What percentage of ones annual household income is a benchmark reasonable car price to pay? 50%? 30%?

What percentage of ones annual household income is a benchmark reasonable car price to pay? 50%? 30%?

I doubt its more but i could be wrong.

And i know it all depends on where other things stand in ones life, like housing situation, kids or no kids, etc.

Just looking for general figures.

Assume everything else is in line and one has reasonable house equity or retirement fund situation for anyones given age.

soma | 22. September 2013

You are right that it must depend on your savings goals, retirement, kids, mortgage, everything.

The deeper question I think you're trying to be comfortable with is, is this too much? And the follow on question to that is not how much does it cost and is it hitting any particular dollar limit, but rather, what are you getting out of it for the price you are paying? And, are there reasonable alternatives to this?

In the end, you have to gauge whether it's worth it for you and your goals. Sometimes that comes from seeing your peers and how they're spending / saving and your relative comfort compared to them. Other times, it comes from yourself and how much you can justify to yourself spending on a car like this.

soma | 22. September 2013

ok, just to throw a number out there since that's probably what you want! 25-33% *post*-tax income and after other mandatory savings, debt items.

bonaire | 22. September 2013

As someone gets older, the number gets much lower. Some young guys will go 50% for the next new hot car. In my later 40s I put it under 10%. It also includes paying for my wife's car, son's insurance and maintenance on our third car. Get married, have kids, be prepared to pay far less on cars based on income. Going in debt to make a statement is a bad decision. Get smart while young. Pay less per month for a car than you put into your retirement account.

N_Tesla | 22. September 2013

I know this is very old fashioned to say, but I have always gone for zero percent. I have always saved my money first then bought the car with cash. For my first car this involved riding the bus for three years so I could afford a Toyota Corolla. Just another perspective, I know this is not an option for people with families.

HGP16 | 22. September 2013

This is an almost impossible question because there are many acceptable answers depending on circumstances and future expectations. You should ask your wife, your financial advisor, and/or someone who understands your whole financial picture the question "Does spending X make sense for me?" Good luck.

carlk | 22. September 2013

+1 tezzla Buying with cash is the best way to prevent one from overspending on car or everything else but not everyone is able to do that.

carlk | 22. September 2013

Sorry reply was for N_Tesla.

derek | 22. September 2013

"Buying with cash is"...baloney.

You guys don't seem like you've studied economics, business, or finance. Now, I'll grand you that most of us who did so are dicks, but here's the academics of it:

A car is a depreciating asset that provides you with a service for the duration of your ownership/lease/rental. We do not buy a car just as "something we own", we buy it as "something that provides me with a service this month". Thus, it makes perfect sense to pay for it "this month". That usually means financing, borrowing, or leasing.


It is a far wiser financial decision to borrow for a car at a low rate, say the 1.75% PenFed gave me on my Tesla, and to use some other wiser vehicle as an investment property...say, for ex: Tesla stock. Mixing car buying and future financial security is a bad choice.

There is a wide range of better ways of using your money, rather than saving for a car. There are tax-sheltered savings plans, 401kKs, Roth savings accounts, high and low risk stocks, or bonds. Just about ANY of those, on average, pay far better returns than the 1.75% PenFed is charging me to use their capital. Just make sure to actually invest the savings, and not just blow the cash you don't spend on a car.

Now, as to the original question. Here, I'm sorry to say, you are waaay over with 30%. That's how much people are supposed to spend on their housing each month, and housing delivers far more consumer value than transport. For a car, you should be looking at 5 to 15 percent, not including gas, insurance, and upkeep. 15% is at the high end, although many people seek to show off and live beyond their means. Well, it's a free country, so be my guest, but a Nissan Altima will also get you to your destination, so any amount of money beyond that is pure "discretionary spending". And that means you'll need to cut back on just about everything else.

The Tesla is a great car, but no car is worth putting stress on your life, or making you ill-prepared for a future home down-payment, or worse - ill-prepared for retirement.

jbunn | 22. September 2013

I agree with Derek in that if you can obtain a higher rate of return on your cash, finance instead and invest the rest.

