How Wealthy People Buy Cars (Cash vs. Finance vs. Lease)

Your Next Dollar: Money Management for High Earners

This episode of 'Your Next Dollar' explores how high earners approach car purchases, comparing cash payments, financing, and leasing. Hosts

Key takeaways

Paying cash for a car eliminates interest payments and prevents overextending finances on a depreciating asset.
Monthly payment focus is a 'broke mentality' that can lead people to overspend and finance vehicles they cannot afford.

Main topics

Cash vs. financing vs. leasing cars
Psychology of car payments and financial mindset

Notable quotes

Cars are where good savers go to quietly leak wealth.

When you're buying depreciating assets, cash is always king in my book.

Conclusion

The episode concludes that wealthy individuals treat car purchases as strategic wealth decisions,

Transcript preview

Speaker 2 (0:00) Cars are where good savers go to quietly leak wealth. Not because a car is evil, but because the way most people buy cars is designed to keep them broke. A monthly payment can feel normal, but the trade-off is that you are making those monthly payments over the course of the next couple of years. And here's the truth. The car in your driveway is one of the biggest wealth decisions that you will make, and almost nobody out there treats it like one. It is one of the largest finance decisions that you will make over the course of your lifetime. If you get this right a few handful of times across your life, and you will be in a really good position. But if you get this wrong, you could be losing hundreds of thousands of dollars that could be going towards things that you actually value. So today, Ryan and I are going to walk through how to buy a car and how wealthy people think about buying cars. Ryan, I am really excited to dive into this one because I'm pretty passionate about this. I think a lot of people get into buying cars and they do it the wrong way. And if you do it the wrong way, you're going to end up costing yourself a lot of money over the course of the next couple of years. Speaker 1 (1:02) Yeah, no question. And I will say I'm especially excited for this episode because I am in the process of buying a car for the first time in 15 years. And I will say, like, I'm kind of a novice to this. So I'm coming to this episode as much of a listener as anything else. So, Andrew, please provide me some guidance. Speaker 1 (1:26) I Speaker 2 (1:26) love it. I'm pumped for this then because this is going to be really, really fun. And what we're going to do in this episode, so listeners understand, is we're going to dive into a couple of different ways to buy cars. Maybe the big ways that you're thinking about right now, paying cash for cars. We're going to talk about how to finance cars if you want to finance cars. And we're even going to dive into lease first buy to kind of see where we both land on that. So first, I want to start out with paying cash for cars. I think this is the simplest way to think about buying a car in the personal finance world. Now, there's a number of pros to paying cash for cars. I am a big proponent of actually paying cash for cars, Ryan, because I think this is something where when you are buying depreciating assets and when you are buying liabilities, cash is always king in my book. Now, for some people out there, they may be arguing a couple different things, which we'll talk about here in a second. But I love paying cash for liabilities. What do you think Speaker 1 (2:14) about paying cash for cars? Oh, I'm a huge fan of paying cash for cars. And again, it goes back to exactly what you were just saying in that we know a car is a depreciating asset. So anything that depreciates over time, you should pay for it in cash. Just think about it like if you were buying clothes, like you wouldn't buy a new wardrobe all on credits and pay it off over five years, right? You know those clothes are going to be worth less five years from now than where they are today. It's the exact same thing with a car. So again, when I think about using any sort of debt strategically, you want to use debt for appreciating assets, assets that are going to go. up in value over time, not depreciating assets. So huge fan of paying for a car in cash, if you can. Speaker 2 (3:00) Exactly. It's if you can, and we'll talk about how to make sure that maybe your future cars, you can be able to pay cash for cars as well. Now, I think paying cash for cars removes one of the most dangerous portions that people do not consider when they think about buying a car. And it's when the dealer comes up to you and says, how much can you afford to pay monthly? Now, in my book, I think that most people, who think about the monthly payments, that is a broke mentality. That is what people do when they don't really have an understanding and a financial education. Because when you are thinking about the monthly payment, then you can extend yourself or you can overpay when you are buying depreciating assets. But when it comes to cash, that is not part of the equation whatsoever. Instead, you know, hey, this car costs $25,000 and I am going to be putting down $25,000 worth of cash. So one of the biggest proponents here is it ensures that you are not not overpaying for a car and trying to stretch out those payments as long as you possibly can to make the monthly payment affordable. Many people do this. And when they think about buying a car, they look at the monthly payments and that's all they care about. They say, hey, if this car, the monthly payments is going to be $700 per month. Well, I have an extra $700 per month that I could put towards this depreciating asset. Speaker 1 (4:11) I will say just in my experience, this is a mindset that I feel like a lot of people inherit from their parents and that, oh, my mom and my dad always told me that all you need to focus on is your monthly payments. And you need to go in and say, I'm willing to pay no more than $500 a month. And like, that's your negotiation. And to your point. that is the wrong way to look at it because there's a lot of financial engineering that can go on behind the scenes to make that payment work that is a major advantage to the dealer and a disadvantage to you. Not Speaker 2 (4:45) to say that your mom and dad are intentionally giving bad advice, Speaker 1 (4:47) but this is a mindset that I feel like a lot of people have inherited. And again, it's the wrong way to think about it. Speaker 2 (4:52) They truly do. And I think it's the first thing that most dealers ask. And that's the reason why they ask that is because they're trying to get you to finance this car. And when you really are negotiating when it comes to cash, a lot of times this is negotiating from a position of strength. Now, dealers will come back to you and they will start to argue with you and say, hey, now you can get a better price when it comes to, you know, paying, you know, financing versus paying cash. And they will say the dealership