Tuesday, March 8, 2016

When Paying Cash For A Car Is A Mistake

Some years ago, I let my ego take precedence over financial analysis, and I bought a new 1998 Mitsubishi Galant by writing a check for it.  It made me feel rich.  In retrospect, had I bought stocks or even T-bills and made payments on the car I would have come out ahead.

Right now, I am considering whether to cash out some CDs and pay off the Jaguar.  The yield on the CDs is only 1.6%, and the car loan is 2.3%.  There is very little that those CDs can be invested in to give a return sufficient to cover the car payments without some principal risk. But cashing out those CDs one at a time to cover the payments a year and a half makes more sense than cashing them all out to pay off the loan.  Even with th the early withdrawal penalty, the CDs will cover 68 of the remaining 71 payments, and interest earned on the CDs still invested will cover another monthly payment.  So staying somewhat liquid only means two more car payments.  Analyze the real cost of paying off loans in this topsy-turvy world of insanely low interest rates.

Spreadsheet error on interest of remaining CDs: there is no cost at all.

Remember: instructions for becoming wealthy are here, for those interested in that sort of thing.

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