RyanChandler
Well-known member
knabe said:
Very true.
knabe said:
As long as the cost of capital is less than the return I can get elsewhere I'm going to string out my notes as long as possible. You'd be foolish to pay cash for a car.
Ford Ecoboost
- Thread starter bim1986
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Very true.
As long as the cost of capital is less than the return I can get elsewhere I'm going to string out my notes as long as possible. You'd be foolish to pay cash for a car.
knabe
Well-known member
-XBAR- said:
you'd be more foolish to buy a new car/truck as well.
paying cash for a used truck cost a lot less opportunity cost than interest and depreciation, except of course for tax purposes.
RyanChandler
Well-known member
knabe said:
That's a big except -- especially when you're running farm tags and accelerating the depreciation over the term of the note.
knabe
Well-known member
"incentives"distort the market place, spawn more distortion requiring an expanding ruling class exempt from market forces.
Went and drove an ecoboost, a f250 gasser, and f250 diesel. We are starting to lean toward the f250 gasser. I loved the ecoboost, but worried about pulling long distances or getting larger trailer.
Leaning toward f250 gasser, cheaper price, cheaper fuel, and I don't think the fuel mileage is as big as gap as it was.
Leaning toward f250 gasser, cheaper price, cheaper fuel, and I don't think the fuel mileage is as big as gap as it was.
RankeCattleCo
Well-known member
-XBAR- said:
So on a 6 year loan for a $60,000 truck you'd rather pay ~$1000 a month, totaling near $72,000, for something that will have 120,000 miles on it, is 6 years old, and is most likely worth under $30,000? That sounds idiotic to me.
RyanChandler
Well-known member
I'm not quite sure who taught you how to analyze investments or calculate pmts but....
a 60k note spread out evenly over 6 years at 3% has a pmt of $911.62
($911.62 x 72) = $65,636.64
and that's at a used car rate
a 60k note, 6 yr term, 0% finc has pmt of $833.33
If you have 60k and you want to purchase a new vehicle, it would be foolish to pay 60k cash for a vehicle when you could finance over 6yrs and the sum of your payments still be 60k.
Instead of putting the 60K down on the truck, I can finance the truck, and then I can invest that 60k in a fund, for example purposes, that returns 10%.
That 60k that I invested (instead of paying off the truck) is now making me 6 grand profit (60k x 10%) per year. I can apply this 6k to my annual truck payment. At $833.33/ month truck payment equals 10k per year. This means that after I apply the 6k, I will only owe 4k per year on this 60k truck.
Any time your cost of capital (in this case - the finance charge, which equals 0%) is less than the return I can get elsewhere (investing in a fund that returns 10%, for example), you should extend the term of your note for as long as they will allow!!!!
With this example, which is absolutely feasible, I would have only paid 4k annually out of pocket over 6 years = 24k for a vehicle==> that's worth around 30K come trade in time
a 60k note spread out evenly over 6 years at 3% has a pmt of $911.62
($911.62 x 72) = $65,636.64
and that's at a used car rate
a 60k note, 6 yr term, 0% finc has pmt of $833.33
If you have 60k and you want to purchase a new vehicle, it would be foolish to pay 60k cash for a vehicle when you could finance over 6yrs and the sum of your payments still be 60k.
Instead of putting the 60K down on the truck, I can finance the truck, and then I can invest that 60k in a fund, for example purposes, that returns 10%.
That 60k that I invested (instead of paying off the truck) is now making me 6 grand profit (60k x 10%) per year. I can apply this 6k to my annual truck payment. At $833.33/ month truck payment equals 10k per year. This means that after I apply the 6k, I will only owe 4k per year on this 60k truck.
Any time your cost of capital (in this case - the finance charge, which equals 0%) is less than the return I can get elsewhere (investing in a fund that returns 10%, for example), you should extend the term of your note for as long as they will allow!!!!
