The following is a guest post. This post does not necessarily reflect the views of Suzanne and David E. McClendon, Sr. or Manian Debil Productions.
Lease vs. Buy A Vehicle: Which Option Creates More Wealth?
Al Zdenek: Author, Speaker, Wealth Advisor
May 2017
Yes, it is time to replace the family car, or maybe you drive a truck. When you go online or go into the showroom, you will have a choice of whether to buy or lease it.Which will you choose? How will you choose? Many don’t know where to begin or in the end what is the best choice. However, if you are trying to make the best financial decision, the one that can create wealth for you, read on.
Let’s get some ground rules out of the way first. The assumptions I am going to make are that you don’t care if you own or lease a vehicle and you want to make the best financial decision for you.
You want the choice that creates the most wealth for you. Depending on your circumstances, the options can be different for different people and their financial situations.
You want the choice that creates the most wealth for you. Depending on your circumstances, the options can be different for different people and their financial situations.
Vehicle assumptions for this illustration:
1. The cost is $30,000 to buy.
2. Financing to buy is available at 3% over 3 years, a monthly payment of $870
3. The monthly lease payment is $601 for three years.
4. There is no money down (whether buying or leasing)
The monthly payment to buy the vehicle over three years is $870. The lease offered to you for three years is $601 per month. The difference between buying the vehicle and leasing it is $269 per month ($870-$601= $269) more if buying it.
Over 12 months this difference is $3,228 (12X$269=$3,228). If you save the $3,228 from leasing in a 401k and save the tax savings, since saving this way will lower taxable income and your income taxes, you could save up to $5,380 per year (assuming a federal and state tax rate of 40%). Saving the payments and taxes, $448 per month ($5,380/12=$448) over 36 months, assuming earnings of 6% per year, would result in a total of $17,724 of wealth created.
If you continued saving the $448 per month for 9 years (three leases), you would have a total of $64,315.
Over 12 months this difference is $3,228 (12X$269=$3,228). If you save the $3,228 from leasing in a 401k and save the tax savings, since saving this way will lower taxable income and your income taxes, you could save up to $5,380 per year (assuming a federal and state tax rate of 40%). Saving the payments and taxes, $448 per month ($5,380/12=$448) over 36 months, assuming earnings of 6% per year, would result in a total of $17,724 of wealth created.
If you continued saving the $448 per month for 9 years (three leases), you would have a total of $64,315.
After three years, the car would be paid off, if you owned it. If you tend to own vehicles a long time, and did not replace this one for another 6 years, you could save the $870 per month or $10,440 per year. If you save it in a 401k like above and save the tax savings, you could save up to $17,400 per year or $1,450 per month.
Six years after the loan is paid off, if you kept saving $1,450 per month at 6%, it would result in $125,919 or almost twice what you would have saved if you leased the vehicle.
Six years after the loan is paid off, if you kept saving $1,450 per month at 6%, it would result in $125,919 or almost twice what you would have saved if you leased the vehicle.
If one did not “run the numbers”, one might take the lease option because they save cash now and it appears to be the best overall decision from that view. Actually, it would not be the best financial decision to build wealth over 9 years in this scenario.
Is this scenario true for everyone? No. Your situation and numbers to buy or lease may be much different. The lesson is to always “run the numbers” or calculate them. Do not rely on “gut feeling”. The results may surprise you. Remember too that you have to save the savings each month too! Many do not, especially after a loan is paid off.
Other considerations which might change your choice above is cash being so tight where the leasing option may produce critical cash flow for living or other necessary needs at the time you are getting a new vehicle.
The lease might be the best option in this case. There might be many more options or considerations when you actually go to shop for a vehicle which might change you decision. Or simply, you like having a new car at the end of every three years and don’t care about it being the best financial decision.
The lease might be the best option in this case. There might be many more options or considerations when you actually go to shop for a vehicle which might change you decision. Or simply, you like having a new car at the end of every three years and don’t care about it being the best financial decision.
But, if you do calculate the differences carefully, and you see that there is a cash flow difference you can save, then you might be able to produce some wealth, reach financial goals sooner in life and not work longer and harder to get there!
Al Zdenek, Author, Speaker, Wealth Advisor, (www.AlZdenek.com) is the CEO, and founder of Traust Sollus Wealth Management (www.twswealth.com).He is a CPA, personal financial specialist, and author of the new book "Master Your Cash Flow: The Key to Grow andRetain Wealth" which gives you straightforward and valuable information you can use in everyday financial decisions to help make the correct financial choice for you and live the way you wish now and reach your financial goals sooner.
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