Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.
Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]
Brad: Welcome to Make your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett, and it's my goal to help you distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve. Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that information applies to you. And that's my commitment to you here each and every week, because after all your money matters. And as you're listening right now, for those of you listening to each and every week, thank you. If you haven't already done so you can go to our website at onecapitalmanagement.com. You can click on the media tab and there you can download and subscribe to make Make your Money Matter podcast. You can also download the podcast on any platform where you would otherwise download podcasts, whether that's the apple app on your phone, Google podcasts, Spotify, SoundCloud, leave us some feedback, let us know how we're doing. If you like the show, share it with someone you like. And I guess if you don't like the show, maybe don't share it. But today we're gonna be talking about something that gets brought up in our practice constantly. And I want to be very clear about something in this topic that no matter what the wealth status is for someone, this topic always comes up as a, what is the best financial decision to be had? And it has to do with your car. Yes, your car. [02:00.8]
Should you buy it or should you lease it? Many people think if they've attained this certain amount of wealth that they'll just have this cash and they'll buy out the car. Well, I'm here to tell you that a lot of people with financial means to be able to do that, tend to look at it differently. So, we're going to be going through that today. And I chose it as a topic because it's something that gets brought up as advisors and I talked to my colleagues here that it's actually a topic that gets brought up probably once a month, once or twice a quarter. I mean, it's a very common topic. So, I thought it'd be good to go through. Now, I'm going to go through a lot of the details, any more granular sense, because I feel like it's worth us discussing in detail. So, let's begin. [02:39.8]
Okay. I'm going to come out of the gate here and say something really profound. That's obviously a joke. It's a very blanketed statement, but it does kick off this conversation, here it is. It all comes down to what type of owner you are. Okay. Brad, we get it. What do you mean by that? Okay. Do you like to hold onto your car years or do you like to switch it out frequently? I mean, do you drive a lot of miles? Do you like spending a lot on insurance? We'll talk about that today. How you answer these questions actually has a lot to do with the decision, the first pivot point in the decision around buying or leasing a car. And for many people listening after buying a home, one of the next major purchase decisions and expenses really is a car. The latest headlines actually, including a recent article in the wall street journal, which is actually titled - Buying a car now is brutal, has to do with buying a car right now in 2021. Talk about how the market for cars has been turned upside down due to the lack of inventory and really parts availability. And the transaction price of specifically used cars relative to this article is up 24% since June of 2020. [03:51.4]
And if you listened a couple of weeks ago on our episode around inflation, as well as our OCM summer playbook, we talked about some of these things because the car market has actually been hit with a lot of the supply chain issues that we're seeing this kick up an inflation. So, this increase in price is there. Hopefully it'll go back down, but the topics around buying or leasing still has a lot of foundation to be gone through. So, you know, as many deals to be had nowadays in the car market, buying a car now does appear more challenging than it was the past. That said what I'm going to say for the next few minutes has a lot to do with just an average car market, if you will and some of the ways to look at it. So, whether to lease or buy can depend on your circumstances and preferences. [04:39.6]
Now, a few years ago, I made a rough calculation and I was talking to some colleagues about this as well. Around, and again, this is assuming the car market is behaving normally. And the conclusion was whether you bought earliest the exact same car you would likely break even at about the three-year mark, so, let me explain. Before that point, by the way, you may spend less on a lease, but after that point, you tend to come out ahead by buying. Why? Well, because the lease payments take into account, the big depreciation hit you experienced with buying specifically a new car. So, which by the way, is the highest in the first two or three years at depreciation. So, if you lease, you are still paying for that depreciation. Let me give you an example. [05:24.8]
If you buy a $50,000 car for cash after three years, you'll be able to sell it for say $30,000, again, it's a hypothetical, which means you spent quote unquote $20,000 owning the car for those three years. Now, if you lease the car, your three years' worth of lease payments will likely be very close to the same $20,000 again, due to the depreciation factor. So, if you buy and keep the car longer than that, it continues to depreciate. But again, at a declining rate over time. Remember the first two or three years as the highest rate of depreciation. So, owning the same car for six years is then cheaper than leasing for six years. The break-even point again is around three years. So, one way to save is to buy two- to three-year-old car that has already taken in the initial depreciation hit. You keep it for seven to 10 years and hope the repairs really aren't that expensive. Again, this goes back up to the first decision point of what kind of owner are you. [06:25.0]
So, let's go into some of the things to consider when we buy a car. Now, depending on interest rates, it may make sense to pay cash. If you have sufficient cash available, if you have, let's say $50,000 sitting in a cash account earning 1%, but your loan would be at 6%. Again, it may make financial sense to pay cash, right? Why would you go and pay six and only earn one? You might as well just pay for the car in cash. Now, if the $50,000 is all you have in your emergency savings account, say, you may not want to tie up all the funds in a depreciating asset and prefer to go the finance route, especially if you're still working, something to discuss later. [07:09.8]
