A few months ago, I mentioned to my friends that I was in the market for a new car, and it started a heated debate. Not about what type of car I would get, but about whether I should lease or buy. It turns out this is a passionate topic!
Over the years, I’ve leased, purchased, financed, rented, traded and borrowed cars, houses, equipment, software and plenty of other assets. There is no right answer, but your decision should depend on a few important questions:
How long do you intend to use this for?
Renting or leasing is often a good short term strategy, but at some point you’ll end up spending way above the purchase price. Purchasing is a great option if you intend to use an asset long after you’re done paying for it. So, do a little math to see where the equation works in your favor.
How quickly will the asset depreciate?
A new car depreciates as soon as you drive it off the lot. But, some electronics can retain 95% of their value after a few months of use, making a quick purchase and resell far cheaper than renting.
Is it a good use of cash?
0% financing, when available, can make much more sense than purchasing something in full, because it frees up your cash for investing in something that will make money for you. Think about what else your cash can do for you before spending it all on something that just sits there.
How will the purchase impact your cash-flow?
Leases and financing agreements help spread the cost of something over the lifetime of its use, which can be great for regulating cash-flow. If this new purchase is a cost that should be tied to the income that it produces for you, leasing or financing might be a good way to match everything up.
Can this asset make you money?
I never hesitate to spend money on something that is going to make me or save me more than I’m spending. For instance, many people buy income properties that rent for more than a mortgage costs them. Or, businesses often purchase new equipment because it will save significant time or output significantly more product.
Of course, some things don’t make you money, aren’t the best use of cash, and are completely unnecessary expenses… but they sure are fun to drive. Just make sure you can afford them!