To the OP, it's hard to say. It depends more on your excess income after your expenses, taxes and savings are taken out. Also you need to crank some number on the cost of a gas automobile, compared to a Tesla. In my case, because of my miles and length of time I keep an auto, Tesla made economic sense, I put 20% down, and can afford the payment.

carlk | 22. September 2013

You missed my point. You will get the true idea of how much the car costs you only if you but it on cash. A lot of people could not mentally connect $1500 monthly payment is exactly the same as $80000 reduction of your net asset. There is no difference if you have the decipline but a lot of people don't.

jonlivesay | 22. September 2013

I paid cash, studied business, economics and finance and am also a business owner. Nothing wrong with paying cash, allows one to observe the true cost up front eye to eye. Always a way to do things differently and many offer good suggestions to doing so. So paying cash is baloney? That's opinion not fact, yet it is stated as fact, and in stating it as fact one assumes all other options are baloney. That's way too narrow minded, but then I'm making assumptions also.

eking | 22. September 2013

+1 jonlivesay

I personally think no more than 20 to 25% post tax income assuming you are saving for your kids' educations and your own retirement, comfortably paying all your other bills and able to live comfortably with your car payment if you finance or the depreciation in your liquid assets if you pay cash. I think our gut always tells us when we are going too far or stretching too much on something. If it feels scary or uncomfortable, don't do it.

GeekEV | 22. September 2013

I did the base price of the car (not counting tax, title, etc.) at 67% of my gross income.

Pungoteague_Dave | 22. September 2013

If you 'can't' pay cash, then the general financial advisor's rule of thumb is that the gross value for personal car(s)in a family should be less than 1/3 of your annual after tax income. Some on this forum will advise that the S is different because other unique financial metrics provide cost saving, bit that is mostly wishful thinking when you consider charger installation, need to have a second car for long trips, etc.

I personally would never finance a luxury purchase (above-$30k auto, boat, motorcycle, plane, etc.). No one needs an S for transportation and the premium cannot be justified except with numerical gymnastics. A monthly payment mentality has you paying the man forever and restricts your ability to develop wealth. Interest payments, whether or not deductible, are a brake on financial success in life. Student loans, car loans, almost any loan or revolving debt short of a conservative mortgage (and even those can be questionable) will be an anchor throughout life in my opinion.

One responsible approach if you can't pay cash now is to keep driving what you have and put the S payment in a savings account for three or four years, and buy the latest model then. Across your life it will be a huge step up financially. We bought each of our kids a Prius on college graduation (no loan) and suggested that they put $500 aside every month as though they had a car payment, so that when the time comes to replace their first car, it is all-cash. Our first kid graduated 9 years ago and is still driving her '04 Prius with 210k miles, and has $50K in savings that would otherwise not exist.

eking and jonlivesay provide good advice.

elguapo | 22. September 2013

I don't disagree with what others have said, but would point out that if the majority of MS buyers have that sound financial mindset, then it really is just a car for the 1% right now. Most Americans wouldn't meet any of the tests discussed above. Median household income in US is something like $65,000.

Again, I believe in what others have said, just think it makes it hard to say the car isn't just for rich people. It is - unless you go beyond your means.

elguapo | 22. September 2013

Sorry, I think media HH income is closer to $50,000 across US.

eking | 22. September 2013

Pungoteague_Dave's advice to his kids is the best advice any parent could give and it obviously sunk in. That mindset leads to real financial independence.