makes no money whatsoever. That's my favorite line that they always say, which what do I care if the dealership makes any money or whatsoever when I'm going to look and purchase this? car. But this is one of those things where you are then just ensuring that you're actually being buying a car that you can afford. Speaker 1 (5:28) Okay, so on that note, actually, I have some I have some advice that I'm looking for. So when I go to the dealership, there's part of me that wants to say when they ask the question, how much do you want to pay monthly, I want my answer to be zero. But I also don't want them to then kind of dismiss me as a potential customer because they're not going to make any money off of me. So it's one of those like when I go in there, like what What's your best advice when you go to the dealership? Like, do you go in and you entertain kind of all options on the table just so you kind of get the full array of offers they're willing to throw at you? And then finally, at the very end, tell them, I'm just going to pay for cash for it. Speaker 2 (6:05) Absolutely. That's the best way that I look at this. I want them to show me all the options because they could have options in place that actually make a lot of sense when it comes to financing. Sometimes if they're going to give me 0 % interest on the financing and I'm looking at this and I'm saying, okay, well, I could probably invest these dollars or put them towards something that I actually value where I can get the difference to be, you know, something that actually makes sense. Then I may consider something like that as long as it fits into my. parameters. But you really want to kind of work and move this along towards the end of the negotiation before you actually tell them you're going to pay cash, because they will shut down. I think they make significantly less if you do not finance the vehicle. And so they will end up shutting down and not giving you the best possible price. A lot of times they will work with you all the way up until the end. Then once you get to the end, then you can start to have that negotiation. Now, sometimes people will come back to you and say, no, I'm going to give you a much better price if you actually go and finance the car instead of paying cash. And we can talk about kind of how to think about that as you get to that point in time. But yes, I think that you need to not tell them that you're paying cash all the way up until the end, unless you're going to like a used car dealership that's pretty, pretty, you know, used to this kind of stuff. But for the most part, most dealerships want you to finance this because that's where they make a good chunk of their money. Speaker 1 (7:17) Yeah, that's Speaker 2 (7:17) really helpful. And that's kind of my plan of attack is just to Speaker 1 (7:19) go in and not put my cards on the table. Just listen to all of the deals that they're going to offer to me. And then at the very end, say, I'm going to pay cash. Speaker 2 (7:28) There's a couple of things that I think about when it comes to paying cash too is I like to look for cars that are used. So I like to look between one to three years. So for example, my current car that I drive right now is I drive a 2018 F-150 and I'm going to drive that thing until it dies. I'm going to try to take it as long as I possibly can. My oldest son is eight years old. I want that to be his first car when he turns 16. So my goal, and that's one of my flexes in life, is I like to drive a paid off car for as long as I possibly can. And when I think about this, this is one of those things where I bought that vehicle one year use. So I bought it in 2019, one year use, and it took a depreciation hit just off that one single year of that same exact truck would have been about $36,000 brand new. Now this was pre COVID. So it was a little cheaper back then, but it would have $36,000 brand new. When I purchased the vehicle, it was $24,000 is what I paid for it. And it had 12,000 miles on it. And so this difference that depreciation hit right off that first year was like the sweet spot for me. So I found this to be One of the best areas to look is between one to three years used. Again, recently, we just purchased my wife's car, and the car that she drives is a Chevy Suburban. We have three kids, and so we just got a bigger car because we have all three kids. And many of you listening right now probably have lifestyle things that are changing. Maybe there are shifts within your kids. Maybe there are shifts within you're getting married. And so you are changing vehicles because of that. You want to save for vehicles to drive your kids around. Maybe you're having a baby. Whatever else is happening in life. plenty of reasons to look at buying a new car. And so when we were looking for this vehicle, the same Speaker 1 (8:58) exact thing was happening, Speaker 2 (8:59) where we saw the depreciation hit of this vehicle over the course of just two years. So we bought it two years used, was $30,000 was the difference between someone who bought it brand new and someone who bought it two years used with less than 30,000 miles on it. And so We purchased that vehicle and we've had zero issues with either one over the course of the last couple of years. So I think the sweet spot is between one to three years used. And if you can find it with one owner, that's usually what I look for is trying to find a vehicle with one over. It gets passed around a couple of different times. That's usually a red flag for me. And then I like to, when I'm paying cash for cars, I like to look at the vehicle, go through it all, but I'm not a car expert. I don't really know what's going on inside under the hood. And so I like to take it to a local mechanic that I know, like, and trust. And if you don't have one, you can have someone recommend it as well. But I like to take it directly to the mechanic and have them take a look at it as well. Sometimes if the dealership won't allow you to take the vehicle to the mechanic, you can have the mechanic come to you. You pay a little bit of extra, but this is like 150 bucks. So this is basically $150 insurance policy. to ensure that you're buying a car that makes sense. This is one of the best things that you can do because I have had mechanics find things that they're like, I wouldn't buy this vehicle because of this, this, and this. And they give you an entire list that you can then show the dealer. And then sometimes you can actually use that as a negotiation piece, depending on what type of Speaker 1 (10:20) dealership that you're at. Speaker 2 (10:21) In Speaker 1 (10:21) the research that I've been doing, everything you said is spot on in the sense of the most appreciation that you see is in the first year. And it is... unbelievable to see how much less expensive the 2024 and 2025 models are compared to 2026. So I'm looking at this and thinking like, if I'm buying a new car, like I have to stomach a very expensive right turn out of the dealership.