importance of making payments on appreciating assets

importance of making payments on appreciating assets VS making payments on depreciating assets.

don't know why I'm posting this, but thought I'd share....

everyone only has so much debt service capacity, so where to put payments will decide if your asset base increases or never seems to get anywhere.

most generally largest purchase one makes is their home. but many times one's largest debt service is their vehicle. I'll use that example because that's the most common.

with rare exceptions, one will generally appreciate and other one will go down in value. As most economist will tell you real property has not really gone up in value. it's only maintained it's real value. this is of course discounting real increases or decreases that can happen due to location and maintence.

lets looks further at the example of most vehicles. Unless you had the foresight of purchasing say a 1968 vette back when they were selling for the out reageous price of say $12,000. (which is not that long ago) go look what they are selling for today.

point is vehicles appreciating fast enough to keep real value is far and few inbetween. so it's almost a given payments made on a vehicle is like flushing $$ down a rat hole.

So if one follows the rule of if you can't pay cash for a vehicle, don't buy it. Then save your debt service capacity for mortgage payment(s) that is supporting an appreciating asset. You will be pleasantly rewarded...

thanks for reading!!

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NEVER NEVER buy a new car unless you have over a Million $'s in the bank. They all go down in value. I work for Lexus and see people go into more and more debt all the time just for a stupid car. If you don't have the cash to pay for a car, Hello you cant afford it.

I don't know why this thread struck a chord with me. Apologies in advance if my comments offend anyone.

That's certainly ideal, and of course it's the sound advice that we all get from parents and good money managers. No question that in a perfect world no one would ever need to borrow money or pay interest, for depreciating OR appreciating assets (the whole appreciating thing is still risk - not ALL homes appreciate you know). And I absolutely agree that paying big borrowed bucks for more car than you need, for status or whatever, is stupid. I don't own a Lexus and don't ever plan on it. 10 yo Ford van and 3 yo Jeep, entry level model (cost us $22k). I also am not strapped for cash or credit at this time. Enough said about that.

However, I might add a touch of realism to this that sometimes, regardless of one's income and discipline, some borrowing can't be helped. For example, where does one put college expenses in this? Is that an "investment" or an "expense". As someone who has two grown kids, both of whom have post grad degrees and one who did so at a private Ivy League university, I can tell you that during that period, when I was paying annually more for kids college than some people make in an entire year, and when wife's van blew the motor, I didn't scrounge up a few thou in cash and run down to Fast Jack's to get a used car. Not for the wife to drive safely. Nope. I bought the Jeep, using an Internet sales person from a local dealership. That's just one of many examples of how we all can end up needing financing. Yes, I COULD have told the kids "you must go to a local school and work your way through". I know people who did that. Wife and I took a different tact that worked out very, very well for our family (in terms of opportunity for the kids that they have now and wouldn't have had otherwise).

So don't discount borrowing as evil . Do use credit wisely, minimize your finance charges (ideally zero if possible), and keep your material lusts in line with what you can afford.

Just my $0.02

tdh, your story of borrowing to pay for quality education is another example of an appreciating asset.

don't see where you get that borrowing is bad. unless you have unlimited capital. borrowing is a necessary part of asset building. of course some may disagree with that too. my entire point is you get to choose where that borrowing occurs.

as most know there is no clear cut catagory for everything. I posted this purely on a whim, thrown out for what has worked for me. what works for me may not work for you.

but truly believe these basic principals will work for most anyone.

Well, there is a little more to it. I bought a new car, despite not having a million bucks in the bank. But even though I had enough to buy the new car with cash (a 99 Cougar V6), I financed it for 5 years at 6.75% and invested the cash in my stock portfolio. I had the confidence that I would net capital gains in excess of 6.75% over those five years, and I did. There was a little risk involved but nothing that would hurt me seriously.

Companies use a combination of equity and debt financing to get needed capital. Both have advantages and disadvantages. With people, debt is really the only option. It isn't necessarily a bad thing, but people make it a bad thing because of wildly out-of-control spending that greatly exceeds any realistic income.

