If you can pay cash, why did you finance?

[JordanH]

That's quite a cynical, and arguably accurate, view of the United States mentality. And I won't argue that scenario, but there was certainly no indication of any of those factors in the original post. Perhaps you know the OP better than the rest of us but the initial post indicated that he had the cash - presumably unencumbered, given the question. I would give him the benefit of the doubt because a) we have no reason not to and b) the question doesn't make a lot of sense if he's talking about encumbered funds.



My business was faced this same question a couple years ago. I required a new business vehicle and, ironically, I purchased an F-150 (Lariat, not Platinum. ;-) The question came down to whether I employed my business capital in the vehicle or in investments. With Ford's interest rates being so low, I was able to leverage the truck and invest the capital in another place. In this case, Berkshire Hathaway stock (I can't remember, but about $190/share.) It now sits at $216-ish or 13.7%... fair enough, just under 7% per year, but that's better than the "almost nothing" that Ford offered. Being an open loan, if the economy starts to turn, I have the option of liquidating the BRK stock and paying off the truck in full.



For me, this was a smart investment. But as I mentioned earlier, it's about risk. If that investment dropped to zero, my business could absorb the shock - albeit with a grumpy owner - but if it doesn't, then it was a worth while venture.


The math remains the same, the only difference is the risk acceptance.

If someone is offering me a 0% loan on a boat... or... well... any asset that I would normally purchase anyway, then I'm taking it!


My view is that if the original poster has unencumered funds AND has an opportunity where those funds can be leveraged to earn more than the expense of the loan, then the OP should do so. Might as well make back some of the money that will have depreciated from the boat. :-)

[a64pilot]

No, I don’t know the OP at all. Just stating that the majority of people who say they can pay cash but don’t, often can’t, not really, or said another way, maybe they can for this loan, but they have more.

It astonishes me though the number of people that plan to Retire with debt, and I’m talking big debt with a decades payment schedule, like house loans.

Then I hear of people who should have six figure yearly incomes when working say things like well Millionaires borrow money, and I immediately think, a million dollars really isn’t all that much money anymore, and if your Retiring from a six figure income, and don’t have a seven figure investment portfolio and are debt free, I’m not sure how well it’s going to work out for you.
Sure you can do it, but as you have become used to that six figure income, it’s going to be a shock, cause that monthly payment and required Insurence comes out of every months budget.

My Wife’s Step Mother is Retiring, basically all she will have is SS, her and her husband’s. She has a house payment, credit card debt and just bought a new SUV, with payments for I’m sure as long as they would allow.

How do you think this is going to work out? Bad thing is that her Father is in congestive heart failure, I’m certain that the ensuing arguments over money is going to kill him, but what can I do?

[JordanH]

Again... that sounds pretty terrible, accurate and stressful. Not disagreeing that it isn't the case for many (or most) but lets not assume it's the OP's situation.
*shrug*
The bottom line is whether OP has the ability to use that capital more effectively than the company/person who lended it to him.

[Belezar]

JordanH is correct, the math tells a story, but as I said earlier, risk tolerance is key. And that is important as the math is based on averages. Banks make their money on leverage. So there is nothing “wrong “ with the debt play if 1) your can handle extreme deviations from the norm and 2) you can sleep at night. Debt is toxic to those who don’t understand it. Sail on...

[chowdan]

I agree debt is toxic. I've lived debt free many years now, and being 29, with a net worth of 1/4mill, with 1/2 in cash awaiting a market decline, I find I do not have the desire to take on debt. My wife and I also quit our jobs and traveled for 18 months so far. My net worth has grown nearly 300% since January and yet I dont have "things" to show it, just account statements.

For me, I can handle #1 when it comes to market deviations, granted we haven't seen much since 09 and then I wasnt really invested so this is yet to be seen and hence why I sit on 100k or more in cash.

But the real kicker for me is #2 - if I had 1/4-1/2 mill in debt I would not be sleeping at all.

