The Rule of 5 When Buying a Car

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Assets first. Wants and desires second. Of course, that's been a theme of mine for a long time. There are many ways to to this. Here is simply another way to look at it and at least consider one question. Can I afford the car I am buying? Essentially, if you can pay cash for the car you drive, while it is not always better. It is better most of the time. That's saying that without getting into the more important calculation or explanation of "the cost of money consideration." I am trying to keep things pretty basic. If taking out a loan is desirable, for whatever reason, consider the Rule of 5. Take the amount of the car you want to buy and times that amount by 5. If you want to buy a $30,000 car, times 5 that comes to $150,000. If you do not have at least $150,000 in assets, be it in a bank account or in investment accounts, you cannot afford the car and should not buy it. In this scenario, let's say your payment would be $450 a month on that $30,000 car and you instead buy a car for $5,000 with cash, but at the same time are sure you could swing the $450 payment if you had to. Make the payment anyway. Put that $450 a month into savings or investment. Worst case scenario, in 6 months, if that $5,000 car may need some repairs, you've socked away $2,700 to help cover it. Best case scenario, you are building assets that will be more valuable than the car you would have purchased on loan. In the average 6 years it takes to pay off a car you would have probably saved $32,400. Even if during that time you spend 15% for repairs over that period, you'd still have $27,540 and would not have incurred any additional debt to pay for the needed repairs.