investments.

I don’t think leasing is a strategy that generally makes more sense than buying because the total cost is more. But I also think you can decide you want a new car every three years and it’s worth paying more for that privilege. That’s assuming of course you can afford it. Everyone only has so much money in their pot, and they need to decide what to do with it. For me, my priorities are paying my mortgage off, saving aggressively for retirement and a little bit of travel. So I buy a modest car, pay it off and then keep it for ~6 years. Could I in theory afford to buy a new car every 3 years? Yes, but I would have less money for other priorities.

Do I think an interest only mortgage ever makes sense? No, I don’t. You might as well be renting because you don’t actually own the house in the end. That just seems silly to me.
 

voce

Ideal_Rock
Joined
May 13, 2018
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4,813
I think this should boil down to your tolerance for risk. If you can stomach financing everything and using cash towards "risky" investments, your rewards may be great. Even your financially savvy hedge fund friends cannot guarantee a certain return from investments, but their operations in the financial markets give them more control and better information over their investments than you. So you'd be risking more than them, unless you are an investment professional.

Myself, I am not currently in the investment profession, although I was taught all the knowledge required to do so and pass CFA exams. Because my work is not in this field, the more I invest into the markets, the more anxiety I have when they are volatile because I know I cannot sell off my positions at the most opportune times.

For my own peace of mind, I'm not putting everything towards investing, but made a personal plan and will take a disciplined approach. I see no reason not to take advantage of many available financing offers, including 0% APR credit card offers.
 
Q

Queenie60

Guest
Investing in the stock market should be a long term investment as you will see ups and downs - this drove me crazy in the past however, my husband has taught me that waiting it out is the best approach. You need to go with what makes more sense based on the way you think and your comfort levels. We preferred to pay our mortgage completely off, we lease our vehicles as we write them off via our business and this makes sense for our financial well being. Each situation is different. if you have money just sitting in a money market account, not making any interest, then it does make sense to pay cash however, if you have a comfort level with the more risky investments, then leveraging makes more sense. Needs to have a balance.
 

lilmosun

Brilliant_Rock
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Like others, I have an emotional aversion to debt and tend to be risk averse. Not necessarily a good thing.

A lot of it is my lack of discipline - I don't like thinking I have more money than I do because I would be tempted to spend it. On a couple of occasions, I have spread jewelry payments out over 2-3 months but only because I know that if I touch my savings, it's harder for me to put it back in.

That being said, I know that having assets with no debt hurt us when it came to things like any possibility of financial aid for the kids college, etc.
 

Dancing Fire

Super_Ideal_Rock
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33,733
I think there are things that may make sense from a strictly finance perspective that may not make sense from an emotional perspective. I am paying my mortgage down well ahead of schedule.
Us too, We payoff our mortgage the yr (2004) our daughter #1 started college. It feels so good w/o a mortgage payment every month, but then comes her tuitions.
 

MissGotRocks

Super_Ideal_Rock
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13,416
I have been fortunate enough to get low interest car loans. While it is tempting to pay cash, a car depreciates rapidly. Depending on the circumstances of the market, I have felt that I could make more money leaving the money be and paying small interest. Fortunately, they are all paid off now but in the future I don’t know that I would do it differently. If the car were to be totaled early on, you would be out a lot of money that may not be reimbursed by the insurance company dollar for dollar.
We did pay the mortgage off early; was a nice feeling to own the house outright!
 

Lookinagain

Brilliant_Rock
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I think your age has to come into the equation. The younger you are the more time you have to ride out the investments in the stock or bond market. The older you are then obviously, the less time you have. So maybe if you're older and the market it up you'd rather sell stock to buy something like a car for cash. If you're younger and can ride the market, low interest debt might make sense and the market could always go up more. I think this answer really depends on age and other financial circumstances.
 

TooPatient

Ideal_Rock
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I have been fortunate enough to get low interest car loans. While it is tempting to pay cash, a car depreciates rapidly. Depending on the circumstances of the market, I have felt that I could make more money leaving the money be and paying small interest. Fortunately, they are all paid off now but in the future I don’t know that I would do it differently. If the car were to be totaled early on, you would be out a lot of money that may not be reimbursed by the insurance company dollar for dollar.
We did pay the mortgage off early; was a nice feeling to own the house outright!

