Principle #4: Never Finance ANYTHING That Depreciates

July 5, 2012 § Leave a comment

Principle #4 is all about the concept of what is called “delayed gratification”. I know, sounds complicated, right ;-) Delayed gratification means that you delay (put off till another time) the purchase or acquisition of something you think will be gratifying (bring pleasure, usually momentarily). I say this in jest because it seems that so few people in today’s western society have the slightest amount of delayed gratification. We as a people are known worldwide for our consumption habits and lack of personal discipline. However, since most people are swamped by debt, usually for perceived “needs”, let’s just make it our goal to NOT be like most people.

Depreciation Defined

Google defines “depreciate” as:

de·pre·ci·ate   /di•prē•SHē•āt/

  1. Diminish in value over a period of time.
  2. Reduce the recorded value in a company’s books of (an asset) each year over a predetermined period.

That said, the idea here is to never finance (lease, loan, borrow to purchase, etc.) anything that will lose value over time. Here are some examples of items that depreciate:

  • cars
  • motorcycles
  • ATVs
  • computers
  • TVs
  • stereos
  • furniture
  • entertainment systems
  • carpet
  • blinds
  • lawn mowers
  • jewelry

You get the idea.

The Numbers

Let’s take a quick look at the true cost of financing items that depreciate. In the first example we’ll look at one of the most common mistakes that people make: the leased car.

Early in our marriage, we were given some advice (note: NOT good idea), “If you just build a car payment into your budget, you can drive a new car every 3 years. It’s great. You’re always under warranty, and you’re always in a newer car.” We took this advice, and just recently got out from under the last lease. I tell you this so you know everybody is tempted by this enticing offer.

Example Calculation Using the Leasing Formula (borrowed from

Let’s assume you’ve decided on 3-year (36 month term) lease of a Toyota Camry XLE that has a sticker price of $24,600 (MSRP).
You have managed to negotiate the price down to $23,000 (Cap Cost). You decide not to make a down payment, but you have a trade-in worth $5000. Your Net Cap Cost is therefore $23,000 – $5000 = $18,000.
Now, the dealer tells you (because you asked) that the Money Factor is .00375 (.00375 x 2400 = 9.0%) and the Residual Percentage is 60% of MSRP. So your Residual amount, in dollars, is .60 x $24,600 = $14,760.
Now let’s do the math:

Depreciation Fee = ( $18,000 – $14,760 ) ÷ 36 months = $90.00

Finance Fee = ( $18,000 + $14,760 ) × .00375 = $122.85

Sales Tax = ($18,000 x .08) ÷ 36 = $40.00

Monthly Lease Payment = $90.00 + $122.85 + $40.00 = $252.85
(sales tax included)

In this example, you have a monthly payment of $252.85 over 36 months, which means that at the end of your lease (assuming you stayed within miles, didn’t dent the car, and don’t have to replace the tires, etc) you will have paid $9,102.60 for a car that you don’t even own. If you’d like to buy the car at this point, you’d purchase it for $14,760. In essence, leasing a car is just a fancy finance term for renting. Most people would never rent a car for 36 months, so don’t lease either.

Again, I am guilty of falling into this trap (more than once), so I am not condemning you if you lease.

Suggestion: Whenever you can, get out of your lease, and purchase a car for cash. It pays!

Lastly, let’s look at the true cost of making a financed purchase of a motorcycle (yes, I’m guilty here too).

Let’s say that you went to the local Harley Davidson dealer and picked out a brand spanking new Road King (MSRP about $20,000). You talk them down to $18,000, and put down another $3,000. Your total financed amount would be ($18,000 + $1,440 tax) – $3,000 = $16, 440 (assuming an 8% Sales Tax rate). Assuming a 6% loan rate over 60 months, your payment would be $317.83/month.

At the end of your loan term, the cost of the bike would actually be about $27,000 ($19,069 sum of payments + $3,000 downpayment + $5,000 depreciated value). My question is this: would you ever pay $27,000 for a base model HD Road King?

Please watch the video below… it makes a simple point: If you don’t have the money, DON’T BUY IT! (PS, it’s funny)



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