Now, another consideration would be the probability of you replacing that $50,000 with new savings, once it has been used to buy the car. Some people psychologically have a harder time paying themselves back than paying the bank, believe it or not. Interest rates for new cars are usually lower than for used cars and often the dealer may offer very low interest financing. So, if your $50,000 is invested, by the way in, let's say a balanced market or equity market driven, and you can expect a rate of return higher than the rate you'd be paying on the finance portion of the car. You may prefer to finance and leave your money to grow. This is a concept we talk about here at the firm called interest rate arbitrage. It's talked about widely, but it's basically saying if you can go get a loan for 1% and let's say you can put a portfolio together, a conservative one over that same five-year period, you would finance the car for, let's say 3% while you're keeping that extra 2%. Right? So, it's really important to kind of look at it from an aspect of, do you not like having a payment or are you comfortable with the payment, but you're paying yourself back after you've put the cash out to buy the car. [08:25.2]
So again, it all goes back to that initial question. What kind of owner are you? And then you dovetail off that into what kind of financial outflow person am I? Am I okay with the payment? And am I okay with that payment knowing that by me not paying cash for the car and keeping my cash and earning more than what I'm paying, even though I still have a payment am I comfortable with that? So those are really great strategies to talk about when it comes to the initial onset of buying a car. So, interest rate arbitrage is a great friend to you if you know what you're looking at. [08:56.9]
Now, I do want to talk about one last subject when it comes to this, the important aspect for retired clients. So, if your money's in an IRA or other retirement account, you probably don't want to listen to this to know, but taking out a $50,000 lump sum to buy a car may actually cost you way more as you well know, because you're in retirement with tax deferred assets, you're going to be paying taxes on that. That may actually even push you into a higher tax bracket. So, I tend to say, be careful there if we get so ingrained that I just don't want to have a payment. I just don't want to have a payment. Well, if you're willing to go and pay uncle Sam ahead of time to do that, that's one thing. But really look through that, make sure it fits into your overall investment and retirement plan. [09:36.4]
Okay. As I mentioned in the onset of this episode, I'm going to go a little granular because I've done this over many, many years now. So, we're going to talk about maintenance and depreciation costs. You're probably going, man, this guy's going real granular, but it's worth it when you talk about this. So, if you're buying a car, you would want to check into, as we all should, what is covered under warranty and for how long. Anything not covered, right, will be your responsibility and probably an extra expense. So, some warranties on new cars are not worth the paper they're printed on. I hate to break it to you, they're expensive. Like for example, expensive mechanical systems that tend to give you trouble sometimes aren't typically covered. I've had that experience myself and often the dealer will try and talk you into purchasing an extended warranty. Be weary here. I have many friends and clients and colleagues who own dealerships and they tend to say that their warranties is actually wearing, make they make a lot of their money. So just not saying they're bad, I'm just saying, look into it, make sure it works for you. So, the question arises of, should you buy an extended warranty? Well, it's a gamble if you want to ask me, honestly, that works similar to insurance, but you'd want to understand the types of repairs you are insuring against to make sure the coverage is worth it. They don't cover everything like I mentioned. So, some warranties are expensive and it may make sense to just save the cash you would pay for the warranty in case the car needs repairs. And if you can't afford to repair the car, if you had a, let's say a costly problem, then it may make sense to get the warranty. [11:07.5]
So lastly, another point to consider is if you have an accident with a car you own, when you try to resell it, you probably going to get a lower value for it. Some insurance policies offer coverage for this possibility, but they're expensive something to look into. So before choosing a car, check out resale values for that type of car. So, when you are ready to sell it, you love an idea on the future valuation. I was just having a conversation last week with my father-in-law regarding this episode, I was thinking about discussing today. And he's a guy who's owned a Toyota Tacoma pretty much for the past 20 plus years. And as I was looking at that car, the same truck he bought like eight years ago, he could sell right now for like $3,000 less than what he paid for it. Talk about holding value. So, some cars do hold values. So, it's important to look into it at least more than anything to manage your expectations so, you know what you're getting into. Now in order to get a sense of how much a car costs, you can use things like truecar.com or edmunds.com or Kelly blue book value, they're all great tools, right? And most car dealers just to be clear, have negotiating room, always know that. They can be able to a couple thousand dollars depending on what car and, and especially if a new model is coming out. So, make sure to do your research before negotiating. [12:22.9]
Okay. Let's switch over to the lease side. So, some things to consider when leasing a car. First and foremost is the lease commitment. So, if you tend to keep cars for a long time, as I mentioned earlier, purchasing maybe the way to go. Again, there's some factors at play there, but think about it. If a shiny new toy though, as I mentioned every few years is your thing, you might want to look into something like leasing. So, if you believe your circumstances may change such as a new baby on the way or elderly parents coming to live with you, or maybe a future move for a summer climate to a winter climate, you know, leasing provides more flexibility since you're not committed to the car for more than say two or four years, depending on your lease term. You'll likely be able to get more car for your money, with a lease as well, which is a good thing and a bad thing. Okay, you don't want to just say, okay, my monthly payment is much less on a lease so I can get this nicer car. Be careful there because remember you're paying for the depreciation and you're paying to “rent” the car. [13:22.7]
