Another payoff Loan or Invest question

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jbsmith05
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Joined: Fri Apr 01, 2016 2:01 pm

Another payoff Loan or Invest question

Post by jbsmith05 » Thu May 03, 2018 9:28 am

Just got a new car, financed 24K @2.94% for 72, paying $500 per month ($100-$150 over min).

I may be coming into a windfall that could pay off the car or at least the majority of it. Do I keep making my $500 payments, or invest??

Current situation,

Mid 30's age
I max my 401k and Roth for me and wife (wife not eligible for 401k)
100K in taxable brokerage(s), low fee index funds
$133 in T-IRA (no contri's)
$62K in my Roth (maxed)
$16K in wife Roth (maxed)
$40K in 401k (maxed)
$2K each in 2 529s (I opt more on the brokerage route for college savings, I don't like the potential restrictions of 529s - I do it now for tax purposes only)

No debt other than the new car and house.
I don't have a dedicated emergency fund - but have been contemplating it...

My thought is that the car interest rate is lower than what I may expect returns over 6 years so I would invest instead of paying off the car. Of course I may end up not earning more than 3% too.

30inMaryland
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Re: Another payoff Loan or Invest question

Post by 30inMaryland » Thu May 03, 2018 9:42 am

I would recommend setting aside at least $10K if not significantly more (depending on your job security) for an emergency fund in high-yield savings/CDs/money markets, although some find them unnecessary. Using any leftover to pay off the car loan is reasonable, in my view.

jbsmith05
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Re: Another payoff Loan or Invest question

Post by jbsmith05 » Thu May 03, 2018 9:53 am

30inMaryland wrote:
Thu May 03, 2018 9:42 am
I would recommend setting aside at least $10K if not significantly more (depending on your job security) for an emergency fund in high-yield savings/CDs/money markets, although some find them unnecessary. Using any leftover to pay off the car loan is reasonable, in my view.
I've been going back and forth on the emergency fund. That's what I was considering doing with this windfall instead of paying off the car because I think I can make more money in the long run....but I'm more risky and long than most and I'd probably put it in an index fund(s) rather than some savings account getting 1.5. Maybe put 5k in the savings for immediate emergencies...but then I say, I have credit cards (again all with no balance) that I could use for a true emergency to cover the float until the funds settle from a sale & transfer.

CoAndy
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Re: Another payoff Loan or Invest question

Post by CoAndy » Thu May 03, 2018 10:06 am

Without knowing the size of your windfall, saving half of it in an Emergency Fund and sending the other half to the car might be a good idea.

jbsmith05
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Re: Another payoff Loan or Invest question

Post by jbsmith05 » Thu May 03, 2018 10:07 am

CoAndy wrote:
Thu May 03, 2018 10:06 am
Without knowing the size of your windfall, saving half of it in an Emergency Fund and sending the other half to the car might be a good idea.
I'm not exactly sure yet, but 20-40K.

Am I the only one thinking I could end up ahead by not sending any to the car given it's low rate?

chevca
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Re: Another payoff Loan or Invest question

Post by chevca » Thu May 03, 2018 10:20 am

You could end up ahead, or you could end up behind. I'd compare the rate to a 5 year CD to keep things fair.

I also look at a car loan different than a mortgage this way. If your mortgage rate were 2.94%, I'd be inclined to say don't pay it off. But, a car loan of 2.94% over a short time frame and on a depreciating asset... I say pay that off and free up the monthly cash flow. IMO

Nate79
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Re: Another payoff Loan or Invest question

Post by Nate79 » Thu May 03, 2018 10:23 am

Overall, yes I would take the windfall and pay off the loan. There is no guarantee that investments will outperform the rate on the loan over the loan payment period. A guaranteed return of 2.94% is pretty good but even better I can tell you being debt free except your home feels really good.

