Last time we played New or Used, and if you were following along, you may have noticed that Used came out on top. This time, for all the marbles, we’re playing Cash or Credit. So let’s see what we’re playing for today…
It’s a 2006 Acura TSX! A fun to drive, very reliable luxury sedan built by Honda. You won’t regret driving this one home. But, ask yourself which TSX you’d rather have – the one behind door number one or the one behind door number two?
Sitting on the other side of door number one is a TSX that you pay for with $15k in cash. You don’t have a car payment, but every month you put the equivalent of a car payment ($276) in a savings account. After 10 years, you’ll be able to trade-in your car for $900 and the monthly payment you’ve been making to yourself grows to an astounding $34k. In the end, you’ll have made $20,322 on your purchase! That sounds like enough to go out and pay cash for your next car!
Door number two is also hiding a 2006 TSX, but you’ll take out a 5 year loan at 4% interest to drive this one off the set. After making 60 monthly payments of $276 to the bank, you’ll have spent $16,560 for a $15k car. After 10 years, you can trade-in your car for $900, but since you were making your monthly payments to your loan, you’ll have no money in your savings account. This time, you’ll have spent $16,460. Thankfully, you have that $900 from your trade-in to put towards your next car.
|Door #1: Cash||Door #2: Credit|
|Term||10 years @ 0.7% (savings)||5 years @ 4% (loan)|
|Miles at End||210,000||210,000|
|Savings at End||$34,422||0|
|Net Money Spent||-$20,322||$16,460|
Just where did these figures come from? The price of a 2006 Acura TSX can be found on kbb.com selecting the standard options and 60k miles. Some of these numbers have been rounded to make things easier. The trade-in value is based on a 1996 Acura TL (Acura only started making the TSX in 2004 and the TL is the closest equivalent). For the purposes of this game show, I assumed you put zero money down and were able to get a 4% interest rate for the loan. For each car I am assuming you’ll drive an average of 15,000 miles a year over the next 10 years.
I don’t know about you, but after 10 years of car ownership, I’d rather have $34k in the bank than just a $900 car to trade back in to the dealership.
But Bob (my game show host name), I don’t have thousands of dollars laying around to spend on a car. What do I do? You start climbing the car ladder. The way it works is you buy the cheapest car you can afford in cash. Maybe that’s only a $1000, but that’s okay. As you get some use out of this first car, make payments to yourself for the next car. Then when you have enough saved up, sell or trade-in the first car and move up to a nicer car. Repeat the process until you die. Eventually you’ll probably get to the level of car you can live with and you’ll stop moving up. But, you’ll still want to keep making payments to yourself for that next car.
Another option is, if you’ve been making payments on a car that you’ve recently paid off, start making those payments to yourself for the next car. Saving $276 a month could easily get you $16k after 5 years.