Best financial advice

Monday night in Community Group we were asked to share advice we'd give to a newly engaged and a newlywed couple. One piece of advice I'd offer is fortunately one I learned early in my marriage.

I've since figured out that people who teach real estate investment classes and sell tapes, CDs, and books about real estate investing normally make more money teaching about real estate investing than they actually do investing in real estate. Years ago my wife and I attended a real estate investment class from John Adams here in Atlanta where we learned very little about the topic at hand but took away some completely unexpected wisdom. Mr. Adams offered the following advice that we apply to this day: finance things that appreciate and pay cash for things that depreciate.

In practice, this means financing your home since it is an appreciating asset. For most Americans, that's not a problem--I don't know of anyone sitting on a big pile of cash who is considering using this cash to buy a home. The second part of Mr. Adams' sage advice, however, means saving enough money to purchase a new or used vehicle rather than financing it. I had done this most of my life, but then again, I drove a crappy 1988 Volkswagen Fox station wagon when I met my wife. I remember the time my wife and I purchased our first vehicle together. We decided to apply this principle, so we saved. I never thought I'd be able to pay cash for a nice car, but we started with an older vehicle and bought a used Ford Explorer with cash. Through the years we've continued to upgrade to newer and newer vehicles as we've saved more and more until last year when we were finally able to buy a new car (minivan, actually).

Why does this principle make so much sense? The answer has to do with the "cost" of money. If you're financing a $30,000 vehicle over 5 years at 5% which depreciates 20% a year, your real cost of the vehicle is actually $7,500 for the first year. Here is the calculation: $1,500 interest ($30k cost x 5% simple interest) + $6,000 in depreciation ($30,000 cost x 20% depreciation per year) on the vehicle. In paying cash for the vehicle, your real cost is only the $6,000 depreciation on the vehicle, which is 21% less than the cost had you financed it.

But Dorkydad, I want a brand new BMW 650i convertible! Tough--so do I, but at $78,800, the only way I'm going to get one is by starting to save now. If you want to do this (pay cash for things that depreciate), make some sacrifices with your first vehicle. Maybe it's not the newest, maybe it has a standard transmission, maybe it has 100,000 miles, and maybe it's not the color you had in mind, but trust me--the peace of mind in not having a car payment as well as the extra cash you'll have each month will more than make up for any buyer's remorse.

I've also discovered that this advice marries up well with some biblical wisdom. Proverbs 22:7
establishes that borrowers become slaves/servants to a lender, so I see Paul's statement, "You were bought at a price; do not become slaves of men" found in 1 Corinthians 7:23 as encouraging us to stay out of debt.