No one knows until after the fact whether investing or paying off the loan will have been the best choice from a financial standpoint.

mortfree
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Re: Another payoff Loan or Invest question

Post by mortfree » Thu May 03, 2018 11:54 am

another idea, pay down the car loan:

to balance of $6000, and pay $500/month for 12 months (appx)
OR
to balance of $12000 and pay $500/month for 24 months (appx)

AND
Save 10k for emergency fund then Invest the rest (if any left)...

jbsmith05
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Re: Another payoff Loan or Invest question

Post by jbsmith05 » Thu May 03, 2018 12:13 pm

mortfree wrote:
Thu May 03, 2018 11:54 am
another idea, pay down the car loan:

to balance of $6000, and pay $500/month for 12 months (appx)
OR
to balance of $12000 and pay $500/month for 24 months (appx)

AND
Save 10k for emergency fund then Invest the rest (if any left)...
This is what I'm leaning toward - question though why does everyone keep saying 10k for emergency fund - seems quite low to me - at least for a family of 4. Is this assuming the spouse also has a 10k emergency fund?

mortfree
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Re: Another payoff Loan or Invest question

Post by mortfree » Thu May 03, 2018 12:17 pm

jbsmith05 wrote:
Thu May 03, 2018 12:13 pm
mortfree wrote:
Thu May 03, 2018 11:54 am
another idea, pay down the car loan:

to balance of $6000, and pay $500/month for 12 months (appx)
OR
to balance of $12000 and pay $500/month for 24 months (appx)

AND
Save 10k for emergency fund then Invest the rest (if any left)...
This is what I'm leaning toward - question though why does everyone keep saying 10k for emergency fund - seems quite low to me - at least for a family of 4. Is this assuming the spouse also has a 10k emergency fund?
I think the assumption is you currently have $0 dedicated EF. some would say 6-12 months of expenses is "better"; I have 40kish in cash savings (I don't call it EF though that is part of its purpose)

avoidingdumbmistakes
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Re: Another payoff Loan or Invest question

Post by avoidingdumbmistakes » Thu May 03, 2018 12:51 pm

mortfree wrote:
Thu May 03, 2018 12:17 pm

I think the assumption is you currently have $0 dedicated EF. some would say 6-12 months of expenses is "better"; I have 40kish in cash savings (I don't call it EF though that is part of its purpose)
I keep a fairly substantial EF but it's more than an EF for me. It's also an opportunity fund because sometimes things pop up and I have cash ready to go (I flip used cars sometimes and buying opportunities pop up at the weirdest times). Not that it's a big deal to sell something in my taxable portfolio but having a nice sized cash cushion makes me feel good and I don't feel like I'm missing out on anything. We're all unique when it comes to how much liquid cash we need and why we need it.

If I were in the OP's shoes I would pay the car off but there are pros and cons as previously posted in this thread. It would free up $500/mo for investing instantly. Cars are depreciating assets so every penny in interest is basically "investing" additional money in a asset that loses value. Also, by having the car paid off you aren't "required" to make any payments with that extra $500 (or whatever the min payment is). It's nice to have the freedom to decide whether you want to put $500 towards something each month while not being required to do anything at all.

mortfree
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Re: Another payoff Loan or Invest question

Post by mortfree » Thu May 03, 2018 8:11 pm

avoidingdumbmistakes wrote:
Thu May 03, 2018 12:51 pm

If I were in the OP's shoes I would pay the car off but there are pros and cons as previously posted in this thread. It would free up $500/mo for investing instantly.
Vanguard mutual funds have a buy-in of $3,000 or more. If OP doesn't have a mutual fund already that they want to add to, then it would take about 6 months @ 500/month to get the minimum required amount (subtle point)...

Now, if OP invests in ETFs, then the minimum amount would be whatever 1 share is worth (VTI is around $136 or so)...

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Quantum
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Re: Another payoff Loan or Invest question

Post by Quantum » Thu May 03, 2018 8:25 pm

Dave Ramsey Style:
0. Stop retirement deposits (401k etc) and get on a tight budget
1. Save $1000 into an emergency fund
2. Throw all extra money, including bonuses and windfalls into your debt, smallest to largest. (Your car)
3. Save a 3-6 month of expenses e-fund.
4. Restart retirement investments.
5. Save for kids college
6. Pay off house
7. Become wealthy

In your case, with the minimum windfall of $20k you could be done with BS3 in less than 4 months depending on your income and expenses.
In the best case windfall you could be done with BS3 a day after the windfall hits your bank.