To elguapo Have you read people here suggest that the MS is for the typical median income family? Probably in most cases the cost is too high.--Elon Musk himself addressed this issue very directly a few weeks ago when he said Tesla is developing another EV that will be more in the $40K price range with a much improved range over the Nissan Leaf. A lot of people, including people who can easily afford today's MS, are waiting for that car. They are happy to wait for a more affordable option that gets the range they need.

cpetrush | 22. September 2013

I wonder what would you be doing with that money instead of the MS payment? Would you be eating Mac and cheese 4 nights a week or maybe just not getting box seats, limo rides, first class travel, etc? I don't know that there's really a percentage for this as much as, what's it worth to you. If you can never take a vacation again because of this payment then it's probably a bad idea. But if you can live with not buying $300 jeans (or whatever you do) it's probably fine.

inverts | 22. September 2013

What about quality of life/mental state? Owning something is a different experience than being beholden to someone else for it. As I have no dept of any kind, I throw away all the "important mortgage information", "do you owe >10K in taxes?", and "dept management seminar" flyers that come to mail box or inbox. I don't worry whether my bank will change the terms on any loan, because I have none. How much is that worth?

Doing a point spread gamble on loan interest rate vs. investment return is what caused the financial melt down on a personal scale. "Investing" in single financial instrument (like the often mentioned TSLA stock) is pure gambling, and has nothing to do with responsible, diversified investing.

TSLA stock is currently on a high, but does not have the 10 year+ horizon, and performance has not been stable for that period of time. When I select financial products, I look for long term performance and stability. The earning-volatility correlation is well-known, and volatility can mean it sinks to the bottom, and you lose your shirt.

Financial security has to do with being able to plan. The fewer variables in the equation, the lower the aggregate error/variability, the better the forecast. Removing any variables from borrowing by buying serves that purpose.

From my perspective, for necessities, one may be forced to get a loan. MS is not a necessity, but a luxury. If you cannot buy a luxury, you cannot afford it.

bareyb | 22. September 2013

I wouldn't buy it if I couldn't pay cash for it. If you borrow the money you are not paying $100k for the car, you are paying a whole lot more. In the end, I'd rather decrease my savings and try to build it back up. Tesla's stock is actually helping me do that quite nicely lately.

avanti | 22. September 2013

There are two kinds of people in the world: Cash people and Credit people. The differences between them amount to this:

1) It takes a few years longer to become a Cash person (at any given level of consumption).
2) It costs ~15% more to be a Credit person.

Take your pick.

Unless you can borrow money at a lower interest rate than you can invest it (and you can't), any strictly financial argument in favor of borrowing for any retail purchase is nonsense. But, some people subjectively decide that option #2 is the better choice. Fair enough.

elguapo | 22. September 2013

@eking I think one if the huge knocks on TM, particularly when they had the government loan, but even now, is "great, you built an awesome car for the one percenters". I realize that's how most new technology gets started and I love my MS, but I guess I feel guilty more people can't enjoy it without feeling like they're leveraging their future. Hopefully Gen III / Model E will come soon.

Also, TM has tried diligently to market the car outside of the top 1% and Elon has also said it's not just for the wealthy. TM's "crazy" math on their website regarding fuel and time savings isn't there for people paying all cash.

Like I said, I guess I just feel guilty with my Tesla grin...

Luclyluciano | 22. September 2013

Wow, some really screwy financial advice in this thread. Pay cash for a depreciating asset that will be worth almost nothing in 10 years. How is that smart? How is that good business? Can't you think of 1 asset that is an overall appreciating asset to invest your $100k in where that asset will be worth more money in 10 years rather than zero? Especially considering we have historical low borrowing rates put in place to encourage investment and spending.

It doesn't matter how much wealth you have. Paying cash for a large purchase, fast depreciating asset is not smart business. If I have to tell you where to put the $100k, then we are not on the same page.

