Pay Cash (For Cars) and Invest the Difference – Version 10/98

A lot of people are in the habit of borrowing money every 4 to 5 years to buy a car. What would it be like if they didn’t borrow money for these purchases, but rather saved in advance of these purchases and paid cash for the cars? In other words, instead of paying interest to use someone else’s money, you find someone to pay you for the use of your money. This calculator looks at just that.

In the top section you enter the starting point of an assumed series of 5 car purchases. Enter in this cell (Original Purchase Price) the dollar amount of the first loan, which is assumed to be the amount over and above any trade in. We will look at five purchases to occur in intervals you indicate. In most cases this interval will be 4 or 5 years. We will take the inflation rate you specify and increase each successive purchase accordingly. You will also need to indicate the assumed auto loan interest rate. The top section then outlines for you 5 car purchases, showing the total amount of the loans and the cumulative cost of the monthly payments of the loans.

Where the top section is looking at the cost of borrowing the money to buy cars, the bottom section is looking at investing money in advance of each purchase to accumulate the purchase price. You will need to enter in the bottom section your assumed investment rate of return. The calculator will then display the monthly payments needed in advance of each purchase to pay cash for each car, while comparing that to the loan payments required as a result of borrowing money for the same car. The bottom section goes a step further, however. You will notice that the advance savings required for each purchase is less than the loan payment required for the loan payments in the top section. We will then show that difference being saved in an investment over the test period (at the investment rate you indicated) and you will see the total amount accumulated as a result of diverting this savings. The result of using cash (in the bottom section) for purchases instead of borrowing money, is you bought the same cars over the same time frame but you have also accumulated some cash on the side. It seems that cash based purchases more efficiently use your resources.

Some may want to know how to switch from debt based purchases to cash based purchases. This will require a few years of sacrifice. If you are in the "borrow for cars cycle", after your current car is paid for, keep it. Begin to pay yourself (invest) for your next car until you have the cash to make the next purchase. This may take 4 to 5 years, but this sacrifice will be worth it if you can accumulate the cash on the side that is shown in this calculator, and that will have a positive effect on your retirement nest egg.