So, although you may get more car, you really want to make sure you value that and make sure it's something you want to do. Again, there's usually an upfront cost to leasing, which is typically an amount due at signing like the tax tag, title down payment delivery costs, etc. Those are all lump sums and they usually reduce your monthly payment, if you do an additional lump sum payment, right? Depending on your credit. So, some dealers will offer things like zero down, but all this does is increase your monthly payments. So, it's all a numbers game, okay. A higher down payment means lower monthly payment and vice versa. So, to get an idea of what you're really paying each month, a quick rule of thumb. So, on average here, you may want to divide the down payment by the months of the lease. It's a good way to get an idea of what you're really paying each month on average. Okay, let's go over to maintenance and mileage again, going granular here, but keeping under the leasing umbrella here, maintenance and mileage has a big deal when it comes to leasing. [14:19.3]
So, some brands has scheduled maintenance included, which can be actually really convenient, I've had that myself. However, there are also some coverages such as like tire protection or dents and scratches that you can buy insurance for that will actually increase your lease payments. So most standard lease offers are around 10,000-mile limits per year. So, if you drive more than 10,000 miles, this will, by the way, increase your payments on the front end or on the back end when you return the car, you'll be required to pay more for the extra miles. A lot of people who've never leased before lose this detail. So, it's usually cheaper to pay for the miles before you return the car. And in some cases, you know, there is a timeframe to do this. You have to buy the extra miles three months before the end of lease. For example, extra mileage, it can range depending on the brand from anywhere from 15 cents to 30 cents per mile, which can add up fairly quickly. A 30 cents a mile with an extra 3000 extra miles will cost you $900. So, make sure to look at how much you're driving. One of the questions asked in the onset of the episode. So again, if you drive more than 10,000 miles, you can do leases for 12 and 15,000 miles, they do go up. But again, if you're going into that realm, purchasing a car might be cheaper for you depending on different factors, especially for driving, you know, 20 to 25,000 miles a year. This can get real restrictive and expensive when it comes to leasing a car. Now, remember, keep in mind on a purchase car the increased mileage may fetch you a lower sales price when you're ready to sell anyways. So, you can weigh the pros and cons there. [15:56.2]
Okay. Insurance costs. So, people forget this, but leasees also require full insurance coverage to protect you and the leasing company. So, if you want to pay for less insurance purchasing may actually be a better alternative. Now this personally, to be fair, leased cars usually have what's called gap insurance built in. This is the insurance that pays the difference between what you owe and what your car is worth if it's stolen or totaled in an accident. Loans do not usually have this coverage. So, you need to check with your insurance company to see if this is something that they offer. And the last thing I'll say for those business owners out there, if you own your own business and can use lease payments or mileage allowance as a tax write off, definitely something to consider and discuss with your CPA and or your advisor around if that's the right play for you. [16:48.1]
And again, if you like our help, you can reach us at (805) 409-8150. You can also go to our website at onecapitalmanagement.com because as small as a subject matter, this may be. And as granular as I went, you're probably going Brad, that was really granular. I could have looked up at Edmonds or some white paper around this, but these are all nearly 20 years of experience in talking to colleagues, it's just good to go through. A lot of our job as advisors is to quarterback some of the decisions you're making. We won't make them for you, but our job is to arm you with the knowledge and then you turn that knowledge into wisdom. Because how you perceive in how you put it into practice in your own life has a lot to do with the knowledge of going into that decision with. Wouldn't you agree? [17:30.4]
So, everything from, you know, maintenance and mileage cost to insurance costs to depreciation costs, and all these things as granular of detail, they may be into a what seemingly might be a simple question or topic around, should I buy, or should I lease really, should be looked at? Because again, if you have one or two or three cars in your household, it's worth looking through. And all decisions like this tend to flow back up to the top with regards to your overall investment objectives and your investment plan, your overall retirement plan. And by the way, as I've said this before, retirement can be somewhat of an ambiguous word, right? Retirement to a lot of people mean it's like, oh, not till I'm 65 or 70. Retirement can really be more being financially free. And that could happen when you're 40, when you're 45 or 50, all depends on how you plan. And so, decisions like this, a simple question around, should I buy, or should I lease a car? All those little impacts have a lot to do with the overall retirement plan and when you choose or when you would like to be financially free. [18:32.0]
And if you want to go through that plan and seek that counsel and find an advisor to help you through these kinds of topics, again, you can reach out to us. You can call us at (805) 409-8150. Again, you can go to our website and find out more about myself, our entire advisory team here at One Capital Management. And you can actually set some time with each one of us on the website directly at onecapitalmanagement.com. [18:53.1]
Thank you for listening to make your money matter. And before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation. Or again, you'd like our help visit us at onecapitalmanagement.com or give us a call (805) 409-8150. And until next week always Make Your Money Matter. [19:13.2]
The information in this podcast is educational and general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [19:36.5]
