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theoriginalharbinger t1_j6eaxhy wrote

> Then, I figured since inflation was at 4-5% (if not more) that 2% interest was essentially free money if I managed the extra cash well.

Inflation is never the right metric to use. You want to compare two things:

  • Risk-adjusted or risk-free rate of return elsewhere. If you can get 4% with your money somewhere else and are financing 2%, you can (mathematically) come out ahead. This only applies if you have the liquidity to invest, though.

  • Probability of self-discipline working in your favor. For a lot of people, "Invest" turns into "Buy better Starbucks once a week."

Inflation doesn't matter. If you can't actually get returns on your money and if your earning power isn't going up, then you shouldn't be financing. As an example, if you can finance at 6%, inflation is 8%, and your medium-term investments are returning 4%, should you finance? The answer is no - you'll end up paying more in interest than your investments are returning.

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OkayestOfAllTime OP t1_j6ecvd0 wrote

Definitely. I didn’t take into account “inflation” as part of the math. I just figured that technically there was a bit of arbitrage between the car loan and the treasury and that influenced my decision.

Also, to get ahead of poor cash management, I made a 1:1 investment for the price of the car in t-bills. I figured that was a good, conservative guarantee of growth against the note.

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