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This is often touted as a good rule of thumb but it’s really a fallacy. Your money does not know or care what it is spent on. If you take out a loan to purchas
by bennyelv 6y ago
This is often touted as a good rule of thumb but it’s really a fallacy.
Your money does not know or care what it is spent on. If you take out a loan to purchase a car, and then use the money you didn’t spend on the car to purchase investments it is no different to spending the cash on the car and the loan on the investments.
If you have enough money to buy a car AND investments (and you need a car) you’re better off spending that money on a car and saving on the credit cost of the loan.
What this rule actually says is “it’s better to have money and invest it in things that appreciate rather than not have money or spend your money on things that depreciate”.
Well duh!
- lukevp 6y agoHmm, that really depends on the market you’re in and the rate of the car loan. I bought a car on credit at 1.8% and freed up money to invest in the market, which appreciated by a lot more than 1.8% per year. Also buying a car in cash is not considering the time value of money. If I spend $30k in one transaction, yes I don’t pay the extra 1.8% of interest but I also don’t have $30k with which to invest or partially hold as emergency funds.
- bennyelv 6y agoExactly - the answer is always that it depends on the exact situation. “Only borrow to buy appreciating assets, only buy depreciating ones with cash” is a fallacy.
- aserafini 6y agoYes. In other words: money is fungible.