I've seen it way to much - people can afford the payments on something, and can for many years then life throws a curve ball and they no longer can afford these things. They also believe they can afford these things because the payments are relatively low, yet in reality if you cant afford it in cash, you cant afford it.

Originally Posted by Belezar

1) your can handle extreme deviations from the norm and 2) you can sleep at night. Debt is toxic to those who don’t understand it. Sail on...

[dfelsent]

It’s all about debt risk and leverage. And cash flow too.
One could argue that life is a cash flow problem.
I’m not a debt fan but it is a useful tool. As long as you understand the issues around risk and consequences.
Bought the boat on a margin loan. Didn’t like the market and sold and covered. I sleep better.
Could I have done better? Yes. Could I have done a lot worse? Yes.
Debt limits flexibility. Debt offers flexibility as well. It’s a tool best used with eyes wide open.

[kev_rm]

Originally Posted by a64pilot

No, I don’t know the OP at all. Just stating that the majority of people who say they can pay cash but don’t, often can’t, not really, or said another way, maybe they can for this loan, but they have more.

I am the OP. The question wasn't about those actually can't. It was about those who actually can and reasons you might get a loan anyway. (hopefully beyond the pedantic risk and time value of money exercises) Saying you don't know me but most people can't... well... to be clear: can. did. happy to compare credentials anytime.

[NPCampbell]

Originally Posted by kev_rm

I am the OP. The question wasn't about those actually can't. It was about those who actually can and reasons you might get a loan anyway. (hopefully beyond the pedantic risk and time value of money exercises) Saying you don't know me but most people can't... well... to be clear: can. did. happy to compare credentials anytime.

If you are converting assets from a tax sheltered account to buy an expensive boat then buying on credit makes fiscal sense.

Take the example of someone liquidating assets from a 401K to purchase a $1 mil boat. As soon as you withdraw the $1 mil it is taxed as ordinary income. Income of $1 mil puts you in the 37% tax bracket. If you had no other income that year, you would pay $330,000 or so in taxes. If you liquidate your assets over 8 years your tax bracket is 24% vs 37% and your tax burden would drop to around $190,000. So financing over 8 years saves you $140,000 in taxes. This is not even counting that you will also be deducting your mortgage interest from your income. If you put your unliquidated assets into a low risk guaranteed/government/insured investment that is earning 2-3% then you will typically come out ahead financially as long your financing is less than 6% or so.

[JordanH]

Very good additional point! It's not just about the lost additional income but also the cost of withdrawing the money.

Just a geographical note; In Canada, we can't deduct mortgage interest from our taxes, let alone on a boat. Also, in Canada, we would be crazy to withdraw large lump-sum against an RRSP... instead, it is better to borrow using the RRSP as collateral for the taxation reasons above.

[a64pilot]

No, you don’t take money out of your retirement funds to buy a boat, that would be foolish, you buy a boat with your discretionary income, if you can cover a million dollar boat with that, then fine, if you can’t well then maybe you can’t afford a million dollar boat.

But that requires understanding that you can’t actually afford a million dollar boat and that is where people don’t want to believe that, it’s an ego thing.

See that gets to the heart of financing a depreciating asset, financing allows you to purchase a boat that put quite simply that you can’t afford.

Of course people are going to argue otherwise, but you buy that new shiny million dollar boat and in five years it’s a slightly less shiny $750,000 boat.

So financing something that loses money is a great way to lose money twice.

[cherylchecheryl]

Originally Posted by a64pilot

No, I don’t know the OP at all. Just stating that the majority of people who say they can pay cash but don’t, often can’t, not really, or said another way, maybe they can for this loan, but they have more.

It astonishes me though the number of people that plan to Retire with debt, and I’m talking big debt with a decades payment schedule, like house loans.

