In any given scenario where you have to make a major purchase, such as a new vehicle or a home appliance, you have to choose how you are going to pay for it. Do you use your own cash or do you try to obtain some financing from the bank? That largely depends on the purchase and the amount of money you have on hand. For example, a $25,000 dollar car is a much bigger purchase than a $1,000 dollar dish washer, but it’s still a choice you have to make. There are benefits and downsides to both purchasing avenues, but traditionally those are what people are left with. At Factum Financial, we do things a little bit differently and avoid the negative side effects of either purchasing route, but we always want to educate people about what is best for them and their finances. Here are the positives and negatives of paying cash or financing traditionally, plus a way you can skip all the downsides and use your wealth dynamically.
We like to pay cash for things. Most people don’t want to use someone else’s money and pay interest on that money or end up in a situation where they can’t pay back the money. That can be a sticky situation, so many people just budget and save until they can make a purchase. Or they are lucky and wealthy enough that they can use cash for anything they want. This is what we strive for. However, something happens when we pay cash. We save and save and then turn that money over for the vehicle. And that’s all we have. Maybe that sounds too simple. Basically, when you pay cash for something, you have what’s called opportunity cost, where you take a loss on the potential purchases you could have made if you didn’t use that money for your purchase. It’s essentially a trade off, but it really means you are left with $0 after you are done. You lose any opportunity that you could have had to earn interest on that money.
For most big purchases, people usually don’t have all the cash immediately on hand they need for the buy. Even $1000 dollars can be hard to part with depending on your money situation, so people often turn to financing. Even when you have the cash, sometimes people will even finance so they can use some of the cash to make investments or try to grow the loaned amount so they make the money work for them. In reality, unless you magically pull a 0% interest rate loan out of a hat, financing ends up costing you more over the life of the loan. On a $25,000 dollar vehicle loan with a 5% interest rate (which is a pretty good rate, since many people are not so lucky) on a 72 month loan, you end up spending almost $4,000 dollars extra just in interest. If you have poor credit, you could end up paying exponentially more. And if for some reason unforeseen circumstances happen, you could default on that loan, ruin your credit even further and end up still being on the hook for that loan. If you are responsible and pay the loan over the 6 years, then you will have a car with 6 years of miles and maintenance on it and that’s it. You will have no interest earned and no money left over, plus the trade-in value will have diminished so you will likely have to return to step 1 again.
How To Finance Differently
Either way you choose to make purchases, you’re basically left with a vehicle and no money left over once the vehicle is paid for, no matter how you accomplished that financing. Some would consider that a pretty good position. But what if it could get even better? What if there were a way to finance the vehicle’s purchase without having to go to the bank, where you can pay back the loan at 5% interest and collect that interest? What if you could also accrue the principal as well, acting like a bank for yourself? This all sounds a little radical, but there is actually a time-honored process you can use to create a cash-flow system and make all major purchases without going to the bank. Want to learn more? You need to speak with the wealth strategy team at Factum Financial to figure out how this system has benefitted many people that are now radically wealthy and setting up a lasting legacy. Contact our team now. Click here to read more from Factum Financial.