You are 100% correct, EXCEPT for the emergency cash flow thing is backwards. Let’s say you have $20,000 for a car. If you put that whole $20,000 to buy a car, and an emergency comes up where you need $5,000, it will be much harder to get a loan to pay for that on the same terms as a car loan.
What you’re describing there to me is an anti-pattern. If you have to spend $20k to buy a car and you blow through your entire emergency fund to do it bringing your emergency fund to $0, you’ve already made a mistake. To use your numbers, if you have $20k and you need a car. You buy a $15k car. You have a fully paid off car, and an extra $5k in the bank for emergencies. Further, I still make a car payment, but to myself, every month that goes into savings to buy the next car outright. Its easy to do because I don’t have a real car payment to a bank. If money is ever tight, I can choose to not make my “car payment” to myself giving me more flexibility, liquidity, and less overall worry. A year after this purchase and even after the $5k emergency, I have $3900 positive in savings from my “car payment to myself” and still have a paid off car.
On the other hand, if you put $2,000 towards the car and borrow $18,000 at 3% for 5 years, that’s $325 a month, give or take depends on fees. Now you still have $18,000 free for emergencies, and you’re theoretically still making money at your job, so you can keep building that neat egg with interest.
Continue to play that out with a more likely bad case scenario. You start with $18k in the bank, and you’ve now leveraged your emergency fund to also cover car. You have your theoretical $5k emergency dip into it leaving you with $13k in the bank. A year later, you lose your job. Your car payment is still due, you have the remainder of the real car payments to make at $325/month to the bank. So now you’re drawing down your savings (and the money you would have paid off the car with) just to live on. You can try to sell the car, but its depreciated and you’re not going to get even enough money to pay off the bank note. You took on the worry of this and this risk everyday for five years to try to make about a measly ~$1k profit.
I’m not saying this is exactly how its going to happen, but in your scenario the possibility exists for this. In my “buy the car outright” it doesn’t. How often in life does everything go perfectly for you? My experience says, not often.
What you’re describing there to me is an anti-pattern. If you have to spend $20k to buy a car and you blow through your entire emergency fund to do it bringing your emergency fund to $0, you’ve already made a mistake. To use your numbers, if you have $20k and you need a car. You buy a $15k car. You have a fully paid off car, and an extra $5k in the bank for emergencies. Further, I still make a car payment, but to myself, every month that goes into savings to buy the next car outright. Its easy to do because I don’t have a real car payment to a bank. If money is ever tight, I can choose to not make my “car payment” to myself giving me more flexibility, liquidity, and less overall worry. A year after this purchase and even after the $5k emergency, I have $3900 positive in savings from my “car payment to myself” and still have a paid off car.
Continue to play that out with a more likely bad case scenario. You start with $18k in the bank, and you’ve now leveraged your emergency fund to also cover car. You have your theoretical $5k emergency dip into it leaving you with $13k in the bank. A year later, you lose your job. Your car payment is still due, you have the remainder of the real car payments to make at $325/month to the bank. So now you’re drawing down your savings (and the money you would have paid off the car with) just to live on. You can try to sell the car, but its depreciated and you’re not going to get even enough money to pay off the bank note. You took on the worry of this and this risk everyday for five years to try to make about a measly ~$1k profit.
I’m not saying this is exactly how its going to happen, but in your scenario the possibility exists for this. In my “buy the car outright” it doesn’t. How often in life does everything go perfectly for you? My experience says, not often.