Marty is an old retired wrinklie with a new knee. “I get the next one done in a month,” he told me. “But I also need new wheels.” So, he bought a Kia. I tried to restrain myself. So, how are you gonna pay for it, I asked? “Cash,” Marty said, “because I get a $1,200 discount.”
He plans on taking that money out of his newly-funded TFSA. Bad idea, I said.
Normally I don’t get too excited about people chucking away money on vehicles, but shortly after talking to Marty I took a call from a guy I deal with in Calgary. “I’m buying a new truck,” he said. Turns out the young stud’s ready to drop $48,000 on a bitchin’ big EcoDiesel pick-up. Sounds reasonable, I said, but how are you going to finance it?
“From my RRSP,” he said. I lost it.
As well as being rutting season for the house-horny, Spring is all that time of year when people do stupid things with vehicles. Like buying them. In doing so they pretty much decide to sacrifice a part of their financial well-being to acquire a machine destined to depreciate to zero. The same machine they could rent for a fraction of the cost, of course, while keeping their investments (especially tax-free ones) multiplying and increasing their net worth.
So remember this simple rule: buy what appreciates and lease what depreciates. With cars and trucks and most other wheeled things (classic motorcycles excepted, of course), depreciation is certain. Kias and Chevs turn to dust. You sure don’t need to buy one to have one.
Here’ why buying a new vehicle sucks.
First, (as stated above, but bears repeating) a car is not an asset. It does not rise in value with time. It loses up to a third of its value worth you’re using the dealership washroom before driving it home for the first time. It’s a horrible place to put large amounts of your own precious, after-tax dollars.
Second, unless you’re a pimp or a rock star realtor needing to make a statement, this is all about cash flow, not status. Buying a car and financing it through the dealer will cost you more than leasing it. Why? Simple. When you buy it, you’re borrowing the full value of the car or truck, right down to zero. But when you lease, you’re skimming off the good, maintenance-free years and financing only that amount. The car still has a residual value when you drop it off – that you were not required to buy.
Third, raiding a TFSA, or an RRSP or any kind of investment account to get a vehicle is insane. Especially now. Even a (shudder) new Kia can be leased at a rate of 1.9% with a $750 credit. Other dealers will go lower on the rate. So why would you suck money out of an account earning 7% or 8% (especially tax-free) to buy a depreciating hunk of metal when the dealer is mental enough to give you the money for 1.9%?
Fourth, cars break, wear out, get recalled and do what all machines do in the end. When you buy you feel a psychological obligation to keep the sucker going until it’s better suited being a planter. Why keep pumping money into something with no worth? By leasing you can be safe, warrantied and upgrade every two or three years. Today with 72- and 96-month dealer financing common, many fools will still have a few monthly payments left on a ride that died.
Fifth, that means most new car buyers today, acquiring cheap vehicles on extended financing plans, will never have any equity in them. If that’s you, take lots of anger management pills before you go to trade it in.
Finally, what’s your time worth? Leasing vehicles may cost you more dollars than dealer financing over the course of many years (and many cars), but you never have to spend time and money hauling it to the shop – since your wheels are always almost-new. As for paying cash, this is like giving your money to an investment dude who promises to lose 18% a year, guaranteed. Guess what you’d do to him?
Invest your money. Lease your car.
Even better, be like the Alberta guy after I straightened him out. “You’re right. I’m not buying. Actually I’m just going to rent this truck on the weekends, when the girls are out.”
A diesel chick magnet. Only in Calgary would that work.