It seems like every day I read a request on social media asking for input on whether or not someone can buy an expensive item. More often than not the item is an automobile and the question is posed anonymously as if the purchase of a car is top secret/privileged financial information.
Rarely the situation described is a wise purchase. I suspect that is the point. They or their spouse has already decided the purchase is a bad idea, but one of them wants to do it anyway. So they think if the majority of responses on social media are in their favor, it will sway their spouse to change their mind. Here is a good teaching point: If you or your spouse have already decided this is not a good idea, you can stop right there and not proceed. Making good decisions is what adulting is all about.
I have been in your shoes. I once wanted to buy a sports car. When I brought it up to my wife, she said no. For something that expensive we had previously agreed that the decision must be unanimous to proceed. She argued that once we were out of debt and had enough money to pay cash for the car, I could buy whatever car I wanted if I still wanted one. When we reached that point, I bought the car I wanted, and she didn’t bat an eye.
I’m not going to copy the actual question that was put forth in this example as I don’t want this to be about a specific person as this question comes up all the time.
Following are the things you should keep in mind before buying an expensive car, so you never have to seek justification on social media from people who don’t know your situation, and whom you have no idea if they even have their own financial act together.
Don’t buy luxuries with borrowed money, use cash
This is a very important point to understand: NEVER, NEVER, NEVER buy luxury items, like vacations or cars, with borrowed money. Borrowing money adds an extra layer of risk to your life. Therefore, if it is a luxury item you want, you should never add more financial risk to your plate. It is not worth the potential loss. Here is a common response.
“I cringe when I see my Tesla payment… If you’re saving and investing, then spend your money on what you love.”
This responder says they cringe at the thought of their Tesla payment, but they must think the high payment and cringing is worth the joy they receive from owning an expensive car and they think others will want that too. If you know the payment hurts you every month, why would you wish that on others? Most of us want more peace in our lives, not more cringing.
Then there is the statement, “spend your money on what you love.” There is the problem, often the person asking doesn’t have any of “their own” money to spend. They have to borrow the money and the payment will be a stretch. They often don’t even have a down payment saved and plan to use their current car for the down payment on the new $100k+ car.
You can’t afford the car if you can’t buy it with cash
If you need a loan to buy a car, then by definition you can’t afford the car. Yet many responses sound something like this one.
“You can afford it, and it will bring you joy. Buy the car.”
I am surprised by how many people mistake being able to afford a car with being able to afford a car payment. These are not the same thing. Even when the person asking for advice states they will trade in their current car to serve as a down payment, and the payments will be a stretch, many responders feel they can afford the new car.
Cars are not an investment, they are an expense
Cars come under the automobile category of “expenses” on a budget form. You will not find cars listed in the investment section. Your car is not an investment at all. Yet many responders make statements like this one:
“Cars are horrible investments, we all know this.”
I would never consider a car as an investment, so actually we don’t all know this. In fact, it isn’t even a true statement.
When we make an investment, we are expecting the investment to give us a good financial return or go up in value. Cars do neither of these things. In fact, they substantially go down in value as soon as we drive them off the lot. Don’t confuse investing and spending.
No, you are not “leveraging” when you have a car loan
Since a car is not an investment, and leverage is a term we use to describe borrowing money to make an investment, a car loan is not a way to leverage your money.
When I buy a real estate rental investment with borrowed money, I am leveraging my down payment to make a higher return on my investment. The leverage created a higher rate of return over paying all cash.
But when I buy a car with a loan, I am getting no cash return on the down payment, therefore leverage is not the correct term to use.
I often hear people advise those who have enough money to purchase their car with cash say to buy the car with borrowed money and invest their cash in the stock market, trying to make it sound like they are using leverage. In fact, what they are doing is investing their cash in the stock market and then buying a car they can’t afford. They should just skip the buying the car part and make the investment if that is important to them.
People use the term leverage to pretend they are doing something financially cleaver when they go into debt to buy a car. They think it is a justification for buying something they can’t afford. Don’t fall into that trap.
No, you don’t “deserve” an expensive car
Many responders want to be clear that the physician who wants the expensive car deserved to get it and didn’t need the spouse’s permission. It sounds something like this:
“Your significant other didn’t have to take the MCAT, endure abusive attendings, pass the USMLE, or cram for specialty boards while working full-time. You deserve a reward after all that.”
Going through medical school and residency has nothing to do with deserving an expensive car. Never make a purchase you can’t afford, thinking you deserve it for enduring something hard.
Some responders go so far as to imply that it doesn’t even matter if you have the money as long as you really want the car:
“Not everything has to make financial sense.”
Well, actually it does. If it didn’t have to make financial sense, you could buy an island and a jet to get there. But since you don’t have the money for that, or even enough money for the payments for that, I guess you should stick to the ideas that make financial sense within your actual budget.
So here is the scoop on buying an expensive car. It’s your money and you can do anything you want with it. If you want to be smart about buying an expensive car, here is what you should do.
-First, make sure everything you need for security is taken care of, such as life and disability insurances, retirement savings, and an emergency fund.
-You have enough disposable money saved to pay cash for the car without any hardship or sacrifice.
-The purchase will not keep you from doing things you want to do such as paying for private school for your kids, an expensive hobby, remodeling your home, or vacationing.
-Your spouse is also on board with the idea.
If all those bases are covered, then you can buy any car you want at any price, without acquiring a loan. Then you can enjoy the car without ever feeling the pressure of a car payment. Which will be especially important if you were to lose your job or encountered major medical bills.
If you need more information on why debt is not your friend, read The Doctors Guide to Eliminating Debt. Let’s all stop managing our debt and start eliminating it.