Would you argue that paying cash for a car is better than taking out a car loan at 2.5%?
Of, course you would! It makes sense. Plain and simple. No ifs, ands or buts about it.
However, if you are a loyal Without Wall Street follower you know we are going to challenge the conventional wisdom behind this idea.
While cash is still king, it is most definitely not the most efficient route to take when making large purchases.
Put plain and simple- opportunity cost.
Opportunity cost the dollars your (spent) dollars could have earned you. It is what you lost out on by spending cash.
You see, when you put a $1 into the vending machine that dollar will never work for you again. It’s gone. Dead.
$1 may only earn you $2 over your lifetime, though, so that isn’t too big of a deal.
Let’s put this concept into perspective by utilizing a larger ticket item like a car.
You purchase a new car for $30,000 in December of 2017 (everyone knows December is the best month to haggle!). They offer you a 36 month loan at 2.5% interest, however you decline and pay $30,000 then and there in exchange for the car and to save the $2,250 you would have spent in interest.
Not bad, right? You saved $2,250 by spending cash!
Let’s peel the onion back one more layer.
If you had saved that same $30,000 for 20-years in an account earning 4% it would have earned you $15,733.69 in interest.
Ultimately, in this example, you chose to save $2,250 rather than earn $15,733. Thus, losing $13,483 over a 20-year span. Which would you rather?
To show the true power of compounding interest—
If you take the same scenario above, but add only $200 per month into the account for 20-years you will have a balance of $140,059.78 by the end of the time period.
Compounding interest is incredible!
Are you taking advantage of it?
We’re diving into the details of this concept and teaching on a better option (one that takes advantage of compounding interest) in today’s show.