To open the automobile purchase calculator double click on the TC icon.  This gives you a menu bar which you can move to another screen if using multiple screens or place it where is most convenient.   You can also resize calculators as you open them to view them comfortably.  To do so, click on the calculator and move cursor to bottom pull down and drag to make the box a larger size.   Select Automobile Calculator. 

There are a couple ways to use this calculator:   put in value of a person’s current assets or leave it blank initially.  Type in net rate of return on savings this is going to fall for most people in the 4 to 5 % range.  Using 5% we’ll do a 40 year projection and if doing a 40 year old that person if buying an auto every 4 years, they’ve probably got another 10 purchases ahead of them.  You can change the buying frequency to set it up for the number of years you want to illustrate.  Here we’ll do the buying a car every 4 years we’ll take an actual purchase price of $40,000 that gives us our first set of numbers.  This makes the assumption that this person buys these cars and downsizes the kind of car he’s buying or the automobile company forgets to raise the price on it. 

In this case, the buyer transfers $400,000 to the car company over that period of time.  We know that this is not true and if we want to take our calculator and interest rate calculator and spend a few minutes to educate the client, they are going to find that the auto purchases average a little above 5%.  So if that holds true in the future then the value of the cars really goes up the cumulative cost goes from $400,000 to over $1,000,000 and we’ve got the actual asset value simply applies a 5% cost to these purchases there’s no way that this cannot happen.  So your true cost of these automobiles is $2,815,000. 

A better way to do this is to add a couple of things we’ve overlooked.  In our state, 8.25% is our sales tax.  The automobile insurance is going to run about $1,800 so in this car buying model, we’ve got 3.4 million dollars of money that we’ve transferred out of our asset pile and to the car and car insurance companies. 

This is a good tool once people have read the book on infinite banking to help them get a handle of their car buying problem.  In the way of an expenditure they lose control of that money and the money they would have earned had it not been transferred.  The number that you have right here also determines based on their situation, their age and purchasing habits how much can be recovered through the infinite banking process. 

I could have started out over here and suppose we’ve got $250,000 and we’re saving $10,000 a year increasing 4% and this shows our value is $4,110,914 so you would think that this person with this kind of savings and money adding into their savings account that they could afford to accumulate and save money and pay cash for their automobiles thereby saving interest. 

Let’s take a look at a four year purchase frequency, $40,000 car plug in our sales tax, insurance, what we have is our $3.4 million of damage done to the account if we pay cash for the cars.  Once the person has read the book this is a good refresher and if not read this is an excellent motivator to get them to read the book because without the infinite banking process they don’t have much of a chance.  They need the art of  acquiring their own debt.  If they are paying cash they create a debt against their existing capital and the paying cash and the borrowing there’s zero difference unless the borrowing rate is less than the savings rate. 

Tutorial by Norman Baker.

How do I figure out if I can get ahead by earning 6% if I have an 8% loan? 

At first glance, the answer is obvious, you don’t get ahead.  However, sometimes we get confused and think that since an account (say at 6%) has an increasing balance while a loan (say at 8%) has a decreasing balance, we might be able to get ahead.  Let’s look at it to see the whole truth of the matter. 

Take a $100,000 account earning 6% over 20 years.  Future Value: $320,713.

We know it earned $220,714 worth of interest.  This is calculated by taking the  $320,714 total and subtracting the $100,000 initial investment.

Now let’s look at a loan for $100,000 at 6%.

We can see that our loan payment is $9430.76 and if we multiply that by 20 years, we get $188,615.20, so we know that we paid $88,615.20 in interest.  So an incorrect deduction would be that it would make financial sense to have 6% earnings while we are carrying 8% debt, but this is only because all of the facts are not presented.  Let’s take a closer look.  The only way to make valid financial conclusions is to have exactly the same cash flows and time periods in each of the comparisons we are trying to make.

Under those guidelines, if we take the $100,000 and pay off the loan at 8%, then take the payments of $9430.76 that we no longer have to make loan payments of and pay them instead to the 6% account, in 20 years, we have $367,731, instead of $320,714 in the earlier example. 

So while it is true that we pay less interest ($88,615.20) than we earn ($220,714), that is only part of the truth.  The whole truth is that cost of money does matter and in the above example, our costs are greater than our gains.  This is the whole truth, even though we earned more interest than we paid out in interest.  There is a $47,017 improvement by paying off the 8% loan with the 6% account and redirecting the freed up payments to the investment.

One critical issue left over is liquidity.  Obviously $100,000 in an account leaves us in a more liquid position initially than $9430.76 being contributed to an account every year.  But eventually the investment account with $9430.76 being added annually will over take the account with $100,000 being contributed up front and will exceed it by $47,017 in the 20^th year.

So if initial liquidity is a concern, then it may be worth giving up some of the $47,017 gain to be in a more liquid position.  However, it is not true that there is a mathematical advantage in having a higher rate of interest on your debt than on your earnings.

Since we are writing this in 2009, there are some true 0% car loans in the market place due to the economy in general and the condition of the automobile industry in particular.  However, knowing the whole truth about your money is critical in knowing how best to finance a car and there is much misinformation around this area.  Don’t be sucked into making higher payments because it’s only 0%!

What happens to car buyers is they get focused on the payment.  A car dealership has a different price for a cash deal than a financed deal.  Lets say you get a quote for a car and its $30,000 if you pay cash.  (That should always be your starting point.)  If you try to get financing at that price, they’ll back out.  They will want to charge you $30,000 for the car if you take their 0% financing.

Car companies offer different deals on the same car, depending on whether you pay cash or use their financing.

They add interest to the cost of the car when offering the “discounted” interest rates.  What does that mean? That is because there is EITHER a $5,000 rebate OR a 0% financing deal.  So in reality they have added interest to the price of the car that they will take off the price of the car and call it a rebate if you pay cash or finance it from an outside source instead of using their internal financing.  As an example, here is the whole truth about your money.

Car manufacturer has a $35000 automobile; you can accept their 0% 48 month financing or take a 5,000 rebate.  If you choose their financing at 0%, your payment would be ($35,000 / 48 = 729.17)  $729.17. 
 
 
 

OR you can take the 5,000 rebate and finance the difference at your own bank so 30,000 (35,000-5000 rebate) for 48 months at 7.5% at the bank equals a payment of $725.37 
 
 
 

So why is using the automobile financing at 0% causing a payment that is more than the payment when we use the bank at 7.5%?  Because the car financing deal added the interest cost to the price of the car in order to advertise a 0% rate.

The same “half-truth” is used for the 2.9% rates and other abnormally low interest rates that are advertised in the marketplace.  Sometimes the rebates are published, sometimes not.  Moral of the story: What you will want to do is ask for the price of the car if you pay cash.  Remember, most of the car companies make most of their money from the financing arm, not the manufacturing arm.  How can they do that at 0% or 2.9%? They can’t.