TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• 1 Ultimate Rewards Point: 50% off;

• Pay for your car in cash or with a car loan;

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• When you can stop budgeting in retirement

  My Take - I’m surprised to hear Suze Orman hates budgets, but I understand her concern. Budgets—or conscious spending plans—to me are a way to control where my money is going.

• Venus Williams says to learn from your money mistakes

  My Take - Love this! Failing and making mistakes aren’t fun. Especially with money. But, what you learn from those mistakes is far better than if you didn’t make any mistakes. 

• You should understand your pension

  My Take - This takes me back to my employee benefits class in law school where we got into the nitty gritty of ERISA regulation. If your employer sponsors a defined benefit plan (aka a pension), it’s important to know how they work!

• Mr. Buffett knows a thing or two

  My Take - Set it and forget it! Nuff said!

• Prof. Shaq shares tips on successful investments

  My Take - Famous, superstar athletes are human just like us! It’s always important to do your diligence before making any investment. Past gains fo sho doesn’t mean future success. 

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Reflection No. 8: Cash or Car Loan?

I - Issue: Should you buy a new car in cash or finance it?

R - Rule: Paying for a new car in cash saves you from paying interest on the car loan and gives you peace of mind. However, taking out a car loan and putting that cash in the stock market could be more financially prudent. The choice depends on your cash flow, financial goals, and opportunity cost.

A - Analysis: When deciding between buying a car in cash or financing it, several key factors come into play: cash flow, opportunity cost, and the total purchase price. Let’s start with cash flow. Buying a car in cash requires saving a significant amount of money. You avoid monthly payments and interest charges but deplete much of your liquid savings. Using your saved cash to pay for a new car can impact your emergency fund or other financial priorities, like investing or paying down debt.

On the other hand, financing allows you to keep more money for different purposes, but those stinkin’ car payments then tie you down. Most auto loans range from three to seven years; the interest rate can vary significantly depending on your credit score. According to Experian, the average interest rate for a new car loan in the U.S. in 2024 was around 6.58% for borrowers with excellent credit and up to 20% for those with bad credit. Financing may feel more comfortable in the short term, but the overall cost of the car will increase due to interest.

Opportunity cost is another important consideration. If you choose to finance, instead of tying up your cash in the car, you could invest that money in assets like stocks, mutual funds, or real estate. Historically, the stock market has provided average returns of 7% after inflation. If the rate of return on your investments exceeds the interest rate on your car loan, you could come out ahead financially by financing the car and investing the difference. For example, if the interest rate on your car loan is 4%, but your money could earn 7% from the stock market, then you, in theory, would be making 3% by putting that money in the stock market.

Remember that investing comes with risks, though. As the old saying goes, “past performance is no guarantee for future success.” These factors make the decision more about your personal risk tolerance and financial goals. If you prefer certainty and minimizing debt, paying in cash might bring you peace of mind, even if you miss out on potential investment gains.

One final point is how financing a car can help you build or improve your credit score. By making regular, on-time payments, you establish a track record of responsible borrowing, which can increase your creditworthiness for future loans or mortgages. However, this benefit may not be significant if you have a strong credit history and don’t need to boost your score.

C - Conclusion: Paying cash might be the best option if you prefer to avoid debt and value peace of mind. Financing, on the other hand, could provide more significant long-term financial benefits if you can secure a low-interest loan (a true fantasy over the last couple of years) and invest the difference.

Time to Reflect…

The choice between paying cash for a car or financing it boils down to balancing peace of mind with potential financial growth. Paying for the new vehicle in cash gives you full ownership and avoids interest, but it can tie up a big chunk of your savings. On the other hand, financing lets you keep cash in hand—money you could invest and potentially grow. Whatever you decide, make sure it aligns with your financial goals, comfort with debt, and where you want your money to work hardest for you.

Quote of the Reflection

Thanks for reading! That’s all for today, but if you enjoyed this Reflection, the best thing you can do for me is to share it with those in your network. Referrals are the sincerest form of flattery 😀 

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