If we can afford the payments, is it smarter to finance part of the vehicle to keep our savings, or should we go ahead and pay cash (keeping $5,000 to $6,000 in our Emergency Funds still)? -Leah
First off, congratulations on building your savings to afford paying cash for the vehicle! Having just purchased a newer car for the first time last year after years of driving old and hand-me-down vehicles, I can empathize with how nice it is to have the money set aside.
If I were in your shoes, I would make sure that your Emergency Fund is enough to cover at least three months’ worth of expenses if something happens to your income. If you have enough after that is set aside to buy a vehicle with cash, I would go ahead and pay cash for the vehicle.
Is it “smarter” to make the payments and finance the vehicle? I would say, in short, no. You will be paying more for the car with interest payments over the next five years than you would if you just paid cash outright.
Also, touching on another discussion for another day, I think we have some serious inflation coming down the pike within the next few years. If you spend the cash now, I believe the money will be worth more now than it would be sitting in savings at a later date when you would use it to pay the interest payments over the next five to seven years. So, not only would you be paying more money due to the interest payments, you potentially could be paying more due to inflation.
Additionally, if you use cash, there is a greater potential at having your money go further by being able to negotiate a better deal. When I bought my car last year, I may not have saved that much money upfront by paying cash, but paying in cash allowed me to go an unconventional route and expedite the process.
After extensive research, I ended up getting my car through a dealer who got the vehicle at a dealer auction. The car was off-lease and had been wrecked and had hail damage but the dealership repaired it as good as new under the lease. The car I bought still had the original sticker in the glove box and we ended up paying half of the value of the original price for a three-year-old vehicle. The previous owner took the hit on depreciation and we were able to get a great deal. And going the cash route allowed us to finish the deal rather quickly.
If you can afford the payments now when you have everything saved up, I would go ahead and use the already-saved money to buy a vehicle. Then, I would take the money you would have been paying for a car payment and set it aside for your next vehicle purchase or another savings goal. When setting aside money for something, I’ve found it helpful to already mentally “spend” the money while it is being set aside. Then, when it is time to write the check, it does not hurt as much.
What about the rest of you? Would you recommend paying cash for a vehicle or would you finance a vehicle and keep more money in savings?
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.