With this example, which is absolutely feasible, I would have only paid 4k annually out of pocket over 6 years = 24k for a vehicle==> that's worth around 30K come trade in time
RankeCattleCo
Well-known member
If the loan rate is under the inflation rate then yes, do it. But at 5% your monthly payment would be $966, and in the end that $60,000 truck cost you $69,552.
RyanChandler
Well-known member
Sheep said:
keep reading buddy-- you're almost to the part where you learn the fisher equation
Opportunity cost is the operative word here:
So at 5%, the cost of capital was $9,552 dollars. So you're telling me that If I give you $60k today, that in 6 years time, you couldn't make me a greater return on my money than 5% or $9,552?
Because I know I can, my 401k is returning almost 3 times that...
RankeCattleCo
Well-known member
How are you making money by driving it daily and using it for recreational uses like hauling steers to shows and going on family vacations? Even if you're hauling cattle to different pastures, going to buy a cow you bought, etc. you aren't making any money, you're just maintaining your business. If you have the cash, why finance it? Why finance anything? I've been taught to buy what you can afford. I'm just against the idea of financing.
RyanChandler
Well-known member
Sheep said:
Whoever has taught you that -while I'm sure they're great people- they have a very limited financial understanding and I highly doubt they are in a position to be giving financial advice. You need to take an entry level finance class. IF you're interested in learning- read up on these topics as they pertain to finance:
#opportunity cost
#cost of capital, more specifically #cost of debt
#leverage
#internal rate of return
#term structure of interest rates
#fisher equation
RankeCattleCo
Well-known member
Thank you but my parents have done quite well. My father went to tech school, no student debt. My mother saved her entire childhood, went to PT school and had no student debt. Combined, they've had a car payment for a total of 5 months on one vehicle. They've had a mortgage for a combined 3.5 years. They both drive relatively new vehicles. They were able to purchase a travel trailer for a camp sight up north and a jet ski to go with it, also in cash. My dad just got a 8 year old 215 HP tractor and a brand new VT tool to play with in the fields that he payed for in cash. Acquired 160 acres in land, 80 acres at a time, and financed <10% for 6 months each time. They are able to handle the custom planting, spraying, and seed cost associated with row crop farming in cash. By no means did they come from money families, and they're parents didn't really give them a dime, they supplied the, with what they needed. Quite frankly, I think this is how every kid should be raised. I think they've done okay. But thank you for the input. I'm not trying to sound like a snobby, arrogant *****, but keeping yourself out of debt and not paying interest allows you to do some pretty awesome things.
RyanChandler
Well-known member
What was the opportunity cost to the way they did it? How much larger, more successful could the operation have been if only they would have applied some practical financial knowledge?
Here's an example:
Say you have $1000 and you want to buy some cattle. (Say cattle are $1000.)
You, being opposed to financing, you go out and buy 1 cow for $1000.
Me, LOVING financing, I would take the $1000 to the bank and put it down as a 10% down payment on a $10,000 loan for 5 years at 5%. I would have then went out and bought 10 cows. Each year, I will owe the bank $1800 ($9k/5) principle + $450 ($9k*.05) interest.
Lets say a calf is worth $500.
With your $1000, you bought 1 cow, she had a $500 calf.
In year 1, you made a 50% return on your $1000.
With my $1000, I bought 10 cows, they had 10 $500 calves = $5000. Subtract principle and interest ($1800 + 450) =$2250. $5000-2250 = $2750
In year 1, I made 275% return on my $1000.
If percentages aren't your thing, look at it like this: I made almost 3 times the money off my initial $1000 as you did.
Here's an example:
Say you have $1000 and you want to buy some cattle. (Say cattle are $1000.)
You, being opposed to financing, you go out and buy 1 cow for $1000.
Me, LOVING financing, I would take the $1000 to the bank and put it down as a 10% down payment on a $10,000 loan for 5 years at 5%. I would have then went out and bought 10 cows. Each year, I will owe the bank $1800 ($9k/5) principle + $450 ($9k*.05) interest.
