By lumping together a business asset and personal asset in one and the same argument you display an obvious lack of understanding of how business and finance works. Both have a completely different purpose and expectation during their lifecycle.
I will agree with you that everyone's situation is different and what might apply to one might not apply to the other. However, if nothing at all, the last 10 years have proven that the average American is stupid about money. Concepts such as debt, leverage, risk, cost of capital etc. are foreign to most individuals.
The problem goes deeper though. The idea of saving for an expensive item does largely not exist anymore. Folks have to have the item today, whether we are talking about cars, vacations or whatever, so they borrow or charge the item and evaluate their ability to afford it based on the monthly payment that comes with it. The gratification has to immediate. In many cases this leads to problems later on. Savings are non existent and debt is rampant.
Yes, I made a blanket statement, a statement that holds in most personal cases. IMO when it comes to personal depreciating assets, if you can write a check for it comfortably do so rather than take on debt. If you can't, at least save for a very sizable downpayment instead of trying to fit in a $800-900 monthly payment ( even if you can comfortably afford it today). 72 months is quite the period to forecast for the average person.
Again, business assets and the use of business capital are a completely different story. I am more than willing to explain that to you on a later date.
LOL.
I’ll let you know that I am a Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC) and Certified Investment Management Analyst (CIMA). I have had my practice for over 15 years. I clearly understand that businesses are afforded additional tax benefits to depreciating assets not often afforded to personal assets. However, both businesses and individuals should be making the best decision based on the economics and best utility of the purchase within their risk tolerance. Within that context, it may be that using leverage is the best decision. It may be that paying cash is the best decision.
You seem to be letting your personal view that vehicles should not be financed (no matter what) overrule the economics and risk tolerance of each person’s situation. My point is that each individual needs to evaluate based upon their own situation.
Here’s a case to illustrate my point:
Casey, age 37, has a net monthly income after all fixed expenses (mortgages, taxes, utilities, etc) of $5,000. He has stable employment. He is on track for retirement savings, college savings for his children, and has built a $100,000 taxable investment account for discretionary expenses. Expected rate of return on that investment account for the next 5 years is 7% annually.
Casey can finance a $50,000 vehicle for 2% over 60 months. He can easily cash flow the monthly payment.
Question:
Should Casey finance the vehicle or pull the $50,000 from his investment account and pay cash?
Answer:
I don’t know.
First the economics:
Certainly, the economics make sense for him to finance the purchase. In theory, he should make an additional $11,000+ in his investment account over the next five years by using the loan. He can easily cash flow the monthly payment. The economic answer is a resounding “yes”
Second, risk tolerance:
By using the loan, Casey is subjecting himself to greater risk. Risk that the investment account won’t perform at 7%. Risk that he could lose his income. Risk that he won’t like the vehicle and want to sell it early. Etc.
Assuming an affirmative answer on the economic side, Casey must decide for himself if the risk of a loan is acceptable to him.
Note: If the economics do not make sense, risk tolerance doesn’t matter. Casey shouldn’t proceed. For instance if the loan rate was at 9%, Casey should pay cash.
I do agree that many Americans have not done enough for retirement savings and saving altogether. IMO, it is a product of lack of financial education and personal sacrifice.
But again, it’s loopy to suggest everyone should pay cash because we all have different economic and risk tolerance situations.
