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      12-03-2019, 10:17 AM   #158
Second Lieutenant

Drives: E90 335i
Join Date: Oct 2014
Location: NH

iTrader: (0)

Originally Posted by Flacht3 View Post
I don't understand the logic here, unless you're never buying a car.

If you want to take the money from the car loan and buy stock instead, aren't you implying you would buy the car in-full instead of financing? So (for example) instead of a loan of $30k over 4 years ($625/month), you're going to write a check for $30k.

Had you financed, you could have put that $30k into the stock purchase immediately, and gotten larger returns off the investment (beauty of compound interest), rather than the other scenario where you "save" $625 in monthly payments and put that towards stock over 4 years.

Let's say that stock grew at 5%/year for you. After 4 years of the initial $30k purchase you'd have $36,465.19. On the $625/month approach, assuming a stock purchase of $625 each month over 4 years at the same 5% return it would be $33,942.23. Congrats, refusing the loan just cost you roughly $2500.

I've learned to stay away from these arguments because there's no right answer and no one-sized-fits-all approach, but scenarios like the above make me scratch my head and wonder what I'm missing...
Not disagreeing with you at all. It works in theory but in practice I've never met anyone with the discipline to actually follow it. If anything it really comes down to one's personal drive. Do they view money as a tool to make more money or as something to buy more stuff?

For example they receive $50k in cash. Put $5,000 down on a new car and "invest" the $45,000 in an index fund. Proclaim to everyone their strategy about the difference between the car note interest rate and the average return on investment, (say SP500 large cap index fund at 10% annually long term). Sounds great.

Now the house that they are living in is 15 years old and has a few unexpected problems. Roof needs to be done, bam $20k. Now they sell shares of the index fund to pay for the repair or finance it. Then there are things like kitchen remodeling, pools, hot tubs, toys like boats, dirt bikes. etc. They tell others that they have the cash in the bank to pay for it but are financing it so their money "works for them".

Generally this is what I've seen happen and the original person ends up with lots of debt (both planned and unplanned) on deappreciating assets and is constantly freaked out about money.

Now when you are talking about high net worth individuals, things are a bit different.

Also would like to note the added complexity of dealing with investments. For the above to work, one would have to continually sell shares, then transfer the funds to a bank account that the car loan is linked to. Then at year end you would be responsible for cap gains, dividends and distributions. Then there are the additional forms that must be included with your annual tax filings. Yeah it can be done but it sure complicates the heck out of it to "save" a few hundred or thousand dollars.

Plus since the principle reduces in order to pay the car loan, the compounding effect is pretty negligible.

Last edited by carguy138; 12-03-2019 at 06:13 PM..