There is an insurance available that is supposed to cover the difference between current value and what is owed. I had the unfortunate experience of totaling a brand new car just a week after buying it. That is how I learned the hard way to make sure to add that additional coverage...

ETA: I forget if it covers the difference between current value and amount owed or if it is difference between that and replacement. I probably ought to read up again.
 

AllAboardTheBlingTrain

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I am uncomfortable with the idea of credit/financing, particularly for luxuries. I use a credit card for points and perks, but I pay off my bill in full at the end of the month. I would finance a car depending on the interest rate I would get and work out the most lucrative payoff option. I wouldn’t buy a car that I couldn’t easily pay the car payment for (even if the market goes through a sudden downturn or I lose my job and can’t find another for up to a year). Same goes for mortgages.
 

missy

Super_Ideal_Rock
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This is where my peace of mind overrules it all. We pay cash (ie credit cards so we earn points and pay it off in full each billing cycle) for everything. We had two mortgages but paid those off in their entirety a few years ago.

We have investments where our money grows but when it comes to purchasing big ticket items I prefer to pay it in full immediately. No financing for us.
peaceofmind.png
 

MRBXXXFVVS1

Brilliant_Rock
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Dec 5, 2019
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1,297
Yes, age and circumstance has a lot to do with risk tolerance.

If you finance or lease a car, they usually require gap insurance which covers the difference between what the car is worth and what you owe.

I think it is about balance, where I draw the line is I prefer to finance real estate and pay cash for everything else. The investment opportunity cost of paying off real estate is just too high. Despite the peace of mind paying cash brings, I do have FOMO on investment returns too. I am a perfectionist and optimizer (even though I know I am optimizing for the wrong things). Can't win either way. I should just stop caring!
 

DejaWiz

Brilliant_Rock
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Apr 23, 2021
Messages
888
I feel that it comes down to the individual situation.

The world essentially runs on two aspects of finances: having enough cash or having enough credit rating to do anything.

There is no right or wrong answer, here.
 

nala

Ideal_Rock
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I purchased my first home in 1998 and interest rates were at a low 7 percent! We both had excellent credit. Then we sold home and upgraded. We divorced shortly after and I kept the house but had to buy him out by paying him back one quarter of the equity ( this is SO Cal) and agreeing to pay for DD’s college—she was only 3 at the time! So I had nooo idea how much it would be. Refinancing for lower interest rates really worked for me and allowed me to live a comfy lifestyle. Having lived through 7 percent, I knew that 4.5 was a gift and now 2.25 is free money! I could have sacrificed my lifestyle—exploring the world with DD, enjoying my commute in a new, safe car, remodeling my home to my taste debt-free (kitchen, 3 bathrooms, flooring, it all adds up) and paying off my DD’s college with no debt—all in the name of paying down my mortgage. I know I made the right decision. I’m on track to pay off my house in 5 years while enjoying being otherwise debt-free. I know that I made the Right decision especially when I love my lifestyle and can still pay outright for a new roof, a new air conditioner or yeah—anything else the joy of ownership throws my way.
I have two siblings who only focused on paying off their house but gave up a lot to do that. IMO they did not enrich their lives or their kids’ and can’t get back that time.
ETA: I finance my cars bc interest rate is super low and I love my new cars. I buy the gap insurance in case I total them. It’s a one time cheap fee. Unless you are a millionaire, most of life’s unforeseen expenses do not come with a 1.4 interest rate.
 
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smitcompton

Ideal_Rock
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Feb 11, 2006
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Hi,

We make financial decisions with the facts at that time. How could you know the stock would double? Don't look back. Recently I sold two positions that I held. I made 50% in one position and 10,000 in the other. I did not want to be greedy. However, every couple of days I check to see how those socks are doing. Silly, isn't it. So far, I sold at the top of both stocks. I must let it go. I bought Facebook on the IPO for 38.00 per share. It dropped below 20 and I sold. Its now 350. Its the past.

You really should be comfortable in what you do. Peace of mind is really good. I also have money in money market accounts, which earn me .05%. But if the market crashes, I wont be penniless. I'm serious. That gives me peace of mind. My house is paid for as well. Balance is the right word.

Annette
 
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