Thinking About Buying: Making Better Purchases

What to Consider When Making Big Purchases
Splurging on a pricey new car can make sense if you follow a few simple rules.
Bloomberg, October 4, 2020

 

 

 

Count me out of the “Financial Independence/Retire Early” movement. I can’t imagine retiring in your 30s or 40s brings happiness or life satisfaction. Worse, the claims of the FIRE proponents do not work well for helping the average person manage their finances. Instead, they tend to be grossly exaggerated or oversimplified.

As such, I am not a fan of bold pronunciations about spending, like: Never buy a boatStop drinking lattesDon’t buy a new car! They seem designed more to attract attention than impart wisdom. I prefer rational guidelines that help consumers make better spending decisions. Overbroad rules of thumb do not serve anyone’s interest, and are often wrong except at the extremes.

Consider this recent Twitter discussion1 on one of my favorite subjects:

No, you do not need to be a millionaire or make almost half a million dollars per year to purchase a new mid-sized sedan or small SUV. The position above, hyperbolic as it is, does touch upon ideas that are important: what makes people happy and how people often make financial decisions unconsciously.

Let’s use an automobile purchase as an example.

Start with the math on a new car: These days, a new car will cost about $179 per month for each $10,000 financed. In the $40,000 example above, with a $5,000 down payment (though I prefer 15% to 20% down2), at current rates (2.89% annual percentage rate for 60 months),3 you are financing $35,000, which equals about $627 per month.

 

 

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