mid term investing for auto purchase

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mickeymag
Posts: 27
Joined: Sat Jan 05, 2013 9:29 am

mid term investing for auto purchase

Post by mickeymag »

This question concerns saving for a car purchase in 5-10 years, where 10 years is much more likely than 5 years.

I’ve got about 15K currently languishing in a low interest bank account. In addition, I save about $3600 a year additional for a new car down the road, so I would be adding to this 15K each year.

I’d like some feedback on my current thinking, but I should preface it with the observation that I am very green at all this, so my goal is to come up with a plan for this money that is simple enough that I can implement it THIS WEEK. Which is to say that I’d like feedback on my proposed plan, rather than a better but more complex plan that will daunt me back into inaction, if you know what I mean.

Roughly speaking, my plan is to contact Vanguard to set up an account and then establish split the money between 2 or 4 no load, no in/out fees indexed funds. Further, my plan would be to start with an aggressive mix of 80% or higher equities and then gradually lower that as the 10 year expected use date approached.

Does this sound crazy? Is this plan so bad that I should hold off 3-6 months until I can spend more time putting together a better plan?

Please keep in mind that I am so green that even the slightest changes to this proposal would need to be spelled out with startling clarity and lack of jargon, ha, ha. Thanks.

(By the way, I have substantial retirement savings that are on track to meet my retirement needs. The above experiment might prove as a model for me to take more control of some of those retirement savings.)
NHRATA01
Posts: 654
Joined: Sat Oct 22, 2011 1:57 pm
Location: New York City area

Re: mid term investing for auto purchase

Post by NHRATA01 »

I don't think that's a bad idea at all, it's pretty close to what I do. I started off with a 5K lump sum in VFINX (the vanguard 500 index) in mid '11 and added 300 every month. The logic being to take what is a typical monthly car/lease payment and invest it with the goal to build up enough for a car purchase after several years. In addition to gaining investment returns from it, you then save the cost of interest on a typical 5 year car note.

Your strategy is probably a little better thought than mine with regard to ramping down the risk as the years get closer. The only point of advice I'd say there is be sure to pick a fairly tax efficient fund when you start moving to bonds - municipals are probably a good bet since you don't owe federal (and in some cases not state) taxes on the interest payments you collect.
MN Finance
Posts: 1926
Joined: Sat Dec 22, 2012 9:46 am

Re: mid term investing for auto purchase

Post by MN Finance »

Imo, you don't "invest" money for a car. You save for it. When we were younger we used to earmark savings accounts for "transportation" "housing" "vacation" etc. That act of saving determines success or failure, not the investment vehicle. It seems wildly unnecessary to build an investment plan that slowly glides from aggressive to conservative for a small goal like a car. It's going to be a flip of the coin whether you come out ahead saving vs investing. And when it comes time to spend the money, a bird in the hand... . And while I applaud the foresight, seems like nearly anyone would have done significant transportation costs sooner than 10 yrs out.
sport
Posts: 12084
Joined: Tue Feb 27, 2007 2:26 pm
Location: Cleveland, OH

Re: mid term investing for auto purchase

Post by sport »

I suggest that you can plan the time for an auto purchase all you wish. However, there is always the possibility that you may need to buy one sooner. What if your present car is stolen? What if it is wrecked? In these events, insurance will reimburse you for the value of your old car (perhaps minus the deductible if it is your insurance that is paying). Then you will need to find another car. Will you want to buy a used one? If you want to buy a new or newer one, your "car fund" will need to provide the difference. Accordingly, if this applies to you, you would want to keep the money more liquid.
Jeff
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