In the opening chapters of the bestselling book Rich Dad, Poor Dad, Robert Kiyosaki offers a central piece of advice: “You must know the difference between an asset and a liability, and buy assets…. Most people struggle financially because they don’t know the difference …” Defined simply and perhaps a little crudely, Kiyosaki sees an “asset as something that puts money in my pocket whether I work or not. A liability is something that takes money out of my pocket.” “If you want to be rich, simply spend your life buying or building assets. If you want to be poor… spend your life buying liabilities.” In the former category, the author puts income-generating assets. Think stocks, bonds, and CDs that will generate interest that compounds over time. It’s money begetting more money. In the latter category, he puts items that lose value, or increase your debt. This includes wasteful consumer goods, credit card debt, and car loans.
This brings us to the video above, created by the PBS YouTube Channel, Two Cents. Here, Philip Olson and Julia Lorenz-Olson spend four crisp minutes exploring the financial downsides of buying new cars, underscoring why they are liabilities, not assets. “New cars are a financial triple threat,” they explain. “We borrow money at interest, to buy [a liability] that we have to pay to maintain, and … that drastically depreciates in value.” In sum, it doesn’t make financial sense to borrow $20,000 (and then pay perhaps another $5,000 in interest) to buy a new car that will be worth $12,000 in 5 years.
So what’s the alternative? It’s not leasing a car. Instead, they recommend buying a quality used car that’s 5 years old–that is, after the main period of depreciation. If possible, buy the car in cash and skip taking a loan. Then use the amount you saved (had you bought a new car) and invest it in an asset that generates income. That’s a more sensible way to go.
The Olsons’ approach gets seconded by Dave Ramsey (see below), who argues that, unless you’re a millionaire, you should buy a quality used car (with saved, not borrowed, money) and, here again, invest the amount you don’t waste on a new car. His video includes tips for negotiating a good price and shopping for car insurance. In another video, he provides more tips for negotiating a purchase.
And, finally, in case you still need to be persuaded, we have included Suze Orman’s recommendations for purchasing a car. In a few short minutes, she drives home all of the points made above.
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