The returns you will get investing that windfall into an index fund might be worth it, but more than likely freeing up the cash from the min payments and having the peace of mind of getting rid of debt would be more worth it.

You can also sell the car, pay the underwater difference out of your windfall, and buy a nice used car for around $6k and end up with a sizeable lump sum to invest.
“The advantage always favors the one who is trying to create fear, over the one who is trying to erase it.” | Howard R. Hughes JR.

aerosurfer
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Re: Another payoff Loan or Invest question

Post by aerosurfer » Fri May 04, 2018 7:04 am

Quantum wrote:
Thu May 03, 2018 8:25 pm
Dave Ramsey Style:
0. Stop retirement deposits (401k etc) and get on a tight budget
1. Save $1000 into an emergency fund
2. Throw all extra money, including bonuses and windfalls into your debt, smallest to largest. (Your car)
3. Save a 3-6 month of expenses e-fund.
4. Restart retirement investments.
5. Save for kids college
6. Pay off house
7. Become wealthy

In your case, with the minimum windfall of $20k you could be done with BS3 in less than 4 months depending on your income and expenses.
In the best case windfall you could be done with BS3 a day after the windfall hits your bank.

The returns you will get investing that windfall into an index fund might be worth it, but more than likely freeing up the cash from the min payments and having the peace of mind of getting rid of debt would be more worth it.

You can also sell the car, pay the underwater difference out of your windfall, and buy a nice used car for around $6k and end up with a sizeable lump sum to invest.

The OP has 100k in taxable and 78k in Roth funds. Just because he doesnt have a dedicated EF doesnt mean he has no money.

The DR program works, however its one size fits all approach doesnt make as much sense for those with money and the knowledge of how to use it. Plus not everyone needs to drive a 6k car.

Im not a fan of a 72month loan, especially since its not a zero (or near zero) interest rate. Either use the windfall to pay down or plan to make payments of less than 36 months

deltaneutral83
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Re: Another payoff Loan or Invest question

Post by deltaneutral83 » Fri May 04, 2018 8:22 am

aerosurfer wrote:
Fri May 04, 2018 7:04 am

Im not a fan of a 72month loan, especially since its not a zero (or near zero) interest rate. Either use the windfall to pay down or plan to make payments of less than 36 months
Agreed, while there are a number of approaches here on BH, I think the vast majority would run from a 2.94% loan on a vehicle (depreciating asset).

soccerrules
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Re: Another payoff Loan or Invest question

Post by soccerrules » Fri May 04, 2018 8:36 am

dogpile!
I would split windfall 50% to EF and 50% to car loan.
I just took money out of my taxable to pay off a lowish car loan. Maybe the market provides a better return-- it hasn't over the last several months.

BUT paying off the loan did the following
1) Freed up $500/mo in cash flow - flexibility to invest, add to mortgage payoff, cash flow college expenses
2) Peace of mine THAT debt was gone (I have 4 cars $0 car debt)

I'm in my early 50's and eyeing FIRE in 7-8 years, so getting rid of debt is important to me. When I was in my 30's I wasn't that concerned about a car loan and mortgage.
Don't let your outflow exceed your income or your upkeep will be your downfall.

jbsmith05
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Re: Another payoff Loan or Invest question

Post by jbsmith05 » Fri May 04, 2018 9:46 am

aerosurfer wrote:
Fri May 04, 2018 7:04 am

Im not a fan of a 72month loan, especially since its not a zero (or near zero) interest rate. Either use the windfall to pay down or plan to make payments of less than 36 months
I only do 72m to give me wiggle room. It's on track to be paid in 40ish months based on the amount I pay extra each month.

jbsmith05
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Re: Another payoff Loan or Invest question

Post by jbsmith05 » Fri May 04, 2018 9:52 am

deltaneutral83 wrote:
Fri May 04, 2018 8:22 am
Agreed, while there are a number of approaches here on BH, I think the vast majority would run from a 2.94% loan on a vehicle (depreciating asset).
Because 2.94% is high for a car loan or just because it's a loan on a depreciating asset?

