Here’s your dream car…now pay up

On Tuesday, I introduced all of you on how we bought a Tesla Model 3. This was my dream car (except we wanted glossy white paint, which was a few thousand more at the time). I didn’t think we would ever be in a position to afford it. It took almost one year of thinking, and we finally made the decision to buy. I figured the battery would last 350,000 to 500,000 miles, which at 15,000 miles a year would last at least 20 years.

It was an easy decision for financing. I didn’t want to go through a bank. Instead, we went with a local non-profit credit union. No profits means financing costs are less. If you are looking for a credit union, check out your local credit union, Navy Federal Credit Union, and PenFed. The key question was, how many years did we want to finance payments? Fewer years means lower interest costs and higher payments. Longer years means more interest costs and lower payments. The key is your budget. Ultimately, we decided on 5 years. The cost came close to $1000 per month. Shocker and major ouch!

To show why we decided upon 5 years, let me introduce you to a concept called opportunity cost. Here’s the definition from Investopedia.

KEY TAKEAWAYS

• Opportunity cost is the forgone benefit that would have been derived by an option not chosen.
• To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.
• Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.

From Tesla’s US site, here is the expected financing cost for 48 months, 60 months, and 72 months.

What is the opportunity cost over 10 years?

That’s the question I asked myself before buying our dream car. Let’s think of 4 situations, pay cash in full today (no financing), 48 months, 60 months and 72 months. Once we finish paying off the car, we’ll invest the saved payments until we reach 10 years. The stock market has returned 6% compound average growth rate over the last 20 years. We’ll use that as our benchmark for how our money grows. For the person who paid in cash, they save $1,143 every month for 10 years.

Length of Financing	Cost	Growth in Saved Payments	Opportunity Benefit / Cost
Pay Cash in Full	56,990	180,788	123,798
48 months	60,864	95,673	34,809
60 months	61,560	62,639	1,079
72 months	62,232	40,999	-21,233

What this shows us is the person who paid in cash and invested the savings would have enough to pay for 3 more Tesla’s after 10 years. Talk about a real opportunity benefit. The person who took a 72 month loan would recover most of their car cost, but still have an opportunity cost of close to $21 thousand. That’s a substantial difference. As you can see, for 60 months, our cost over 10 years was close to breakeven. Given our budget, that made the most sense.

It’s unrealistic to expect 2.49% regardless of your loan term. I would expect lenders to increase the cost for longer periods, same as they do for mortgages. Might not be much difference, but as cars are most people’s second most highest expense after housing, every dollar matters. *

It requires real discipline to take your saved payment after paying off a debt and sock it away. That discipline allows you to enjoy something great now, like your dream car, and still save for your future. Whatever car you purchase, new or used, take into account the opportunity cost. Your wallet and future self will thank you.

* We’ll discuss later how taxes are most people’s highest lifetime expense, in contrast to conventional wisdom.

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Thanks for reading!

Warmest regards,

smilingdad