Then I hear of people who should have six figure yearly incomes when working say things like well Millionaires borrow money, and I immediately think, a million dollars really isn’t all that much money anymore, and if your Retiring from a six figure income, and don’t have a seven figure investment portfolio and are debt free, I’m not sure how well it’s going to work out for you.
Sure you can do it, but as you have become used to that six figure income, it’s going to be a shock, cause that monthly payment and required Insurence comes out of every months budget.

My Wife’s Step Mother is Retiring, basically all she will have is SS, her and her husband’s. She has a house payment, credit card debt and just bought a new SUV, with payments for I’m sure as long as they would allow.

How do you think this is going to work out? Bad thing is that her Father is in congestive heart failure, I’m certain that the ensuing arguments over money is going to kill him, but what can I do?

Best guaranteed investment return you can make is paying off that 20%+ credit card debt.

I know you know that. Hope you can at least wean the wife's step mother off revolving credit card charges. With cash back cards, they are great as long as you pay them off each month and you have spending under control.

I know wives who have only made the minimum monthly credit card payment because they didn't want their husbands to know what they spent. The situation usually ends quite badly.

[a64pilot]

My Wife talks about the Coffee’s she went to when we were Military, a major topic of conversation was which credit card to use, which one offered the free interest rates for rolling over debt etc.
It usually did end up bad, cause it eventually catches up with you.
Most people experience debt, we did. It’s real tempting to have something now instead of waiting for it. And maybe that’s logical when your young, it would be tough for a Married couple first starting out to pay cash for a house, but at some point in their life as they age, they should get to a point to where they are paying cash, even for a house.

But that’s not what happens, what happens is you take the equity from the old house and either pay off credit cards or roll it into a down payment for an even bigger house, often of course both.

But you can believe me or not, but once you get debt free, and I mean zero loans and start operating under the belief that if you can’t pay cash for something you can’t afford it and saving money to buy things, you’ll find that it gains momentum, your net worth begins to build its own momentum, just exactly the same as debt does, just the opposite. Every year due to the miracle of compound interest plus your trickle of savings, it begins to grow and one day it’s gaining from interest faster than your savings.

If your young and you want to retire with a Million dollars in Retirement funds, it’s not all that hard, it’s just $300 a month, really. But almost no young people do that. Yes I understand a Million dollars isn’t all that much money anymore, but it will generate between $50,000 to $80,000 a year without touching the principal.

However most people end up looking at Retirement with at least a large Mortgage, car loans and credit card debt, and their Retirement planning includes making payments to cover that debt.

However let’s look at that zero interest loan rate one spoke of on a truck, I mean your crazy not to borrow money with a zero interest right?
No, instead of buying that truck at zero interest, instead take that money you would be making in payments and invest it, and make money off of it, and also take that money that you would be paying for full coverage Insurence and put it in investments too.
One way has you getting $60,000 interest free, and the other has you ending up with at least $80,000 invested.
Your $80,000 ahead, but you didn’t get to drive a new truck, you kept your old one.

As much as people want to game the system, and the system is set up to reward debt, but in truth financing is all about I want it now, and I want to pay for it later. But that comes at a cost.

Let’s look at some easy, simple conservative numbers at how a middle income family can Retire well, but it does require that they adopt a frugal lifestyle. Its not hard to make it so that your Retirement income matches or exceeds your best working years.

They Retire with a Million dollars in a Retirement fund, now before you scoff, all that is required is to save $300 a month starting when they were young, which is as simple as driving an old sedan as opposed to a new SUV.

That 1Mil will return very conservatively $50,000 a yr. surely more, but we will stay conservative.
One of them has a Retirement of $30,000 a yr.
Once they reach age 67, they will draw about $2,500 a month each from SS or $60,000 a yr.

So 50 plus 30, plus 60 is $140,000 a yr.

That’s $11,600 a month, it’s not hard to cruise on over $10,000 a month. In fact what happens is you don’t need nearly that much, but your living fine because you learned to live frugally, and your habits carry over to old age too, so what happens is your Wealth continues to increase year after year.

