MythTip: Run the Numbers
Personally, I think this video is fantastic. I wholeheartedly endorse the principles discussed here. The principles that Dave Ramsey teaches in it are fantastic. How does this system work? Easy. No interest is paid. Instead of paying interest, you save that money and put it into your next car. Piece of cake. This is why debt is not your friend. Your monthly payment on the car isn’t really telling you what you are giving up.
What I would like to point out is how this illustration is effective only for the exact terms used. It assumes that you invest a full $464 a month at a constant 12% interest rate. And that’s great. There’s nothing wrong with that assumption. But if you want to run the same system yourself, and only save $200 each month at 4%, you may be surprised to find that you can’t upgrade the quality of your car quite so quickly.
This is why it is important for everyone to understand the basic principles of finance. Every situation is different and will yield different results from any other situation. So, what should you do? You should run this system for sure. You will save hundreds of thousands of dollars in car payments over the course of your working life. But, to minimize the number of surprises you encounter while operating this plan, you should run the numbers for yourself, for your situation. By doing so, you will be sure that your plan will run smoothly.
Posted on 21 Nov 2008