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  • Writer's pictureStephen Gardner

Cash for cars is the worst

One of the worst things you can do with your money is buy a car in cash. It loses value as soon as you drive it off the lot. You give up the right to use that money for other needs or wants and it stops earning interest immediately. Plus a car is a depreciating asset so it loses value over time while the money you used to pay for the car in cash loses future buying power thanks to inflation.

In a perfect world you could use your money and keep it earning interest. This perfect world exists but only in a properly designed permanent life insurance contract. Cash value insurance is the only financial product that allows you to continue to earn interest on your money, even when you have taken it out for buying a car or rental property or flipping real estate or whatever the purchase may be.

The second you withdrawal money from the bank or use it to buy a car, it stops earning interest. It's gone! The bank removes it from their ledgers and therefore it stops earning interest.

It's important to understand that you finance everything in this world when you have money. You either pay for the right to use someone else's money or you give up the right to earn interest on your own. This is called opportunity cost and it is a real thing.

Let's say you had the opportunity to buy a piece of real estate with your cousin and she went on to earn 50% on her money when she completed the project and sold the home. That is opportunity cost. You lost out on money could or should have earned by putting it or keeping it somewhere else.

So what does opportunity cost have to do with buying a car? Well, a lot!

Let's say you had $30,000 at the bank and you were able to earn 6% interest each year on your money. Leaving your money in this earning environment coupled with compounding interest would have your money growing from $30,000 to $40,146.77. That's $10,146.77 in interest.

By removing your money from this earning environment it earns 0% and compounding interest ceases to exist on this money. Instead you will actually lose the $10,146.77 of opportunity interest and you will lose to the car depreciating in value. After 5 years, the car will most likely be valued at $15,000. You took a 50% loss on your money.

Because money loses value every year its best to buy something today with someone else money and pay it back with a weaker and weaker dollar in the future. You need to keep your money earning. With a traditional loan you will lose less to interest but you will still lose to deprecation so you've improved one area of your finances, but we can do better.

If you financed the car for 60 months or 5 years at 6%, you would pay $4,799.04 in interest. If you left your $30,000 to earn the $10,146.77 you'd still be ahead by $5,347.73. That's the interest you are up by, minus the interest you paid to the bank on the car loan.

$10,146.66 - $4,799.04 = $5,347.73.

Using OPM (Other People's Money) to buy the car and pay it back over time resulted in an extra $5,347 in your pocket. Who couldn't use an extra $5,300 just by understanding finance a little better? But it gets better.

Now imagine you took the time to fund a properly built cash value policy that earns every year. You would have an incredible advantage over most Americans when it comes to buying cars and being smart with your money. With the right plan and company, you can have your cake and eat it, too.

Imagine being able to leave your $30,000 growing, but also use that $30,000 to buy the car you want. This is called making money work in two places. Your money will continue to earn compound interest without the interruptions. You will also be able to pay back the insurance company with a weaker and weaker dollar each year until you've paid off the loan. By paying yourself back this way, most people pay off their car in about 51 months. The remaining 9-10 payments to finish off your 60 month commitment are premium that goes into your plan to increase your wealth.

With one of these plans, your entire payment goes to principal reduction on your loan and interest can be paid or absorbed on your anniversary date. Traditional loans like cars and homes have each payment going toward interest and whats left towards principal. In the case of a mortgage it takes 20 years before more of your money goes to principal and less to interest. This is being smarter with your money.

Then best of all, you take the remaining money from selling your car and dump it into your plan or if you don't have room put it in savings or open a new plan. Whatever route you go, the end result is more money.

Stop buying cars in cash because you give up interest and control. Stop financing with a bank because you build up their bottom line instead of your own. At the end of the day, don't you want to build your own wealth and not the banks? Now you can and I can show you how it is done. Let me mentor you to more money.



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