Full disclosure - I'll keep it well beyond when it's fully depreciated - most people don't do that. I'm not one that gets a new car every 3 - 5 years. So barring an accident or some other catastrophe I'll own this car until it costs more to maintain it than its worth. Historically the cars I've had have all lasted more than 10 years - I'm religious about preventative maintenance - which is really just oil changes on a regular interval.

chevca
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Re: Another payoff Loan or Invest question

Post by chevca » Fri May 04, 2018 10:45 am

jbsmith05 wrote:
Fri May 04, 2018 9:52 am
deltaneutral83 wrote:
Fri May 04, 2018 8:22 am
Agreed, while there are a number of approaches here on BH, I think the vast majority would run from a 2.94% loan on a vehicle (depreciating asset).
Because 2.94% is high for a car loan or just because it's a loan on a depreciating asset?
Yes. :happy

Especially if you're paying it down aggressively anyways. There's really no point to keeping this loan around. Pay it off and be done with it. Then keep the car for a long time with no payments.

deltaneutral83
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Re: Another payoff Loan or Invest question

Post by deltaneutral83 » Fri May 04, 2018 11:00 am

jbsmith05 wrote:
Fri May 04, 2018 9:52 am
deltaneutral83 wrote:
Fri May 04, 2018 8:22 am
Agreed, while there are a number of approaches here on BH, I think the vast majority would run from a 2.94% loan on a vehicle (depreciating asset).
Because 2.94% is high for a car loan or just because it's a loan on a depreciating asset?

Both. I'm not financing anything that goes down in value unless there is an extenuating circumstance I can massively arbitrage. 2.94% on a vehicle isn't anywhere close to the exception for my preferences. You'll see plenty of 0% financing where people gobble that up too from time to time, but that usually comes with full MSRP. But, BH are great at finding purchases to arbitrage and make spreads that others do not. I also don't worry about making a spread on a small amount of money either. It's inconsequential in my bigger picture and usually not of interest to me. I'm not going to revert back to my 20s/30s when I'm 75 and have buyers remorse over missing out on a small spread on financing of X/Y/Z for the risk being taken.

mortfree
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Re: Another payoff Loan or Invest question

Post by mortfree » Fri May 04, 2018 11:41 am

I was bored and wanted to see what the dollar amounts were for the interest here since 2.94% is a "scary" number...

24k at 2.94% for 72 months equals $2200 in interest. (No extra payments)

same terms but payment is now $500 like OP has been doing: $1564 in interest, 52 months to pay it off...

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Quantum
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Re: Another payoff Loan or Invest question

Post by Quantum » Fri May 04, 2018 3:13 pm

jbsmith05 wrote:
Fri May 04, 2018 9:52 am
deltaneutral83 wrote:
Fri May 04, 2018 8:22 am
Agreed, while there are a number of approaches here on BH, I think the vast majority would run from a 2.94% loan on a vehicle (depreciating asset).
Because 2.94% is high for a car loan or just because it's a loan on a depreciating asset?

Full disclosure - I'll keep it well beyond when it's fully depreciated - most people don't do that. I'm not one that gets a new car every 3 - 5 years. So barring an accident or some other catastrophe I'll own this car until it costs more to maintain it than its worth. Historically the cars I've had have all lasted more than 10 years - I'm religious about preventative maintenance - which is really just oil changes on a regular interval.
If you are good with PM, then you are the perfect owner for a well maintained used car. =)
“The advantage always favors the one who is trying to create fear, over the one who is trying to erase it.” | Howard R. Hughes JR.

bgf
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Re: Another payoff Loan or Invest question

Post by bgf » Fri May 04, 2018 3:37 pm

jbsmith05 wrote:
Thu May 03, 2018 9:28 am
No debt other than the new car and house.
I don't have a dedicated emergency fund - but have been contemplating it...

My thought is that the car interest rate is lower than what I may expect returns over 6 years so I would invest instead of paying off the car. Of course I may end up not earning more than 3% too.
odd choice of words. i don't see "no debt"; i see substantial debt, which includes a mortgage on primary residence and $24k for a car.

i would use it to make an emergency fund, then pay off the vehicle, and then invest the remainder.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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