How Canadians Should Finance Cars

You're either going to pay up to someone else because you had to tap into their pool of money, or you're going to give up interest you otherwise could have earned because you spent your own money. Both methods are a permanent transfer away from you. And every payment that you make is a deposit in someone else's bank.

Let's take a little bit of a dive here into an example of how people go about financing things in their life. We can just use an example right now of a car. Again, I want you to be thinking about your situation. Maybe a colleague or a friend, someone you've spoken to. Let's use a car as an example. So that's the need. There's a few different ways that you can go about car financing. Well, a lot of people in Canada are what we refer to as a debtor. So they're going to go to the bank, they're going to jump through all the hoops. They're going to qualify for a car loan, let's say, and now they're going to work real hard for six, even up to eight years in Canada, now that we can stretch loans out for. So you're working real hard. You're making payments, paying interest. Someone else has the control, they're collecting those payments, and the money is flowing away from you and your family. And remember, you don't actually own anything until the final payment is made.

At any point, if life happens, God forbid, this payment cycle gets interrupted, they're going to come and get your stuff, they're going to come and get your vehicle. You're going to have to downgrade. That's how that's going to go. So that's a sad story, but that's what's possible. Now let's assume everything goes good. You're maybe earning more money five or six years later, or maybe you turn the car in early, like we talked about with the mortgage example. What are you probably going to do? You're probably going to upgrade. Maybe you had a couple of extra kids, maybe you need a bigger vehicle. And instead of dropping down to the same place, you're probably going to drop down even further. Now our payment is larger, or maybe the length of the term is longer. And then you're going to repeat this cycle all the way through again. Imagine that this was time. Push it all the way out to age 100 and you'll see there's a reason why I used age 100 later on in the presentation. But people are getting into this cycle. They get all those cars and things that they need throughout their lifetime, but they wind up with little to no money at the end now. Well, there's a smart group of people out there who say, you know what? Forget financing through a bank, forget making payments, forget paying interest. I'm not doing that. I'm too smart for that. I'm going to be a saver. So just like I said earlier, what do they savers do? Because they know that they have a future need. Maybe it's a car. They're going to work really hard and they're going to pile up money where in someone else's bank. So they're going to give away motion of that money and they're going to give control over that money to the bank so that the bank can multiply those dollars and they're going to pile that money up. Gosh, that looks a lot like a payment. They convince themselves that they don't have a payment because I'm in control, I'm just saving the money. And then I'm going to make a big balloon payment here to go and get my car. And now what happens to the momentum and the access to capital? The momentum on the money is gone. They've sent the money to the bank, they made one balloon payment and convinced themselves that they don't have to make a payment anymore. But what happens? Well, don't they have to go ahead and save for their next need? They know that a few years down the road they're going to need to upgrade their vehicle again. So they're actually making a payment. There's no escaping the payments. They're paying money, they're making deposits right back into someone else's bank, giving use and control over that money and just so that they can go back in and re access that money again down the road to solve their next problem, to solve their next objective for the family. So this is actually what's happening. And just like I said earlier, if we go back and think of this as time to age 100, you could see that there's not a whole lot of difference between the debtor and the saver. They both got the things that they needed, but they both permanently transferred money away from their family. And at the end they kind of wind up in a very similar spot. Now this person on top, the debtor, they can see the interest because it's built into the payment. They can look at their payment schedule and see how much interest they're going to pay. This person doesn't actually see the interest that they're giving up the opportunity to earn and let that sink in for a minute. Remember we talked about money has two values, right? It has what it can purchase today and the growth potential on that money, what it can earn in the future. Well, both people here, the debtor and the saver, have actually permanently transferred money away and all that financial energy and the growth potential. But what the saver is not seeing and the opportunity to think differently, the teaching point here is they're giving up the opportunity to earn interest. So like Nelson says, we're always dealing with borrowed money. You're either going to pay up to someone else because you had to tap into their pool of money, or you're going to give up interest you otherwise could have earned because you spent your own money. Both methods or are a permanent transfer away from you. And every payment that you make is a deposit in someone else's bank. So whether that's a payment to your car or if that's a payment to save up for your next car, it's a payment and it's a permanent transfer of money away from you and it's a deposit in someone else's bank. And all of this could be you.