I don't think what you use debt for is important. I talked to a coworker who got cleaned out by investing on margin during the stock market bubble--there's some borrowing to buy an "appreciating" asset that didn't appreciate! And even education can potentially cost more than it returns. It's important to keep debt as a percentage of net worth and income as low as reasonably possible. If a person has a negative net worth, or is borrowing more than he or she earns, that is big trouble.

lightraven, you've pointed yet another example of paying on an appreciating asset.

but I have to respectfully disagree with you that what debt you incurr is unimportant.

I agree. Bought my car in full, 7 years ago and it still runs and looks like new. I put a little extra money into it to fix things when they broke, but it sure beats my friends who are still paying on their car loans.

Just throwing in a related aspect of having debt on your home as being (in a twisted way) beneficial - In one of the more interesting aspects of disaster management, operations like FEMA will provide low cost loans in the event of a disaster "if" you have a loan outstanding. If you own your home free and clear, you are pretty much stuck.

In other words, FEMA protects the banks, not you. It is therefore in your best interest to have a bank interested in your home.

I guess you can always look for an older car that has increasd in value orwill? Then again, Ive often looked at cars as disposible items, like shoes or underware.

One thing you see in the hybrid arguements is the price saved driving a new hybrid vs driving an old gas hog you already own or can buy cheap. You need to drive so far and or gas needs to go up so much before it will be cheaper to buy a new hybrid vs keeping the old gas hog or buying one instead.

I am from the school it takes money to make money. sure you can live debt free your whole life, but you are severly limited to your income or earning power.

If you can start a business with a few thousand and possibility make more, I would do it. Worse to worse you fail and truely have nothing to loose, you just file for bankruptcy and follow the course.

As someone who works customer service at an equipment company, I am shocked at the range of money the businesses have for stuff. Ive talked to sole contractors who plop down 110 grand to 3 million for a few trucks for construction work. Ive talked to companies that have to use multiple credit cards to make a deposite on a piece of used equipment of a few grand.

Myself, I have been in and out of debt on credit cards off and on. I used money borrowed from co workers when I was a mechanic to buy used tools to do shade tree work to make money and keep dads car running. I use to buy fast food in rehab to run the computer lab after hours. I nearly maxed out two cards to get a college degree. I maybe again for a car, but that may change.

There's good advice here. Real estate, as an investment, makes more sense than an auto. In some respects, used cars make more sense than new. I've read much advice like this in the last few months, some of it here. I must not be as smart, or have as much self-control as many CPFers, because I did recently buy a new car.

Having never owned a new car, always buying used, it was quite an experience. I don't like having the monthly payment, no doubt, even if I did get 0% APR. I agonized over the decision. I tried going the used car route. Lack of warranties and relatively high price of used cars were drawbacks. So was the APR on a used car loan. I looked into getting an extended warranty from outside sources as well. In the end I found it too risky, though the return might have been, with luck, better than the new car. Add to the mix the number of hurricane or flood cars hitting the market here, and that CarFax and others can sometimes miss things, and voila, instant uncertainty. Since I don't know a mechanic, I was faced with paying one every time to check a used car. Also Texas cars tend to have high mileage.

Did my emotions get the better of me? Did I fail to do all the research, or just not think it through? Maybe so, but I tell myself otherwise. I now have reliable transportation, backed by a solid warranty (or so it would seem). There are going to be sacrifices, such as no more lights (how many do I really need though?), at least for a while. I gave up fast food, which had become a very bad habit over the last two years. I'm waffling on the give up cable and high speed part, but will probably get over the hump and do that as well as take up exercising again. I'll sweat some more this summer, too, and not just because of rising electricity costs, but due to a warmer thermostat setting.

I've gone back and forth over this more times in the last few months than I care to remember. Did I do the right thing? Well, it's done, the commitment is made. There is a thrill, for now at least, every time I drive the car. It's an expensive rush though. Having had unreliable vehicles for the last few years, sans air conditioning, the contrast is glaring. Of course no monthly payments...

