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So, my last car payment will be made on 10/15 and I plan on keeping the car as long as I can (2014 Jeep w/ 51k miles). My car payments weren't much ($342/month) but now I will have one less expense. The way things work in our house is the mortgage/taxes/home insurance are taken from my account on the 1st and my car payment and my son's 529 plan contribution ($300) are taken out the 15th. I like having fixed expenses. My wife pays all utilities, cable, daycare and groceries. I'm 42, all credit cards are paid in full (no debt besides mortgage) and I max out my 401k.
Some things I was thinking of doing are:
1) Using the money to pay down the mortgage. I refinanced in early 2013 to a 20 year @3.25%. Have 15 years and 5 months remaining now. Using the calculators, it looks like I would knock off a little less than 2 years - don't know if that's worth it.
2) Increasing 529 plan contribution? My son is only 4, so still 14 years to go. Probably should bump it up but no idea how much ($500?)
3) Backdoor Roth IRA (although I'm not familiar with the process) - our income exceeds the limit for a Roth IRA.
4) Save up and have more ready cash. I have about 30k in a regular savings account for emergencies and such. It doesn't seem like a lot though when I just had to pay $3800 to fix our water line that burst.
Any other suggestions or ideas? I'm open to anything.
Thanks!
You have a good handle on your finances.
My default answer is to put the cash in an online savings account so you can pay cash for your next car. At some point you could start buying some CD's.
You have 30,000 in your emergency fund. That should cover at least 6 months expenses. If not build it up.
Your ROTH idea is very good. Assume you still need to save for retirement. Since you seem to know what your are doing you can use the ROTH to park some or almost all of your emergency fund or car payment.
"The money you put into (no earnings) the ROTH you can take out without a penalty. If you are using this for savings for the emergency fund or car or any other reason be sure to invest in "safe" investments and not equities. I think you have to have the ROTH account open for 5 years before you can take your contributions out. Might want to do some research as some people say you can take it out at any time and I do not recall the correct answer. After your needs for savings change you can invest the safe ROTH money in Equities.
Assume you spouce is doing as well as you in retirement savings and car needs.
So, my last car payment will be made on 10/15 and I plan on keeping the car as long as I can (2014 Jeep w/ 51k miles). My car payments weren't much ($342/month) but now I will have one less expense. The way things work in our house is the mortgage/taxes/home insurance are taken from my account on the 1st and my car payment and my son's 529 plan contribution ($300) are taken out the 15th. I like having fixed expenses. My wife pays all utilities, cable, daycare and groceries. I'm 42, all credit cards are paid in full (no debt besides mortgage) and I max out my 401k.
Some things I was thinking of doing are:
1) Using the money to pay down the mortgage. I refinanced in early 2013 to a 20 year @3.25%. Have 15 years and 5 months remaining now. Using the calculators, it looks like I would knock off a little less than 2 years - don't know if that's worth it.
2) Increasing 529 plan contribution? My son is only 4, so still 14 years to go. Probably should bump it up but no idea how much ($500?)
3) Backdoor Roth IRA (although I'm not familiar with the process) - our income exceeds the limit for a Roth IRA.
4) Save up and have more ready cash. I have about 30k in a regular savings account for emergencies and such. It doesn't seem like a lot though when I just had to pay $3800 to fix our water line that burst.
Any other suggestions or ideas? I'm open to anything.
Thanks!
I would have that exact amount deducted from my paycheck. Not sure if you have an HDHP + HSA or not but it is a shoe in. You can invest in CDs getting at least 1%. Sure it's not what they say you'd get from a 401k investment like Vanguard but the world is becoming more uncertain. Bank accounts are ensured by the FDIC and you can use the $$ tax free for any health related expenses.
That is what I would do. Again, 401k's even pensions are becoming more unstable than ever. A bank account is still close to a guarantee.
The reason a college fund makes no sense to me is that you have no idea whether you child will even attend college. And at the time, they may be able to qualify for funding because they are already married. Or maybe they just want to be an accountant, why bother to invest in a specific future for your child when you aren't certain your child is even going that direction. Good luck to you.
I would have that exact amount deducted from my paycheck. Not sure if you have an HDHP + HSA or not but it is a shoe in. You can invest in CDs getting at least 1%. Sure it's not what they say you'd get from a 401k investment like Vanguard but the world is becoming more uncertain. Bank accounts are ensured by the FDIC and you can use the $$ tax free for any health related expenses.
That is what I would do. Again, 401k's even pensions are becoming more unstable than ever. A bank account is still close to a guarantee.
The reason a college fund makes no sense to me is that you have no idea whether you child will even attend college. And at the time, they may be able to qualify for funding because they are already married. Or maybe they just want to be an accountant, why bother to invest in a specific future for your child when you aren't certain your child is even going that direction. Good luck to you.
My son went to the local Community College and was done. He'd been telling me for years that he (mostly) hated school, and didn't want to continue.
