Cash Vs. Finance

wing_zealot wrote:

bid_time wrote:

Oasisbob wrote:
Always amazes me how many people will finance an RV...

It amazes me how many pay cash!

Over the last 11 years (since the end of 2007 which includes the market crash in 2008) my investments have earned a 6.4% average annualized return. This year it was over 20%. I have several loans, one at around 4.5%, one at 3.21%, and one at 2.94%. I can pay them off anytime I want to; but why would I. I'm making more keeping my money invested.

Let me put it to you simply. I took out a $25,000.00 loan in the end of April at 3.21% for 60 months. I left that $25,000.00 invested in my moderate risk balanced index fund. I take the payment $451.55 out of that fund account every month, first payment made the end of May, the balance remains invested. As of Jan 1 I have a balance of $24,307.89 in that account. The loan payoff amount is $21,893.62

Yes it was a good year. But even if it was an average market (7% per year) I would still be $900.00 ahead at this point.

I still have the money to pay off the loan any day I want; plus I get to keep the difference between the payoff amount and the current balance in the account. (minus taxes) which would amount to about $775.00 today.

Now obviously there is some risk involve. If the markets are in a downtrend, maybe it’s not a good time to capitalize your own loan. If the markets are stable and remain stable, in the end you reap a substantial benefit. Anytime the market slides such that the balance in the account is in danger of not covering the payoff amount, I can pay off the loan free and clear.

Your biggest risks are the first few months. If the fund dives and loses 5% a month for the first 3 months you would be looking at a $3500.00 loss. If the markets perform normally, you will start out ahead and be able to sustain blips as the market moves up and down in its normal course.

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