eking | 22. September 2013

Elguapo, yes I see your point. The government loan is controversial but I personally think overall it was a good investment. The technology Tesla developed, aided by that government loan, will be put to use for less expensive versions of EVs that travel further, modeled on the S. I also totally agree with you on the misleading pricing feature. My dad was on the website today, and he noted the misleading base price of low $60K (still expensive) but that was assuming that you are in a position to take full advantage of the $7500 tax credit. For that reason alone they should show the actual price first, and then the adjusted price with all caps warning that you only get this price if you owe at least $7500 on your taxes. My dad also very astutely observed that so many of the "options" are what anyone buying a $60K + vehicle would expect (sound, Michelin tires, nice leather seats, etc.). The true cost of the car before that tax credit is very easily between $80K and $90K for most people, possibly more. On this forum a lot of people go full bore and drop $120K. I didn't realize Elon Musk had suggested the car isn't primarily for well-off people. It certainly seems like it is.

elguapo | 22. September 2013

@eking I completely agree on the options. Especially the tech package. I know there are people who didn't buy it and are very happy, but I find that hard to understand.

eking | 22. September 2013

Well I don't have my car yet, so I can't say whether I think it is worth it, but I did go ahead and get it, and hopefully I will think it is worth it. LOL

Pungoteague_Dave | 22. September 2013


You are a PRIME example of how financial education in this country has failed. I am a finance professor at a major university. Take it from me, when you finance a major depreciating asset, you are still paying cash (using someone else's checkbook), PLUS you are taking financial market risk and paying extra for the cash. The transaction must be looked at from the seller's perspective. They are receiving 100% cash for your car. One way or another, you are giving them all of the purchase cash by either paying real money, or by mortgaging your future. This isn't a guess or an opinion, it is fact. When you finance, you have taken on all of the cash obligation over time, PLUS the financing costs. How fast it does or does not depreciate is completely irrelevant.

The mentality that you espouse is what the real estate investment gurus convinced themselves was true before the financial crisis. Then they learned that asset value can go down as well as up.

What you suggest leverages BOTH your lifestyle (a luxury car) AND your investments, putting both at risk. Leverage is a beautiful thing when assets go up, not so much when they don't. That is why all the banks had to be 'bailed' out - they had too little equity to cover paper losses and fund obligations when their assets became illiquid. That caused/allowed the government to come in and loan them money at usurious rates, with warrants and other equity kickers. When the bank assets regained liquidity and value, the banks paid off the government with huge gains to the taxpayer (no bank failure cost taxpayers a dime in the end, even Lehman). But it cost the shareholders plenty.

You are a shareholder in life. Can you maybe use leverage to your advantage? Short term, yes. But it is a gamble on factors you cannot control (such as a financial crisis) - so long term, the house wins. Every time.

If you can't buy a consumer item for cash, you generally can't afford it. If you can afford to pay cash and then decide to finance, it is a slightly different equation, but not much, unless you are far more disciplined than the average household.

Roamer@AZ USA | 22. September 2013

Lots of interesting ideas here.

My view is if you can't pay cash for a car don't buy it.

Interesting thought on investment values. The car will obviously depreciate so your money spent is truly spent.

But how much it will depreciate is an an interesting question in today's economic environment. With the government issuing stock ( printing money) ,at an extraordinary rate, the value of your dollar is being diluted rapidly. Owning dollars is a bad bet. Owning hard assets that will go up in an inflationary cycle may be smarter than sitting on dollars being diluted. This also works if you borrow since the future dollars you pay back are worth less than the dollars you borrowed.

We have been diluting the value of dollar bill stock certificates by issuing extraordinary amounts of new stock at the same time we are borrowing vast sums and spending it on no value added activities. This can only end with massive inflation to bring things back into balance.

Didn't work for the Weimar Republic or Zimbabway and won't work for America. So it may be OKay to put 100 k into a hard asset and enjoy the ride when the value of your dollars crashes but your hard asset is worth more because of inflation. Sooner or later economies have a nasty habit of forcing economic balance.

Kaboom | 22. September 2013

quite the discussion my inquiry has generated.

Couple of things i should point out:

- When i meant 30% or 40% of an annual salary, i meant that reflects total price of car, not total yearly contributions every year. So if someone makes 100k, would a reasonable car for that person be a 30K car, which i assumed would get them through 7-8 years.