I've had a couple of reasonable car loans. I'd only pay down a mortgage if I were really far ahead of the game. Stuff happens and sometimes you need large amounts of cash--or you have to get a loan.
Paying cash is an astoundingly dumb financial decision. Not sure why this topic keeps coming up and some people just don't get it. Please explain why, in a world where 0% or even 1 or 2% financing is widely available, you would take money out of an investment to pay cash?
A: Because people tend to spend more when they borrow money, even at 0% interest.
I understand the psychological aspects of having no payments - I struggle with forcing myself to not pay off low interest loans - but the fact remains that pulling money out of an investment that is earning more interest than the interest rate of a loan is demonstrably stupid. It's called leveraging other people's money. The math is really easy. Work it out some time and you'll realize how irrational you're being.
Just as investments go up, they can also go down. Sure, investing in the long term, the investment should go up, but a car loan with those rates are usually around 4 or 5 years. If you are in a bear market during those years, it was a stupid decision. Secondly, As mysticaltyger pointed out, you are more likely to spend less on the car as you will feel more pain when you part with the cash.
Keep putting that same amount every month into a savings account until you have enough accumulated to buy your next car for cash. Never pay interest on a depreciating asset.
If you can get a car loan for 1.5-2% then it's really not a big deal, especially if you put a decent amount down and/or shorten the term down from the typical 5-6 years. I'd rather do something that will get me more for my money - either investing toward retirement or paying down some other loan with a higher interest rate.
The fact that the asset is depreciating has absolutely nothing to do with whether it should be financed or not.
Enlighten me. Explain like I'm five. And don't forget to account for the interest I've been accumulating on the money I've been saving for about 10 years so I can pay cash for the car.
I understand the psychological aspects of having no payments - I struggle with forcing myself to not pay off low interest loans - but the fact remains that pulling money out of an investment that is earning more interest than the interest rate of a loan is demonstrably stupid. It's called leveraging other people's money. The math is really easy. Work it out some time and you'll realize how irrational you're being.
Because the amount of people who qualified for a 0-2% car loan are simply few and far between. And most 0% loans are manufacturer backed and don't give you the discounts/rebates you would otherwise get. It's the 0% or xyz discounts not both.
While I may not be a loan guy, I have recently screened well over 120 applicants for rentals. With the exception of about 10 most had credit ranging between 550 and 650. I guarantee you not one of those people would qualify for a 0-2% loan. More like 12-17%. Those people could benefit from buying cash rather than being in debt.
And you don't buy a new car anyway. You buy a three year old car just off a lease. And either
Keep it for three years and resell it
Or
Drive it till it dies and save for the next one
The problem with leveraging other people's money is when you lose your job or run into financial issues like you just bad sick or you had major surgery you better have the reserves to power through. Most don't. But it sounds good to leverage other people's money.
My investments are investments. I don't use those returns or accounts to buy my cars. I have a specific account designed for car purchases and only for car purchases. Every 10 years we look at the need to buy a car. If I don't need a new car I don't buy a new car. Right now my wife's car is getting to the magical mileage I usually start looking. I dont buy on a whim, but we're starting to look. Last time it took a year to decide on what to buy. Some think it's along time but I don't care what others think.
I have great credit so I easily qualify for a 0-2% loan. I may buy on loan (if it's immensely financially beneficial ) but not always. It really depends. I'm not irrational and a car purchase depends on what I'm getting out of it. ive bought on loan before. I'm not afraid to buy on loan but I don't overvextend. And worse comes to worse I have the money to pay it off.
Some people have the money to buy cash without touching other finances. Just because you or I think it's irrational it doesn't mean crap. What works for you or me doesn't work for everybody.
Last edited by Electrician4you; 09-24-2017 at 11:49 AM..
Wanted to add something.
My wife's car we bought used. 8k and put 2k in it on tires, fluid changes, a squeaking pulley, and a 4x4 actuating motor. That was $900 bucks. The actuating motor was just for the 4x4 light n the dash. I'm OCD about warning lights. Guy wanted 11k for it. Nothing bad wrong with the car, I just told him here is what I'm willing to pay for it in its current condition. About 25,000 mikes added. My cost of ownership was about 420 bucks a month as is currently calculated over time of ownership. But I can still today sell that car for 8k. So my cost to own drops to about 80 bucks a month over time of ownership. Let's say I only get 6k for it. That's a steal but let's say that. My cost to to own is still only $160 a month. And it's not a pos econobox. The depreciation is very minimal now so I can recoup a lot of my initial costs.
Sure I took a chance buying used. But I looked at the records, the shape of the car, maintenance and so far it works. So for the price of a buy in on a lease or a partial down I'm driving a car for a very minimal price.
Everybody has their own way of doing things
Paying cash is an astoundingly dumb financial decision. Not sure why this topic keeps coming up and some people just don't get it. Please explain why, in a world where 0% or even 1 or 2% financing is widely available, you would take money out of an investment to pay cash?
Because it's such a small part of my income and will have no effect on my investments.
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