To Achieve… To Succeeed…

Millionaire Money Habits

July 7th, 2008 at 11:15 am

Should You Pay Cash or Get a Loan?

pay cash or get a loanThose who have a substantial savings may be blessed with the luxury of choosing to pay cash for a big purchase or to get a loan to finance the purchase. If you have a million dollars on hand, for instance, and want to buy a new car, real estate, or finance your child’s college tuition, which is the better move? Should you pay in cash and be completely free and clear on your purchase, or is it smarter to get a loan?

In addition to managing money wisely, what allows people to become wealthy is their ability to use other people’s money and move their cash quickly in and out of investments. So the first criteria that needs to be considered is if the purchase is an asset that will appreciate, or if it is a liability that will depreciate in value.
If the purchase is an asset, you first have to consider how long your money will be tied up in the purchase. Ideally you want to be able to pull your money back out of the purchase as quickly as possible so you can take advantage of other investment options that present themselves. By maintaining a high velocity with your money, you won’t have to worry about your cash being parked in something you can’t access quickly while you watch opportunities pass you by.

The second thing to consider is your buying power with your cash and how that compares to loan rates and tax advantages. If you are looking at purchasing a $200,000 summer home with cash, you have to consider the following:

  • Tax deductions from paying mortgage interest.
  • Can you earn a greater return on investment if you finance the purchase and place your cash in another investment vehicle?
  • You can pay $200,000 cash for your home, or make a $200,000 down payment on a piece of $1 million commercial real estate that will pay you month after month in rental income.

While there may be some convenience to owning free and clear, it is the leverage of other people’s money and the ability to have cash on hand to participate in investment opportunities that allow you to build great wealth. If, however, your cash is just going to sit in a savings account not earning anything, you may think about paying in full for your purchase or the interest rate on your loan will just eat away at your savings.

Millionaire Money Habit: When it comes to building wealth, debt actually helps you create and build wealth. Use your money and loan options wisely, and you can allow your net worth to explode.

Tags: , ,


RSS feed for comments on this post | TrackBack URI

  • 6 steps to financial freedom

    6 Steps to Financial Freedom
    free when you subscribe to my newsletter.
    *I respect your privacy and will never share your email.