[a64pilot]

Originally Posted by cherylchecheryl

Best guaranteed investment return you can make is paying off that 20%+ credit card debt.



I know you know that. Hope you can at least wean the wife's step mother off revolving credit card charges. With cash back cards, they are great as long as you pay them off each month and you have spending under control.



I know wives who have only made the minimum monthly credit card payment because they didn't want their husbands to know what they spent. The situation usually ends quite badly.

I stay completely out of that. To not do so would make matters much worse I’m sure. I have made a statement or two and probably shouldn’t, but Hell, we are Retired, he can’t work due to health and she still is due to debt, and of course they are way older then we are.

It’s watching a train wreck occur, she has the last of his old cars that he inherited up for sale now, a Model T. What made them unusual was none of them were restored, they were all original and in excellent shape, but they have all been sold off one at a time I’m sure to cover the credit cards.

[JordanH]

You're still going on about cases that are not relevant to the OP and not opening your mind to other situations. You make the blanket statement, "No, you don't take your retirement funds out to buy a boat." But you absolutely might.

For example, You have retired early (maybe 50 or 55) with a large pension waiting for you at 65, you have private savings to live on for the rest of your life. But, you've been saving your entire life into a tax deferred investment (Here in Canada, they are called RRSP's). If you pull out money from the RRSP early, you are penalized (Regulations), if you pull out money in a lump sum when you retire, you are penalized (taxes). So... if you want to make a large purchase - boat, retirement home, whatever, with the funds that are locked in your RRSP, you absolutely can and should borrow against them.

For example, Lets say you are a teacher from Ontario and your partner is also a teacher in Ontario. The pensions from you both are enough to live on for the rest of your days and you can retire between 50 and 55. (For those that don't know, the Ontario Teacher's Pension Plan is the largest institutional investors in the world, $191B in net assets and pays well.) But they want to get on with living at age 55.
Are you suggesting that they slowly withdraw money to be tax efficient over 20 years, and then buy a boat with the funds in their RRSP?
Or borrow against their RRSP now to make tax efficient use of the locked-up funds and go sailing?

Of COURSE there are positive cases where this makes sense.
Of COURSE you wouldn't do this if you are living on credit cards. But we've already established that OP is reasonable, rational and not a crazy case.

[JordanH]

Originally Posted by a64pilot

However let’s look at that zero interest loan rate one spoke of on a truck, I mean your crazy not to borrow money with a zero interest right?
No, instead of buying that truck at zero interest, instead take that money you would be making in payments and invest it, and make money off of it, and also take that money that you would be paying for full coverage Insurence and put it in investments too.
One way has you getting $60,000 interest free, and the other has you ending up with at least $80,000 invested.
Your $80,000 ahead, but you didn’t get to drive a new truck, you kept your old one.

<facepalm> I guess you've never run a business.
If you need to buy an asset to run your business, you can't simply NOT buy the asset and make do without it.
If you run a restaurant, you can't say, "I'm just not going to replace my stove when it breaks."
If you need to commute to clients, you can't say, "I'm not going to have a vehicle."
If you're a carpenter, you simply can't say, "I won't replace my saws."

What we're talking about here is not about whether someone SHOULD purchase an asset. The decision is made. We are assuming the asset is going to be purchased. What we're talking about is the best way of funding that purchase.

When you're in business, you consider these factors all the time. Do you pay cash for inventory or buy on credit? What is your debt equity ratio? Do you buy a $500,000 restaurant cash or a $1M restaurant that is leveraged. What is your return on capital employed?
If your business is property management, would you purchase one unit with 100% cash down or mortgage 4 units with 25% down? These are ALL the same in terms of logic and decision making process. Will you make more (risk adjusted) with the leveraged investments than it costs you to finance them? Are you able to maintain a positive cash flow?

People who can't manage a simple credit card are not the subject of this discussion although they might be able to learn from it.