Ways to pay for flight training?

[Econ]

my point is flawed? if someone is debt free and plans to remain that way a reasonable person would assume that he has the money to pay for what ever he is about to purchase, short of stealing this car, that would be the only other way to get it and remain debt free. or am i missing the fourth option - you let me know?

You're missing quite a bit. Why exactly would a reasonable person "assume that a debt free person has the money to pay for whatever he is about to purchase?" Do you think this high school student we're talking about is debt free? I suspect he is but if your assumption were correct we wouldn't even be having this discussion. He would already have a large portion of that needed for flight training.

rather than cloud this "discussion" with the effects of captial gains taxes, lets assume that most people would rather there be a chance of getting a return on their money that losing the 14,000 or 15,000 right off the bat like you seem to suggest by not investing. that would be one hell of a capital gains tax.

Yes, let's not cloud the discussion with relevant facts which refute your position - which facts you clearly don't understand. I did not say or imply that a person would lose $14,000 to $15,000 dollars. I clearly said that the purchase of the vehicle would provide value in whatever form. That, my economically challenged friend is not a loss.

The point concerning the capital gains tax is relevant. If a person invests $20,000 and finances a vehicle the relevant issue is the difference between interest earned on the investment and interest paid on the financing. Because interest on capital investments are generally taxable at 20% that effectively decreases any savings the person may have. If the person is risk averse (such as a retired person who can not afford to lose any of his principle) investing funds in an instrument that would provide a return high enough to offset the interest paid on the auto financing would not be readily attainable in this market if at all. Hopefully, you can see that these issues are relevant to "us regular stiffs."

and his form of investment of his 20,000.00 is a CD at his local bank. High risk stuff there! he will still do better than if he spends stupidly pays cash for the car. his compounded interest even at a significantly lower rate than his loan rate will pay him more interest than he will pay on his loan.

I wonder if you think this response is intelligent? Donalds Trump is not the only person who pays capital gains taxes. If you invest and have positive returns you will also pay capital gains taxes.

CDs are currently getting no better than approximately 3% at the very best. An auto loan for a person with reasonably good credit at a credit union ranges from 4.5% to to 6%. When you add the tax effect to the 3% returns on the CD you're returns are even less than the interest rate on your auto loan. The simple fact is, assuming a $20,000 auto loan and a $20,000 investment, is that you are losing money even when you consider the time value of money (compounding).

You said to run the numbers. Here they are:

Total interest paid on an auto loan over 5 years = $2,6445.48 at 5% interest.

Total interest earned on a 2.5% CD, net of tax, over the same 5 year period = $2,170.01.

Hmmmm. Are you starting to get it? Financing the vehicle and investing the funds in the CD has in effect cost $475.47. If the person had simply paid cash for the car, he would have paid no interest at all. The CD interest did not completely off-set the loan interest which does mean a loss.

a person who thinks that they are as intelligent as you obviously do - must know how significant compounding interst is?

Impressive mind-reading!!

you do not need, nor will you ever get a higher pecentage rate on your savings than you will get on your loan. this would collapse our banking system.

And how exactly is relevant to our discussion?

the only person who is talking about a high risk investments.

Huh?

in my eyes, a high risk investment is still better than lighting 14 or 15 thousand dollars on fire - which is what you are doing if you plop it sown on an automobile.

You're still missing the point. Purchasing an automobile which provides utility (economic term for usefulness - don't want to let your beliefs concerning my intelligence waver) which means you're not "lighting" money on fire. You are receiving value for value. Perhaps you've not been wise in your automobile purchases and have received less than given. Even so, a purchase is an exchange of values.

you will certainly turn that 20,000.00 into 5 or 6,000. this is your advise for this person.

No, you turn the $20,000 into a vehicle which provides utility or value for 5 years. You also have the remaing value of the vehicle.

maybe at 17 years old he can save the money for flight training. how old will he be when he finally has the money? way older than he needs to be.

Well, we agree on this one. If he is unable to pay for flight training with current resources or if he is unable to earn the funds then I am all for financing.

talking a loan also gives him some protection from inflation - there has been some of that in aviation in case you haven't noticed.

Yep. It also exposes him to market risk. That is the risk that the cost of his financing will decrease over time and that he will be paying more for his money than another. Just in case you haven't noticed, money today is much cheaper than it was 2 years ago.

as far as guarentees of his 20,000, my friend there are few if any guarentees in life - you must know this. there are some though, and this is not a comprehensive list ...

That was a very nice list. I don't see its relevance but thanks all the same! Oh, by the way, you do remember that the person we're speaking of doesn't have $20,000, don't you?

your responce to my statement may seem intellegent at first glance but all of the "points" that you make are made totally out of context. each is true in some situation, unfortunately not in this one.

I'm glad to see that you think I'm intelligent!! I think I've demonstrated how my points are relevant. I've "run the numbers" as you sugested. Perhaps you would care to respond to each of my points and demonstrate how they are not relevant? That will be interesting indeed.

 

[TXCAP4228]

A little math...

A "CD" Type time deposit for 60 months with monthly compounding and an initial principal value (present value) of $10,000 will yield a total of $2,838.59 in interest at a 5% SIMPLE INTEREST RATE.

A Loan for $10,000 repaid over 60 months with an APR of 10% will accrue $2,748.22 in interest.

Bottom line:

If you put your money into the bank, even at a lower rate of interest, you will earn more interest than you would PAY OUT IN INTEREST for a loan with similar attributes. Notice too that the loan in my example has twice the interest accrual rate of the CD.

Interesting.

 

[Vardog]

Got Me!

I didn't realize until now that you were purposely distorting this. I believed that you were serious - GOOD JOB. I bow to your superior humor. I just didn't see it until your last posting. Clever is as Clever does. You are the master!

