My 2010 Z

Micas

This will sound preachy, and it is, but I've been watching these types of threads and thought I'd relate my experience.

In my 20's, I drove a cheap car that cost $4000 for 7 years.. yes, that's 7 years. I paid cash for it with a bit of help from the parents. During those 7 years, I saved up money.. a lot of it, and every car I've bought since then (3 of them), I've paid cash. That puts me ahead of the game in that I'm never paying interest. I owe nothing on credit cards, and the only debt I carry is the mortgage on my house, and I could pay that off if I wanted to, but mortgage interest is deductable on taxes.

I know having a styling ride when you're in your 20's is a big deal to a lot of guys. Most think in terms of monthly payments that they think they can afford. When all is said and done, doing that costs a whole bunch of money. Having some discipline can pay big dividends down the road though. It doesn't work for some people, but it does for me. I'm 43 now, and even if I were to lose my job in a bad economy, I could last probably 5 years if I had to without living in my car.. down by the river. That peace of mind was worth always riding with my friends when we went out on the weekends because they had the hot cars.

Just food for thought.

dudafunk

^^^^^^^^ Would want to ask you, I've been giving this thought lately:

When buying a house, prices vary so much by the thousands. What if one were to pick a house that was '$20k cheaper' than what you'd pick 'otherwise'.

Do you get the thought process?... that if one wants to be picky and agrees to not be too picky with the house then there could be a balance achieved.

Do people think this way?

Micas

Honestly, I don't think you'd be any more likely to buy a house as you are to actually buy a car.

But I guesss.. to answer the question.. buying a house that costs 20k less in order to buy a car that costs 20k more is an incredibly bad idea that should be obvious. First, you live in your house.. you just drive a car. Second, a car is a depreciating asset and a house is generally an appreciating asset. Over the long term, a house will appreciate in value in proportion to it's cost. In other words, a 200k house might be worth 250k in 10 years. A 1 mill house might be worth 1.25 mil. The difference in appreciation is 200k.

Those are numbers I just pulled out of my arse, but you get the idea. A car is always a big money drain. In fact, it's probably the biggest money drain you'll ever have besides kids. This is espeically true if you keep buying a new car every 3 or 4 years.

I know it's exceptionally difficult to do, but as a general rule of thumb, if you start in your early 20's taking in more money than goes out, putting money in a retirement account (401k etc.).. never paying any interest on anything except a house, you'll find yourself in your 40's with several hundred thousand dollars in the bank. You don't have to earn 6 figures to make that happen. It just takes a willingness not to have to buy things that are out of your reach.

dudafunk

Sure but, doesn't answer my question.
Take a walk down the lane, house 1 will be $200,000 and house 2 will be $220,000. I'd "Live" in either. Whats wrong in living in the $200,000 one...

The debate I'm making is, if I DON'T buy the car, even THEN, how do I know I can spend $X on a house?... how much is X going to be? - Once I establish that based on what I can afford, how much credit I get etc., I then check, oh, I can buy a $220,000 house - now how bad is the $200,000 house?... hmmm not bad...

Thats the argument I'm making... hope to hear your reply now. Maybe I wasn't phrasing myself correctly.

Micas

This gets into the territory of off-topic home buying, but I guess I'll bite.

There's a lot of factors that are involved in buying a house. Sometimes it doesn't even make sense to buy a house. It depends on what your long-term goals are and your lifestyle. Sometimes renting a house, or simply living in an apartment makes sense if your life and work are more volatile. A standard rule of thumb is that you shouldn't buy a house if you don't plan to live in it at least 10 years. If you buy and sells houses at a more rapid pace, you start losing a lot of money in closing costs and such.

Maybe I'm still not getting you, but your asking why not buy a 200k house instead of the 220k house? Why stop there? Why not buy a 150k house, or a 100k house. It all depends on what you want. There are generally good reasons why one home may cost more than another. There may be location value differences, or ammenities that are worth more in one house than the other.

The way you know how much you can spend on a house is to get pre-qualified for a loan. Generally, real-estate people won't talk to you if you haven't got a pre-qual letter so they know you are serious and know how much you can actually buy. One of the problems that caused the recent housing bubble is that people were buying homes at the limit of their qualification. A bank will pre-qual you for your maximum amount, and since they get higher returns the more money you borrow, they'll pre-qual you to the point where you'd be just barely able to make the payments. It's always better to buy less home than you can afford for a lot of reasons.

When you get pre-qualified, there are variations in the amounts and terms of the loan. You can buy a more expensive house on a 30 year note than you can on a 15. You have to decide what's in your own best interest. A 15 year loan will have a lower interest rate than a longer term. My house is on a 15 year note at 5%. I will own it outright in a few years.