So here I stand. I could not buy something I thought reliable outright. It won't always be new, but a new car sits in my driveway now.

Please note the difference between rationalizing if you can afford a payment VS chosing where that payment goes.

again, one can only support so much debt service and still maintain reserves if something should go wrong. Mr Murphy has struck before and will do so again.

let's go thru this same sacrifice of owning a new vehicle and the large payment. instead chose to make those same sacrifices twards an asset that will increase.

there's been many examples already given. one that has not been pointed out is starting a small business. naturally there are risks and rewards of doing so. bear in mind something like 90% of all small business will not be in business for long. not too good of odds, but some do make it.

for most safest vehicle is home ownership. you gotta have somewhere to live and tax benifits too. combine this with the lowest defaut ratio of any loan. it's not if you should own a home, it's more like when.

it's a statistical fact that vehicles under 75k miles generally don't have major failures. then major maintenace (water pump, CV joints, timing belts, alt, starter etc) generally occur between 95k-115K+ miles. this is discounting lemon models. engine/drivetrains generally go for much longer. some 200k+.

if you fall into this safe zone and change into a new vehicle. then yes is was an emotional choice

I agree about the home owner part. I already own. I tinkered with the small business idea, but decided I don't have the vision. Like the world needs another place selling flashlights and night vision devices, LOL.

The distinction between rationalizing affording the payment and deciding where it goes is excellent. I have allowed for Mr. Murphy, but not as much as I could have if I didn't have car payments, and more is better in that scenario. Also I could have invested in something else with the possiblity of it appreciating being much higher than the car doing so, and I don't believe it will appreciate.

Please note I think your advice, and that of others here is good. I'm relieved that it's done for me, but still second guessing, though that's my nature.

I've never quite gotten the concept that it makes a difference IF the borrowing is discretionary.

If I buy a house and spend $7,000 a year on interest that interest is still gone. If I buy a Ferarri and pay $7,000 it's the same.

You might be saying that you should only get a loan if it will make you money (appreciating assets) but that's not always going to be true. Here's a case in point;

I had rented at $500 a month. I bought a house with a payment of $1300 a month. I sold the house in 7 years and after the real estate commission I had $23 K in my pocket. Did I lose money or make it?

To complicate things.... I got divorced in that 7 years and had to buy out my ex's equity which did not take into account real estate nor loan fees. Add $20,000 to the cost.

I think the better rule is to not borrow unless there is no other way to do it. Pay cash when you can. Go without if you have to.

Daniel

Borrowing to actually make money is the most sensible thing for a person to do. Making money with other people's money is the best way to make money. The more the better. If you're robbing Peter to pay Paul and you are borrowing to buy a car to save money for your business that would be ok but you are likely passing by deductions.

It's common knowledge for years one of the greatest distinctions between millionaires and folks with a lesser net worth was that they didn't buy new cars. I don't know if that still holds up and probably doesn't reflect the mega wealthy. However if you buy a car new then keep it for 7-10 years and there is nothing wrong with that. Of course if you trash it then don't keep it, but if you take good care of it then that is a sound financial decision that you aren't assuming someone else's mess.

If you have young children and want the best safety for them or have other such issues then saving money on vehicles probably isn't a good investment. If you are planning on a busy period in your life then that is also a good time to have a new car so the car doesn't factor in for repairs. Unless you have a lemon, it's nice not to worry about repairs. However even if you can afford it, I feel pretty stupid selling a car for half what I paid for it 2 years later as I have done and then I miss my old friends after selling them off. Bright shiny toys can just be a distraction from life.

Let's face it, unless you can write off your car, debt on vehicles compared to many other items, such as homes, really is counterproductive to gaining wealth. Obviously with the debt load of the average American there is a serious problem here and perhaps even more bubbles yet to burst.

Thanks bogus1, excellent post!

many ways of originating business loans. SBA or small business administration is always ready to loan out significant sums to capitalize small businesses.

originating larger business notes/organzing a new venture is a skillset to it's-self.

this can fall under catagory of: be careful what you wish for, you may get it