"Cash is King." This phrase is deeply ingrained in us. And it has its justification: A paid-off car belongs to you. No one can take it away. You have no monthly rates and owe nothing to anyone.
That gives a feeling of absolute security. However, financial pros look at a second side of the coin: Opportunity Costs.
Simply put: What could you have done with your money otherwise if it wasn't stuck in your car?
Interest to Yourself
Even if you don't pay interest to a bank when buying cash, the money "costs" you something. You forego potential profits that your capital would have generated.
A car is (almost) always a depreciating asset. It loses value every day. An ETF savings plan or a fixed deposit account, on the other hand, is a productive asset – it generates returns (interest, dividends).
The Calculation: Cash-Carl vs. Leasing-Lisa
Let's play through a scenario that shows how this decision can play out over 4 years. We calculate conservatively and include maintenance costs as well as taxes on capital gains.
Assumptions:
- Car List Price: €50,000 (Purchase Price €45,000 thanks to 10% discount)
- Starting Capital for both: €45,000
- Leasing Rate: €400 (Factor 0.8)
- Investment: 5% Return p.a. (pre-tax)
- Duration: 36 Months
- 1.Pays €45,000 cash. Account is empty.
- 2.Pays maintenance (approx. €1,800) over the term.
- 3.Sells the car after 3 years. Residual value: approx. €25,800.
*Vehicle value minus paid maintenance costs.
- 1.Invests €45,000 (5% return).
- 2.Pays Leasing (€14,400) & Maintenance (€1,800) from capital.
- 3.Earns interest (+€6,000) and pays tax on it (-€1,600).
Result: Lisa has approx. €9,250 more wealth at the end.
Why is the difference so big?
Almost €10,000 difference is huge. The result clearly shows the power of Opportunity Costs and the risk of Depreciation:
- Depreciation: Carl's car loses real value significantly (approx. 48% in 3 years). This is the biggest cost driver when buying.
- Capital Returns: Because Lisa keeps her money, it works for her. The interest covers part of her leasing rates. Note: We assume a 5% return. This implies Lisa takes moderate risk (e.g., Stock ETFs) – returns are never guaranteed in the market.
- Leasing Offer: Lisa chose a quite decent offer (Factor 0.8). If the leasing were overpriced, her advantage would melt away.
- Capital Withdrawal: Since Lisa withdraws money monthly, her investment capital decreases. This slows down the compound interest effect – without this factor, the gap would be even wider.
Good to know: It's exactly these complex details – from taxes to monthly withdrawals – that are easily overlooked in back-of-the-napkin calculations. Carculated takes all these factors into account for you automatically.
Conclusion: Security costs Return
The calculation shows: Leasing + Investment is often mathematically superior given good conditions.
But: Buying cash offers a psychological benefit that cannot be measured in Euros – peace of mind. so the decision is yours: Do you want to maximize your wealth (Lisa) or keep your head clear (Carl)?
Note: The example above is a model calculation. Real results depend on market performance, inflation, and individual tax rates.