I think it's important that people think long-term in their spending, and a car is a huge financial out-lay. Consider it taking a big stack of 100 dollar bills and setting fire to it. Only the buyer can decide the "worth" of the driving experience, and the satisfaction they get from a car.

Again, I'm very preachy about this topic, but I continually see people buy cars that cost many thousands of dollars by looking at the "monthly payment". If they never break that mentality, they'll always be burning even more piles of 100 dollar bills in paying interest. My point is that if you start young and discipline yourself to never paying interest on anything but a home, you'll be so much ahead of the game.

It's all relative really. I paid 40k cash for my G35 in 2003. I've had it 6 years, and everything I've done over the last 20 years allows me to pick pretty much any car I want and just write a check for it. I could afford a turbo 997, a GTR, heck, I could buy pretty much any car south of a Veyron for cash, but I'm focusing on a car that will probably cost me ~$38k + TTL. I'm deliberately limiting myself in order to be even further ahead when I get to my 50's, because I eventually want to retire with zero worries.

Live well below your means, and profit in the long run.

dudafunk

Apologies to the OP for the sidetrack from my side as well, but this is a very interesting discussion for anyone aged 20+! I have tried to have this talk with many a one, and never been able to come to a conclusion so far. Micas sounds very informed so..

The question of paying interest on only a house and not on the car is irrelevant. In my opinion, 0% interest or 3.99% interest or anything is very abstract and borders on the line of marketing even. I'm looking at the fact that I'm buying some car, at some overall price vs. not buying it at all and saving that money for the house.

And so therefore the question is, how much will I benefit if I "save" $20-30k by not buying a car. I have been unable to find a good answer to this because buying a house is so 'fluid' and you talk in 100's of thousands and not in tens. So 10-20-30k more or less on a typical $200,000 first home budget might not make a big difference - is what my perception is.

Again, I'm arguing that if I qualify for $X, don't buy a car, buy a $(X-delta) house (delta off so I don't spend all income on monthly payment), why won't I be able to find a house I am comfortable with for $((X-delta)-$30k). My perception is that I would be able to find this. And that how much am I going to be wasting on interest by stretching to the 30 year instead of the 15 or even 5 year loan.

Micas

Okay, I'll use this post as an example. There is something very wrong with those terms. I did an amortization on 22.5k @ 3.99 for 60 months. His payment should be $415 and not $553, and total interest cost for the life of the loan would be $2356. Your argument that 0% and 3.99% is basically "marketing" is realistically a $2356 difference, not zero. That's on a 22.5k loan. The person who has that loan did not do the math to see that there was something very out of whack.

If you move the terms to a 32.5k loan, the payment goes to $598 and interest cost of $3403. That's with a very good interest rate.

I guess if somebody considers 2k+ (depending on principal) trivial, then that's fine. A person could make an argument that if you had investments that were earning more than the interest rates paid on a car loan, then it's best just to finance the entire amount. That's valid, but I think that's risky.

Personally, I think if you don't pay interest, you're a few thousand ahead in the long run, and the philosophy of not financing anything but a house has a multiplicative effect. It all adds up over a long term, and the returns you can make on that saved money adds up to a significant amount over time. I think a lot of people ramp up their outflow of money to close to, or more, than their income and that's a very bad thing.

In terms of your idea about spending less on a house in order to afford a car, it's a legitimate point. I'm just saying that you can pick any arbitrary number for a house to offset anything else you'd like to buy. Managing income and expenses is all about just deciding on what you want. If a certain car gives you a lot of value, you can certainly balance that against what you spend on other things. It's all up to the individual. Some people are perfectly happy with a Civic, but they want a $15k home theatre, or whatever. Some people want it all, and work like crazy to make a lot of money.

The point is, I think people should stop thinking about buying cars in terms of monthly payments, and reduce needless expenses. I consider interest paid as a needless expense (except on a house). I think living pay check to pay check is a recipe for disaster.

If you want to know the difference between a 15 year loan, and a 30, you can check a calculator. Keep in mind that the interest rates are different based on the length of the loan. You can't get a 5 year home loan I don't think. I think the shortest they go is like 7.5, but I'm not positive about that. If you have a high enough credit rating and significant assets, you can get a signature loan for whatever period you want in order to buy a house, but that's not a good idea because you can't deduct the interest.

Mortgage/Loan Calculator with Amortization Schedule

Anyway, I'm mostly repeating myself and ruining the thread, so I'll stop.

Slynky

A man after my own (aging) heart. We could probably sit down and make a toast to "waiting till you can more or less afford something" versus catering to what our (my kidz, for example) current generation has learned growing up--"Want it now? Get it now!"