 

[RFtech]

Vardog,

The example you give about the vehicle is interesting, but I have to side with Econ.

Anyway, my Company provides me with a vehicle, so I guess it’s a moot point.

 

[Vardog]

siding with econ

he did use a lot more important sounding words didn't he? he was just kidding though-don't you see it. his math used totally bogus numbers. remember this isn't about our student buying a car, rather it is about whether or not he should finance his training. Good job on the company car!!!!!

 

[Econ]

TXCAP4228,

Your calculations are incorrect. Using yor scenario the interest paid on the car over the 5 years totals $2,748.34. Interest earned on the CD (compounded monthly and adjusted for the capital gains tax totals $2,289.92 for a difference of $458.31 This means that using your numbers, the person who finances the car and invests in a CD will lose $458.31. If you think my calculations are incorrect put together a simple amortization schedule in a spreadsheet. Or, give me your e-mail and I'll send you mine.

 

[Econ]

Vardog,

My calculations were serious and accurate. I'm not distorting anythiing. As I stated, the interest earned on the $20,000 investment in a CD was adjusted for the 20% capital gains taxes to be paid on that interest at the end of each year. When you reduce the total accrued principle and interest by the amount of taxes to be paid at the end of each year an investment in the CD loses you money in the situation we are discussing.

You can not avoid the capital gains taxes unless you have other passive investment losses. You will pay a capital gains tax so it becomes very relevant in situations such as this.

If you disagree with my calculations I'd really be interested in knowing where and why you disagree.

 

[Vardog]

I'll bite

you are absolutely correct. this capital gains tax thing makes me want to pull all of my money out of interest baring accounts and put it in my driveway to get rained on.

 

[Econ]

Vardog,

I didn't think you would actually come up with a response. First you refer to somebody else as a moron and then run when your opinions are challenged. Yes, finance is not your forte. You should stick to flying.

 

[Vardog]

what you just wrote is not a responce

you have single handedly taken the simple subject of financing flight training and turned it into a forum in which you can spout your 'knowlege.' by misunderstanding the purpose of this dialogue, and taking things that were said out of context, you have muddied the waters for some 17 year old kid who is not trying to buy a car - though that was a valid example of finance vs. paying cash. you can study this and fill it with your vast knowledge of capital gains taxes and it will not change my mind one bit. capital gain tax or not, there is no good reason to put hard cash into something that depreciates in value. it is financially stupid. it is turning, in our example, 20,000.00 into 5,000.00. it has been difficult to have this dialogue with you because you pretend not to see this. that is why i assumed that you were just kidding. Sorry to make that assumption.

 

[Econ]

Vardog,

I can't resist!

you have single handedly taken the simple subject of financing flight training and turned it into a forum in which you can spout your 'knowlege.' by misunderstanding the purpose of this dialogue, and taking things that were said out of context, you have muddied the waters for some 17 year old kid who is not trying to buy a car - though that was a valid example of finance vs. paying cash.

I simply took your example and demonstrated how your assumptions were incorrect by "running the numbers as you suggested. This is muddying the waters?

you can study this and fill it with your vast knowledge of capital gains taxes and it will not change my mind one bit. capital gain tax or not, there is no good reason to put hard cash into something that depreciates in value. it is financially stupid.

Vast knowledge? I didn't realize that knowing that capital gains are taxed at 20% was a vast knowledge but ok.

it is turning, in our example, 20,000.00 into 5,000.00. it has been difficult to have this dialogue with you because you pretend not to see this. that is why i assumed that you were just kidding. Sorry to make that assumption.

I actually see what you are trying to say. Automobiles certainly do depreciate and are a terrible investment. So what? Financing a vehicle does not keep it from depreciating. It still decreases in value. The matter at issue here is cash flows. Using your example, the person financing and investing $20,000 would be better off paying the $20,000 for the car because that way he avoids the interest which is not offset by the interest earned on the investment.

 

[TXCAP4228]

Capital gains...

TXCAP4228,

Your calculations are incorrect. Using yor scenario the interest paid on the car over the 5 years totals $2,748.34. Interest earned on the CD (compounded monthly and adjusted for the capital gains tax totals $2,289.92 for a difference of $458.31 This means that using your numbers, the person who finances the car and invests in a CD will lose $458.31. If you think my calculations are incorrect put together a simple amortization schedule in a spreadsheet. Or, give me your e-mail and I'll send you mine.

Econ, I was indeed ignoring the effects of capital gains taxes. The numbers based purely on interest earned vs. interest paid were my point. In any case I didn't used a spreadsheet, I used my trusty HP17B(2).

I would suggest that this conversation has devolved to the point where the details of the financing are somewhat moot (and not necessarily comprehensible to anybody not in the business).

Do any of us really disagree with the premise that a 17 year old really has no business going in to debt to pay for flight training?

My suggestion is get a part time job - or use that tried and true source: Mom and Dad.

 

[Vardog]

JP

we are not trying to keep the automobile from depreciating. we are trying to keep from throwing away our money. I'm going to run away now as i have a life that seems to have paid me well inspite of my foolish notions of money and how the world works. maybe we'll pick this up some other time.

as for your advice on my flying career. my ratings are the spoils of my foolish financing methods and i dont give a ... what you think i should stick too.

 

[Econ]

TXCAP4228,

Yep, I couldn't agree more. If this young man is still in high school then going into debt is probably not a great idea. I think he ought to work and save as much as he can while in high school so if he ever does have to finance he won't have to finance as much. My student loans were a painful thorn in my side until I got them paid off. I wish I'd been smart as a kid and saved the money I made.

Kevin

 

[Econ]

See ya Vardog!!