Don’t Let Bad Loans Uproot Your Family’s Financial Legacy
When considering taking on debt, it's essential to understand that there are two distinct types: good debt and bad debt. Good debt puts money into your pocket, while bad debt takes money out. Bad debt involves promising to repay the borrowed amount with your future earnings or another way put is it is your future energy already spent. For example, if you earn $100,000 annually as an employee and take out a $30,000 car loan, you're committing a portion of your future income (or energy) to pay off that debt over time.
Let's examine the consequences of this decision and explore how to make a bad debt purchase more strategically. As an employee you pay 40% in taxes overall (per Tom Wheelwright, CPA). If you are making $100,000 a year this leaves you with $60,000 after taxes. To understand this physically, 40% of a year is you working from January 1st to May 26th just to cover your tax obligations. That’s nearly half a year gone before you even begin to pay for your lifestyle.
Now, consider the car payment on that $30,000 loan. With an average interest rate of 8.16% according to FRED (as you can see here) over a 72-month (6-year) term, your monthly payment would be approximately $530 (assuming you pay sales tax, title, registration, and fees in cash).
This equates to $6,360 annually, or just over 10% of your $60,000 net income ($5,000 monthly). In terms of time, this adds another month and a week to your yearly work commitment. For the next 6 years, you'll be working from January 1st to July 2nd solely to pay for your taxes and car. This is what we mean when we talk about future energy spent. You are committing over a month of your time for the next 6 years to pay for your car.
What's more, after 6 years, the average car depreciates by 60% of its value. Your $30,000 vehicle, for which you paid a total of $38,000 (including interest), is now worth just $12,000, resulting in a net loss of $26,000 – nearly half your annual salary.
So, what's the alternative? This is where the rich separate themselves from the poor. The wealthy make their money work for them. The poor often trade future income for temporary gratification. As an employee, consider buying a used "beater" car or keep the one you are driving now and saving your money for 6 years. Instead of a $530 monthly car payment, invest that amount in an account. For this example, we will use a conservative 6% growth rate, and starting with $2,200 as the initial investment as it would have gone to your taxes, registration, and fees in New Jersey.
After 6 years, you'll have roughly $49,000 in which you can use $32,200 of your $38,000 contributions tax free to purchase a car in cash, plus have an additional $16,800 left in the account to continue growing (including $6,000 in tax-free contributions). By delaying your purchase and paying cash, you'll have earned in interest an extra $8,500 over that period.
Now, assume that after another 6 years, you want to buy another new $30,000 car. Continue investing the $530 monthly "car payment" during that time period. Your account, starting with $16,800 (the remaining balance after the first car purchase), will grow to nearly $70,000 in 6 years.
As you can see, now over the next 6 years while driving our shinny new car, we now have close to $70,000 in our account by investing our “car payment”. At this point, you can withdraw another $32,200 to buy a second car (potentially upgrading to a more luxurious model) and trade in your first car for $12,000 (assuming 60% depreciation). This leaves you with a $20,200 out-of-pocket cost for the new $32,200 vehicle and approximately $50,000 remaining in your account ($20,000 of which is tax-free).
Over 24 Years, Here’s the Final Tally:
After 6 Years: Investing $530/month at 6% growth, starting with $2,200, your account grows to $49,000. You can withdraw $32,200 to buy a car in cash, leaving $16,800 in the account to continue growing. Plus, you’ve earned an extra $8,500 in interest over this period.
After 12 Years: Continue investing $530/month. Starting with the remaining $16,800, your account grows to $70,000. Trade in your first car for $12,000 (assuming 60% depreciation), leaving a $20,200 out-of-pocket cost for the new car. You’ll still have $50,000 in your account, of which $20,000 is tax-free principal (your contributions).
After 24 Years: Over two more 6-year cycles, continuing the same strategy, you’ll have bought three new cars total in cash and have $96,000 in your account, with $37,800 as tax-free principal.
Compare this to financing:
Assuming you are trading in your car each time, investing the difference of loan payment in an account, using the principle each time with your trade in to get your new car:
Financing Approach (24 Years): Financing a new $30,000 car every 6 years, you’d buy four cars, and would be left with $25,800 ($16,800 tax-free principle).
Total Cost Difference: The cash strategy makes you approx. $70,000 over 24 years—money that can you can use for unexpected events, fund your children’s education or build a legacy that lasts for generations to come!
Conclusion:
Our strategy:
Three new cars bought with cash.
You end up with $96,000 in your account.
Of that, $37,800 is principal and can be withdrawn tax-free.
Financing approach:
Three new cars financed (fourth you would pay cash).
You end up with $25,800 in your account.
$16,800 of that is principal and can be withdrawn tax-free.
Total cost difference: Approx. $70,000– the true value of that "beater" car!
When to finance a car as an employee: If your debt is generating income, it’s good debt. Let’s say you finance a $30,000 car and rent it out, earning $1,200/month. After paying your $530 loan payment, you’re left with $670 in net income. Now the car is an asset—it puts money in your pocket. That’s good debt. And now, with that extra income, you could afford a second vehicle—or reinvest to build more wealth. Keep in mind, this would now be a business, in which tax laws would apply differently then being a standard employee.
It’s not about never spending money—it’s about using your money wisely. Delay gratification, let your savings grow, and make strategic purchases that align with your long-term goals. The car you drive today shouldn’t cost you your financial freedom tomorrow. By delaying gratification, letting your savings grow, and making strategic purchases, you can turn a potential $38,000 car loan into $96,000. At Eagle Legacy Planning, we’re here to help your family make these smart financial decisions. Book a meeting today to start building a financial legacy that doesn’t just survive—it thrives—for generations to come.