- And lots of advice about investment or opportunity value. buts lets also assume that a car must be bought as neccessity. So spending 40-50k on car is a given already (in the demographic of the forums here at least)

ausdma | 22. September 2013

Putting this much money into an asset that will depreciate this much is crazy, no doubt about it. With this car we will be over twice as crazy as we have ever been before!

However, we're cash customers for everything we do, cars, houses, whatever. Every time we confronted this decision in the past we were faced with a known cost of money and a good idea for depreciation vs unknown investment performance. I remember one time I committed to buy something using a liquid asset I intended to sell. Between contract signing and closing the liquid asset suddenly depreciated. One never knows. Investments and jobs can be unpredictable.

Crazy is as crazy does though. I'm totally looking forward to the ride!

madbuns | 22. September 2013

For some reason, I have always understood that the yearly payments should not exceed 10% of your gross and that the ideal range was 6% to 8%.

The above said, everyone's circumstances are different and car loans have changed greatly since I got my first car. I took financing at 1.49% and believe, given the context, that doing so will work out better financially than paying cash. My first thought was HELOC, however, the rates were horrible, even when adjusted for the tax savings.

As they say, YMMV.


cfOH | 22. September 2013

If you can pay cash for the car, but can finance it at 1.49% and your investments are generally doing significantly better than that, I don't know why you'd convert assets that are making a decent return into an asset that's generating a negative return, especially when money is so cheap right now.

Granted, I'm pretty conservative when it comes to money, and my PhD isn't in Finance, so I have a pretty low-risk, simplistic view of investing.

jbunn | 22. September 2013


cfOH and a couple of the author posters have the right end of the stick here. Much like we pay down any high interest credit card debt FIRST, there is no financial wisdom if pulling out of a bull market to pay off a car you can finance at 1.49%.

If you were in the market last week, you probably make about 4-1/2% just on the week.

I sold two gas cars to get the Tesla. I do not have a second car, and am able to take long road trips with it. Anything other 5 hours, I'll fly for. I do not need a gas car for occasions. And I've done the math, and the Tesla saves considerable money over the time span I intend to own it. To another posters point, I do not need a stack of cash on my desk to be able to visualize a large amount of money.

I don't have any credit card debt, and the only payments I make are for utilities and discretionary expenses.

As an investor, "cash is trash". I might as well bury it in the back yard. I'm more interested in making it work by investing it.

JoeFee | 23. September 2013

12% of your net 1M = P85 :)

ausdma | 23. September 2013

There's logic in both notions. The answers really have to do more with your whole situation. We'll cross that bridge when we get to it, likely later this calendar year.

bonaire | 23. September 2013

Kaboom wrote: - And lots of advice about investment or opportunity value. buts lets also assume that a car must be bought as neccessity. So spending 40-50k on car is a given already (in the demographic of the forums here at least).

As a necessity? Well sure - but a 40-50k car is NOT a necessity. It is a want. You can easily buy a nice used 3-year old car for $20K and drive to work. You WANT a nicer, newer, nobody else sneezed-in car. The WANT then leads to thinking about what options to buy new (dealers/companies make great profits off of options). Then you might consider leasing in order to rent a nicer car for 3-4 years rather than buy to hold for 8-10 years. And then you end up in a payment "prison" making car payments from your 20s until you hit your 40s and realize you have spent over $300K on cars. People do it all the time.

If I could meet my 20 year old self, I would beat that guy silly. I should have bought used cars, made deals that were in my favor and kept my wife out of the showroom floor. And yet, we still bought cars that we held for 8-years or longer. I guess we are all learning our own lessons as life goes by.

