It seems like everyone has a story about a memorable car purchase. Lucky for me, I got my story when I was purchasing my last vehicle five years ago. Let’s just say it finished with paperwork being ripped up and thrown in my face all because I didn’t want the pothole protection insurance. Perhaps the salesman did have a point as I do live in the pothole capital of Canada (Winnipeg).
My wife’s car is on its last leg, so we have the pleasure of going through the car buying experience again. For comedic reasons, I was ready to visit the same dealership, but they are unfortunately out of business. I assume I wasn’t the only one to receive such a memorable experience. Contrary to what you may be thinking, my hatred of purchasing vehicles doesn’t come from the experience, but rather the fact that I’m buying a depreciating asset.
As a financial planner, I’m always preaching to clients to have their money working as efficiently as possible. To withdraw funds from my growing TFSA to purchase a vehicle is out of the question, especially when the value of the vehicle will drop as soon as I drive off the lot. My second option was to borrow the funds to purchase the vehicle. In my mind, this is not a very attractive option as I’ve seen enough loans go upside down where the value of the car is less than the amount remaining on the loan. I don’t want to be in a position where I’ll need to purchase another vehicle in the future and still have loan payments on my previous car. Leasing is also an option, but I’m not currently in the new car market
So what’s the Plan?
Based on our situation, we decided on a combo of using our savings and borrowing. We knew we would need a new vehicle a couple of years ago when my wife’s car started acting up. We decided to start putting money away on a monthly basis equivalent to what we thought the cost of borrowing would be. We’ve saved “two years” of payments which we will apply as the down payment towards the car. We chose not to use our TFSAs as those funds are invested with a long-term horizon in mind. We will borrow the remaining funds (at the best rate possible) to finance the remainder of the vehicle. Our thoughts were that once we start making loan payments for the vehicle, our cash flow will not change as we are already accustomed to putting the funds away.
As for my experience with this purchase, I’ve hired my father in law to head up the vehicle search. He is retired and loves to go toe to toe with the dealerships. Perhaps he’ll be the one ripping up the paperwork this time.
Stay tuned for my next post where I’ll go over a debt swap strategy to purchase a vehicle.
Marc Sabourin is a Winnipeg based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His focus is on helping pensioned employees achieve their retirement goals. He draws on his real-life experiences to explain strategies that are often presented as intricate. He believes financial literacy is an integral part of one’s financial well-being and his goal is to make learning about these topics fun and enjoyable.