Lets say a calf is worth $500.
With your $1000, you bought 1 cow, she had a $500 calf.
In year 1, you made a 50% return on your $1000.
With my $1000, I bought 10 cows, they had 10 $500 calves = $5000. Subtract principle and interest ($1800 + 450) =$2250. $5000-2250 = $2750
In year 1, I made 275% return on my $1000.
If percentages aren't your thing, look at it like this: I made almost 3 times the money off my initial $1000 as you did.
RyanChandler
Well-known member
and over the 5 year term:
My $1000 would have returned $13,600
Your $1000 would have returned $5000.
PLUS:
I would have 10 cows at the end of the 5 years.
and
You would have 1 cow at the end of the 5 years.
My $1000 would have returned $13,600
Your $1000 would have returned $5000.
PLUS:
I would have 10 cows at the end of the 5 years.
and
You would have 1 cow at the end of the 5 years.
RankeCattleCo
Well-known member
And I own my cow. The bank owns yours.
You say you pay $2250 a year on your loan. After 5 years, you will have paid $12,250 for your 10 cows. You now own them.
So now a cow dies because it got a DA. Another dies during calving. One won't rebreed. Realistically, after 5 years you have 6-7 of those cows. Those 4 cows didn't produce all 5 years. Say they met half their potential by having 2 calves... You still have to make payments on them, and I don't.
What happens when you lose your job halfway through a 6 year car payment and the bank comes and takes your car? (Yes we are in ag, selling out means income from assets, you probably still owe on these, anyway,nbut in a normal job you don't have that). When I pay for my car in full and I lose my job, guess what, the bank can't come take my car
You say you pay $2250 a year on your loan. After 5 years, you will have paid $12,250 for your 10 cows. You now own them.
So now a cow dies because it got a DA. Another dies during calving. One won't rebreed. Realistically, after 5 years you have 6-7 of those cows. Those 4 cows didn't produce all 5 years. Say they met half their potential by having 2 calves... You still have to make payments on them, and I don't.
What happens when you lose your job halfway through a 6 year car payment and the bank comes and takes your car? (Yes we are in ag, selling out means income from assets, you probably still owe on these, anyway,nbut in a normal job you don't have that). When I pay for my car in full and I lose my job, guess what, the bank can't come take my car
RankeCattleCo
Well-known member
That would actually be false if I buy a cow every time I accumulate another $1000
After 1 year I would have 1 cow and $500
After 2 years I have 2 cows and $0
After 3 years I have 3 cows and $0
After 4 years I have 4 cows and $500
After 5 years I have 6 cows and $500.
So I have 6 cows and $500. So my cost would be $5500 for the 6 cows (when factoring in the surplus)
My cost per cow is $916.67
Yours is $1,250 per cow. I'm making more profit, but growing slightly faster.
After 1 year I would have 1 cow and $500
After 2 years I have 2 cows and $0
After 3 years I have 3 cows and $0
After 4 years I have 4 cows and $500
After 5 years I have 6 cows and $500.
So I have 6 cows and $500. So my cost would be $5500 for the 6 cows (when factoring in the surplus)
My cost per cow is $916.67
Yours is $1,250 per cow. I'm making more profit, but growing slightly faster.
RankeCattleCo
Well-known member
What happens when your income doesn't meet the money needed to pay on your loan?
RyanChandler
Well-known member
Sheep said:
In our example, calves would have to bring less than half of what we figured for that to even be a consideration. If some fluke happened, I would just file for an extension and they would put that years pmnts on the end of the term.
I financed 30k worth of cows in 2010 from the FSA, in 2013 I PAID THE NOTE OFF COMPLETELY!!! I own free and clear over 20 cows from the venture alone.
Now you, being so opposed to financing, tell me how in 3 years time you could have acquired 20 cows free and clear w/ ZERO money down?