If you take your annual salary, you should also factor in "dependents". One kid, subtract 5%. Two kids, subtract 10%. Three kids, get a vasectomy :) The bigger the family, the bigger your obligations to be as responsible with your money as possible. Single guy - live large for a little while but I also have single guy friends who were raised conservatively. That's why they can retire in their 40s and 50s and travel the world.

wbrown01 | 23. September 2013

I think the better question is not your income but how much you spend on gas in your daily commute and how much you can offset the hefty car note of a MS. I would be spending $400 on gas if I was driving an ICE. I travel 80 miles a day round trip to work and even if I did not have the income for the MS I would be paying basically the equivalent (~$900) if you add gas to a basic new car note. More people should do the math before they say the MS is too expensive for their income, it's not. It's not if you have a long commute. There is a manager at my job who travels 150 round trip; I know he pays a car note every month on gas.

Kaboom | 23. September 2013


I never lease new cars for just 3 years then dump. To me it seems like the worst financial setup. You are the one eating the first three years of depreciation on cars over and over. Never made sense to me, unless perhaps people get thier companies to pay their leases.

Always typically buy a 2 year old car, and hold it for another 5-6 years before flipping to another. I just happen to be at the stage now where i am ready to swap out of my 7 year old ride, so the timing works well.

And my car is a neccessity for my situation, with kids, a lengthy commute, weekend trips etc. And while a 10 year old corolla clunker will get me from A to B and save alot of money, I do think that most people here are somewhat removed from that stage and do consider a decent car part of who they are and their image, and a sense of accomplishment and pride and lifestyle, that at least a 40k car brings.....or perhaps 30k.

Pungoteague_Dave | 23. September 2013

I retired at 52 and am spending my time riding bicycles and motorcycles in fantastic places around the world, while teaching a few finance classes per year and sitting on a couple corporate and charity boards. None of this would have happened if I had taken on revolving auto debt, student loans, or any other form or debt except a home mortgage (and that one I regret).

To those who say it is better to borrow at 2% or less and stay invested, I understand your math. However, it is taking market risk with assets that YOU DO NOT HAVE. Leverage is beautiful in a bull market. However, no one is able to time markets, and bear markets are almost always a surprise. Bull markets can be equally unpredictable. I know, you are a market timing genius - we've heard it all before - you have been long TSLA since Day 1.

With that said, I am fully invested in the market and personally own shopping centers and other retail assets around the U.S. We use leverage on some of those assets, but ONLY on a nonrecourse basis. I don't completely eschew debt. However, consumer debt is almost always a lifetime trap - for most people. It is a key reason why the average person lives a life of quiet financial desperation, from paycheck to paycheck deciding who gets paid and who doesn't. Your situation may be different and you may have more discipline than the average investor/consumer, but that in my experience represents less than 5% of the public.

derek | 24. September 2013

@kaboom said "When i meant 30% or 40% of an annual salary, i meant that reflects total price of car, not total yearly contributions every year. So if someone makes 100k, would a reasonable car for that person be a 30K car, which i assumed would get them through 7-8 years."

OH! Well, that's very different. That sounds entirely reasonable.

derek | 24. September 2013

As one of the more reasoned voices in favor of cash, I'll argue against you.

I was the first person on the thread to call buying a car in cash as "baloney".

If you can buy the car at 1.5% financing, and can invest in the market at a higher rate, then that is the best course. Of course, it doesn't apply to EVERYONE, since some are in different situations. Also, as I wrote, nobody should let those payments exceed 15% of their income, or they are overspending on transport.

Now, if borrowing is 1.5%, what is the return one could expect from the market? Well, you're right to point out that the current bear market is a short-term and unpredictable thing. OK, fine. But you probably also know the historic returns from the stock market. Over 50 years or so, we've come to learn this approaches 10%. Similarly, the real estate market, with its ups and downs, still produces a far more prodigious return then the paltry 1.5% PenFed charges me to use their money.

So, people who aren't at risk of bankruptcy, or who aren't in imminent risk of cash flow crunch, should invest in the stock market or real estate instead of a Model S. You yourself are invested in commercial real estate...because it pays.

