Have you ever saved up cash for something you really wanted to buy? The new Playstation console that was just released. A fancy new dress for an upcoming gala. New fishing gear for a summer trip. You stash your cash in a coffee can (or the bank, like normal people), saving until you have enough to pay it in cash. And if you want to buy a car, you may be inclined to do the same thing. But should you pay cash for a car?
It’s Not a Great Idea to Pay Cash
I get it. You don’t want a car loan looming over your head, and why wouldn’t you want to own your car free and clear? It sounds like the best idea, but there’s a better use for your money.
A Car is a Depreciating Asset
The moment you buy a car, it begins to lose value. That’s what depreciation is. Think of it like releasing a fistful of dollar bills into the air every day. When you pay cash for a car, it’s easy to imagine your money disappearing into the wind. And even for Acura cars and SUVs that hold their value better than others, your hard-earned cash that you’ve saved is going to diminish every day.
Investments Can Earn You Money
Instead of paying for a depreciating asset in cash, have you considered putting your money to work for you? There are so many ways you can do it. Buy stocks, bonds, or even Bitcoin, all of which will eventually grow in value. Take out a second mortgage with your savings and purchase an investment property. Or simple GICs and RRSPs will grow your money at a faster rate than the interest you’ll pay on your car loan. Plus, you’ll have access to that cash when you need it.
Consider the Time Value of Money
A dollar 10 years ago could buy more ‘stuff’ than it does today. In 10 years, inflation is going to drive prices up even further. If you pay cash for your car, your money is disappearing instead of growing, and you’ll need that cash in the future.
There’s Security in Savings
When was the last time your hot water tank was replaced? Will your second vehicle need new brakes or tires soon? Your teen is going off to college, and there will be tuition to pay. If you pay cash for a car, your security blanket disappears. You’ve just spent money that might be necessary if the unexpected happens…but hopefully it doesn’t.
Can you pay cash for a car? Sure, if you really want to. Should you pay cash for a car? There’s certainly good supporting evidence that your money is better used elsewhere.