In your and my times, you just didn't decide you wanted to watch a movie and download it right then. Or that you got tired of this game for your gaming platform (as if we had one of those any better than an Atari) and run to Blockbuster and get one. Tired of your 2,000 songs on your iPod? Just go to the iTunes store right now ! Tired of this channel on TV? Switch to one of the hundred other channels. Instant messaging and instant gratification go hand-in-hand these days.

It leads to, for example, my 19-year-old son wanting EVERYTHING now instead of waiting (like I did). And all he wants to know is if he can afford the monthly payment.

And there you go. The question every dealership salesman asks because s/he doesn't want you to worry about the price you'll ultimately wind up paying, he only wants you to look at this car one month at a time.

As Micas said (if I can paraphrase), you need to worry about the total cost of that car and the amount of interest over the life of the loan as well as the monthly bill.

As to a house and what amount should you spend on one or how much could you qualify for... a rough guide is you can afford a house 3 times your yearly gross salary. Make $70K a year? You should be able to get into a house around $210K. That assumes anything else you owe money for isn't too far out of kilter.

When wife and I decided on how much to spend on building our new house, we could have easily qualified for a $275K house. We opted for $220K because we wanted to have money left to live comfortably as well. Maybe that helps with one of the questions. We bought in '98 and it will be paid off in 5 more months. We pay $3,000 a month now.

Our credit card (Amazon) is used for our convenience and we haven't ever paid a bit of interest on the balance because we pay in full every month.

If I get a new car (Z), I'll pay about half of it down ($20K) and the remainder will be paid off in about 10 months. Money wasted on interest will be somewhat minimal. The RSX I own was paid off in about a year (had a balance of $18K at purchase).

Hope this helps and hope the comments about the younger generation aren't seen as anything other than constructive.

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dudafunk

My question from this - LOOKING BACK - do you feel you would have been going crazy in a house worth $200k instead of $220k - and thereby been in a position to afford an extra $20k on your car. I'd put my money on YES which is why I'm so into buying a 'better' car first. But I'm open to change my thinking and would love to understand why someone would say NO to this.

Slynky

Well, without figuring it out, the difference in a house payment for $200K -vs- $220K will mean a difference of about $120 per month. If this amount of extra money would mean the difference between you getting a nice car or a REALLY nice car, then I guess you have your answer.

What Micas was wanting you to be concerned about was the amount of money one puts forth in total when going into debt for a huge chunk of cash. It's, in reality, wasted money. So, as long as you're trying to determine, for instance, if buying a cheaper house will allow you to have a more expensive car, you should also consider if paying/wasting (for example) $3,000 in interest over the life of the loan is worth having it NOW instead of saving up for it.

That's the sort of thought I weighed when considering purchasing a Z for myself... if paying/wasting (for example) $500 is worth having a 2010 model instead of waiting for the 2011 model and having just about all the cash I need.

Hope this answers your question.

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Slynky

And to specifically answer...

We had a Honda Accord purchased one year earlier. We sold it in 2006, so we didn't really get a new car. We did, however, buy a Nissan XE PU the same year. Paid it off in about 18 months. If we had gotten a house for $20K less, I don't think we would "gone crazy". I also doubt we would have done anything differently as it relates to car buying. (but the house would have been paid off by now... LOL)

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Micas

Okay, I lied, one last thing.

You're quibbling over 20K so you can "afford a car", as if that 20k is going to be putting you at your limit. You're looking at it in very strange terms.

Let's get right down to it. How old are you and what's your annual income? I'm betting that you make less in a year than you want to spend on a car. The sense that I get is that you're a young guy who really wants a car he has no business getting, and is that 19 year old type that is Slynky's son.

Young people do stupid things. I did. I'm not going to tell you not to buy something, that's obviously pretty pretentious. I can try and talk you out of leveraging everything in order to satisfy a material desire, but ultimately we're all product of our mistakes as well as our successes. Being held hostage by a big debt for a long time is a lesson that sometimes needs to be learned the hard way.

dudafunk

The reason why I don't cry about the $3000 interest and call it 'borderline marketing' is because I could be picking a car which advertises 0% interest and then just eliminate this factor --- but no. That wouldn't be right. So I will look at it holistically - that OK, I'm going to be spending $X overall - for SOME product. And is it going to be ok living in a house $X cheaper than what I would buy if I don't buy a $X car.

Overall, I feel consensus though, with mica's and your arguments. BTW I'm 24.

Slynky

If you can get a car at ZERO interest, just make sure it somehow isn't built into the price of the car. If you're bringing your own loan company, then obviously that's not a worry.

Getting a car at ZERO % is pretty much like paying straight cash for it (but a little at a time). In fact, better because money inflates (to some degree).

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XBadgerX

Can't compare a house to a car.
House = investment that can actually gain value over time.
Car = horrible investment.
It's your money, do what you want with it.