You introduced risk. Sure, OK. When one finances the car, and buys stock instead, one takes on risk. An obligation to pay for the car, and the risk of the stock going to 0. But as a finance prof, I'm sure you understand that a certain cost can be assigned to the risk. So, if I can borrow money at 1.5%, and invest it at 2%...I might not choose to accept the risk for just 0.5% upside. However, when the long-term guess is that markets deliver near 10%, the cost of the risk becomes much smaller than the expected benefits. There is only one correct choice.

This "I buy everything on cash" notion that people falsely associate with some kind of valor is baloney. Debt is a perfectly simple and useful financial instrument.

Also, the choice to tie simple debt to the financial meltdown is ludicrous - that was caused by complicated mortgage derivatives, mixed with lies, 0 money down customers, moral suasion and false ratings from ratings agencies with bias, and banks with negligible reserve requirements. That's as logical as saying chemical reactions are bad because nuclear fission makes things radioactive.

bonaire | 24. September 2013

derek - the problem with loans and what you said is that debt and loans are so very loose that they are easy to get if you have money already. For some people, even with a good credit score, they should not be given loans for various reasons. Example is their future job prospects, whether they are about to get a divorce or not, they are in a high-risk job which could injure them, whether their industry is drying up and they will be swamped with cheaper, offshore workers at half the rate. Various problems with the consumer lending landscape that is not typically in the mindset of a wealthy person. Credit caused a big gap from haves to have-nots. It continues to get wider every day. Think of those 0% loans for consumer goods. Don't pay it off after the 1-year and 22% to 29% interest is applied. But people are dumb enough to sign-up. I use these all the time because I just pay them off just prior to 12-months. Not everyone does and traps so many people.

If you like debt so much, do you believe that the US 17 trillion dollar debt will ever be paid off? In order to do so, we will need to conserve tremendously, reverse the import/export gap, cut off our spending and drive up debt-relief through some sort of taxation and benefits reset. This debt was grown because it was "good for the economy". Not so much outside of people heavily invested and wallstreet who are making the rules. Let's see how the cavalier attitude about debt looks in 5, 10, 20 years.

Being debt-free can help feel good who doesn't need to be constantly leveraging something to get something else. Calmness can be a life-goal. One of the reasons people buy EVs. The drive is far calmer than an ICE vehicle. It's even calmer when it's fully paid-for.

derek | 24. September 2013


Sure, but your arguments are more about "living within one's means" and I totally agree.

Why would you automatically associate using debt to finance a vehicle with living beyond one's means? That's like saying Oxygen is bad, because too much of it poisons us -- so use none. Debt is a tool, which used wisely, improves quality of life.

As Dave said, debt adds risk...but so does leaving your home in the morning! Or driving. The question should be whether it's worth the additional risk. (Hint: it often is.)

Comparing usurious lending, consumer entrapment, credit card debt, and federal overspending carelessness is off the mark. Remember, we're talking about either financing or paying cash for a car one has ALREADY decided to buy.

And maybe the original poster should not buy the Modle S: In my first comment, and my second, I stipulated that (in general) people should not allocate more than 15% of their income to car payments. That was a reasoned position. Saying all debt is bad, and swearing off of it is NOT a reasoned position.

"Using debt" does not automatically invoke "living beyond one's means" any more than "drinking water" invokes "drowning".

jonlivesay | 24. September 2013

Derek some people pay cash for things. Why do you feel this is baloney? If you have extra cash why not spend it? Why do you always have to leverage ? Assume someone has say 38 million in liquid assets and sees the Model S and decides to purchase, what benefit would financing be to them ? This might be an extreme position, but I think demonstrates why paying cash is not baloney. Agree with the notion of finance of a needed item over the shortest term lowest rate you can find and afford. No way should you finance a toy, and the Model S is really just a toy. Buy a less expensive car if you need to finance or at least understand that by financing the extra 40k you just spent on this car over a less expensive model is because you wanted the toy not that you needed it. Not everyone lives in that highly leveraged world that you like so much and I bet those that pay cash don't want to. I can imagine the highly leveraged person getting up each morning to check their investments and plan their next move, stressful! Imagine waking up without that, sure maybe a cash person could jump in and play the game but why would we? That's like driving an ICE around when you could drive a Tesla, given the opportunity most people would pay cash and most people would drive a Tesla. Many different situations and none of them are baloney, just freedom of choice.

bonaire | 24. September 2013

"Remember, we're talking about either financing or paying cash for a car one has ALREADY decided to buy."

derek, I am mainly thinking about the guy who walks into the mall, gets a smell of a Model S and finds that leasing is available to him to make a stretch to get it. Without that debt, such impulse "must have" purchases can be curtailed and perhaps save the guy in the long run.

