Economic Trends, Academia, and Mother Nature

by Greg Robb
September 19, 2005

A couple weeks ago I was on my way to Indianapolis and needed gas. As I pulled to the pump the price tag for a jug of petrol astonished me. For the first time in my life I was going to pay north of $3.00 per gallon for gas. I closed the door covering the gas tank on my Ford F-150 to discover the damage... $75.25. That's right, to go 375 miles I just paid three times the amount of the first thing I ever saved money to purchase - my Boy Scout Knife (and that took 6 months of extra chores around the house).

The drive that followed sparked thoughts of purchasing a motorcycle, a moped, or even a scooter to save on gas costs. Once I came to my senses, I settled on purchasing a more gas efficient vehicle to make the daily commute. Realizing a simple law of economics was pushing me towards a major purchase; it was now time to determine how to pay for the new four wheel depreciating asset. Should I pay cash? Should I take out a loan? Where should I get the loan? All of the finance lessons I had learned from my overpriced education as well as the articles I had read over the past ten years should surely have the answer. Right? Maybe not...

We have all been told: 1) If you can earn a better rate on your money than the rate you are being charged, then take out the loan. 2) Given the opportunity to pay down one loan or another, always pay down the one with the higher interest rate. 3) If you must take on debt, always try to make the interest deductible. This is where Real Life and Non-Fiction are not always on the same page.

I currently have a loan on my Ford at 1.9% and a loan on a new car right now will come in under 7%. Given the past performance of publicly traded investments, I am confident in my ability to outpace either loan in the long run. However, I am paid by commission which creates a bit of uncertainty in my cash flow. For this reason alone I have decided to carry only one loan between the two vehicles. Since I am trying to live the one car payment lifestyle, the next obvious step taken by the textbooks would be to maintain the lower loan on the Ford and pay cash for the new vehicle. Unfortunately real life would like to put in its two cents. Even though the amount I owe on my truck is about the same as the amount I am willing to pay for a new vehicle, the monthly payment is close to twice as much. I have already expressed my close attention to cash flow; therefore, I will be paying off the truck to assume a lower payment.

For those about to call your alma mater and complain about the cost of your education, the textbook answer to the final question will prevail... I promise.

Beth and I are in the process of selling our house and purchasing a new home in a wonderful community by the name of Granville, Ohio. All excitement aside, the question has come up as to where to dedicate future savings. Should we save up for the down payment or should we pay down the car? My answer: Pay down the car, more house debt is not only tax deductible, but a house is generally an appreciating asset which only increases your ROI (Return on investment) by employing more help from your local mortgage company and less from your savings account.

The moral of this story is to always measure success with relevant benchmarks and never come to a final decision without first considering all things important to you. In my case, a simple economic trend disproved a personal finance truth taught in classrooms nationwide. The greatest result from this entire ordeal remains... thanks to the greed of a relative few, Mother Nature will be choking on less fumes, even if only because of this Halfsquare.