Pungoteague_Dave | 24. September 2013

The long term return from the stock market is NOT 10% as derek stated. The long term historical return is around 7%, and pension fund actuaries are now moving this down toward 6% for forward planning. That 'average' return still beats 2% financing - BUT the 2% financing window runs for 3-5 years when buying a car. No one can say with even 50% assurance that investing the borrowed money will outperform 2% or even be a positive return over 5 years. Averages are almost always statistically misleading:

Long term return history is also not particularly useful as a benchmark for returns - this is how insurance salespeople snooker unwitting chumps into buying whole life policies - they show amazing charts (line always moves up and to the right). It turns out that your date of birth (not month or year)has more to say about returns than the statistical average for the overall market:

“Tail risk (the risk of large losses) is dramatically underestimated by many investors and the tools we have available to manage such risks are hopelessly inadequate. Financial theory which is taught at business schools and universities all over the world is plainly wrong.”

I continue to believe that car financing, while a personal decision, should not be in any way correlated to investment decisions. When you borrow to buy stocks (that is what those who finance their cars as an investment strategy are doing) you are AMPLIFYING MARKET RISK. That ain't an opinion or a guess - it is a fact.

Brian H | 24. September 2013

Heh. I think you meant "bull market", not bear.

And the OP was referring to the full price of the car as a % of salary, not the payments.

Longhorn92 | 24. September 2013

Much of this discussion really has nothing to do with the car. The car is a depreciating asset regardless of whether you pay cash for it or finance it. Most of these discussions are about leverage and investment speculation (exactly which asset you are financing doesn’t really matter).

There are two reasons people borrow money for a car:
1. They don’t have the cash to buy it, or
2. They do have the cash but chose to speculate that their after-tax investment return will be greater than their cost of financing.

If you are borrowing because of #1 above, then you should make sure that the monthly payment is affordable taking into account your after-tax cash flow, other debt/obligations you have, and the stability of your current employment.

If you are borrowing because of #2 above, then you should simply be aware of the risk you are taking. Mainly, you are gambling that your SHORT-TERM investments will earn more than you are paying on the loan. I say short-term because if, for example, you are borrowing at 2% for five years, your average life of the loan is only a little over 2.5 years. Therefore, you are betting that you will earn more than 2% per year after-tax over the next 2.5 years. If you do, great, you win. If you don’t, you would have been better off paying cash.

I agree that the historical LONG-TERM investment returns are much higher than 2%; however, that is a long-term investment return. The historical short-term returns are much more volatile, and there is no guarantee. This is why I personally chose to pay cash for my car but finance my house. I am not confident that I can achieve a 2% after-tax return over the next 2.5 years given the current state of the world, but I am fairly certain that over 30 years I can achieve an investment return greater than 3.5% (my mortgage rate, which is actually less after tax benefits).

Longhorn92 | 24. September 2013

One correction: I should of discussed the mortgage average life as well, so 18-20 years (instead of 30 years).

Gizmotoy | 24. September 2013

@Longhorn: Pretty much agree with everything you said, though I suspect those executing your option 2 are going to have a longer-than-average life of the loan. After all, the mindset is that interest rates are so low that it's better to keep that money invested. So assuming that's the reasoning, why pull it out after 2.5 years when you've got that low rate locked down for 5? The only reason would be that you've grown sick of the car and want something else.

That said, even 5 years is relatively short term and subject to a lot of volatility.