investng for 6 years while paying off car loan

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tehslax
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Joined: Fri Jul 31, 2020 10:32 am

investng for 6 years while paying off car loan

Post by tehslax » Fri Jul 31, 2020 10:37 am

Hi Everyone,

I recently purchased a car for 0% APR but have the cash on hand. Making monthly payments on the car is not a problem to me while investing the lump sum. The total cash on hand is $30k, with additional savings untouched. So basically, I can invest this money freely for 6 years or so.
What would be a good investment for this money?
My goal is to make at least 4% after taxes.
Risk tolerance I assume is moderate to nearly high.

thanks!

BuckyBadger
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Re: investng for 6 years while paying off car loan

Post by BuckyBadger » Fri Jul 31, 2020 10:45 am

People who hate debt will say pay it off.

People who enjoy leverage will say keep it.

Which are you?

I'd keep it.

katrid11
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Re: investng for 6 years while paying off car loan

Post by katrid11 » Fri Jul 31, 2020 10:47 am

What is the purpose of the money if it isn't to buy the car? Ie - when will you need the cash?

IF you need it in 6 years, then I would be more moderate with a 75/25 stock/bond split. I would still look at the typical 3 fund portfolio but maybe just do 2. Wellington does a decent job for a balanced fund to park it in 1 place but that's closer to 65/35 mix

IF this is really play money and it has no real use in 6 yrs but to just grow then I lean towards a 90/10 or 95/5 split.

IF you might actually need this for the car payment at some point, then it needs to stay liquid in a MM or short term CD and 4% ROI is not a chance.

Topic Author
tehslax
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Re: investng for 6 years while paying off car loan

Post by tehslax » Fri Jul 31, 2020 10:51 am

katrid11 wrote:
Fri Jul 31, 2020 10:47 am
What is the purpose of the money if it isn't to buy the car? Ie - when will you need the cash?

IF you need it in 6 years, then I would be more moderate with a 75/25 stock/bond split. I would still look at the typical 3 fund portfolio but maybe just do 2. Wellington does a decent job for a balanced fund to park it in 1 place but that's closer to 65/35 mix

IF this is really play money and it has no real use in 6 yrs but to just grow then I lean towards a 90/10 or 95/5 split.

IF you might actually need this for the car payment at some point, then it needs to stay liquid in a MM or short term CD and 4% ROI is not a chance.
I do not expect I will need the money in 6 years as I am set on savings.
I set it aside to invest while taking advantage of the 0 APR.
It may even stay invested longer than 6 years.
This time frame of 6 years is just to match the duration of the loan so if I go over it's not a problem.

What funds or ETF would you recommend?

bloom2708
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Re: investng for 6 years while paying off car loan

Post by bloom2708 » Fri Jul 31, 2020 10:54 am

Part of your cash on hand should be an Emergency Fund.

Another part of your cash on hand is near term spending. Vacation, Taxes, etc.

How much cash on hand do you have after those 2 buckets?

There is nothing that can get 4% guaranteed for 5-6 years. You might do better or much worse than 4% investing in stocks.

We do not know what returns will look like. Up, down, sideways.

0% is 0%, but the value of your car will drop 50 to 75% in those 6 years. No free lunch.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

Topic Author
tehslax
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Re: investng for 6 years while paying off car loan

Post by tehslax » Fri Jul 31, 2020 10:57 am

bloom2708 wrote:
Fri Jul 31, 2020 10:54 am
Part of your cash on hand should be an Emergency Fund.

Another part of your cash on hand is near term spending. Vacation, Taxes, etc.

How much cash on hand do you have after those 2 buckets?

There is nothing that can get 4% guaranteed for 5-6 years. You might do better or much worse than 4% investing in stocks.

We do not know what returns will look like. Up, down, sideways.

0% is 0%, but the value of your car will drop 50 to 75% in those 6 years. No free lunch.
I have emergency and near term spending set aside and it is more than the $30k I have to invest.

If 4% is difficult, what will be a close enough invest portfolio in this case?
Anything better than a savings account if preferred.

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Toons
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Re: investng for 6 years while paying off car loan

Post by Toons » Fri Jul 31, 2020 10:57 am

BuckyBadger wrote:
Fri Jul 31, 2020 10:45 am
People who hate debt will say pay it off.

People who enjoy leverage will say keep it.

Which are you?

I'd keep it.

I am in the category in "Bold"
:mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Impatience
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Re: investng for 6 years while paying off car loan

Post by Impatience » Fri Jul 31, 2020 10:57 am

People are overcomplicating this. 0% APR means no interest. Any investment will PROBABLY beat that. Pay the minimum car payment and invest.

Bonus points: inflation will make your car loan’s principal balance decrease in real terms over the years so you actually gain by paying it off slower (unless we start deflating - rare but possible).

EnjoyIt
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Re: investng for 6 years while paying off car loan

Post by EnjoyIt » Fri Jul 31, 2020 10:58 am

I am a big fan of investing and not paying down low interest rate debt such as a mortgage or school debt. I am not a big fan of taking on debt for a consumable or depreciating asset or luxury.

Is the $30k a decent sized portion of you investments? If so I would just add it to my investments based on my AA. In a few years when the debt is under $10k I would just pay it off to eliminate the payment. I would also keep the car for about 10 years and start looking to replenish my car buying fund to reach that goal when I am getting close to the 10 year mark.

If the $30k is a small portion of your wealth 5% or less, I would just pay it off and be done with it.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

Topic Author
tehslax
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Re: investng for 6 years while paying off car loan

Post by tehslax » Fri Jul 31, 2020 11:03 am

EnjoyIt wrote:
Fri Jul 31, 2020 10:58 am
I am a big fan of investing and not paying down low interest rate debt such as a mortgage or school debt. I am not a big fan of taking on debt for a consumable or depreciating asset or luxury.

Is the $30k a decent sized portion of you investments? If so I would just add it to my investments based on my AA. In a few years when the debt is under $10k I would just pay it off to eliminate the payment. I would also keep the car for about 10 years and start looking to replenish my car buying fund to reach that goal when I am getting close to the 10 year mark.

If the $30k is a small portion of your wealth 5% or less, I would just pay it off and be done with it.
It is about 1/3rd of my investment. I plan to own this car for at least 6 years.
Should I do something like VALIX?

EnjoyIt
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Re: investng for 6 years while paying off car loan

Post by EnjoyIt » Fri Jul 31, 2020 4:49 pm

tehslax wrote:
Fri Jul 31, 2020 11:03 am
EnjoyIt wrote:
Fri Jul 31, 2020 10:58 am
I am a big fan of investing and not paying down low interest rate debt such as a mortgage or school debt. I am not a big fan of taking on debt for a consumable or depreciating asset or luxury.

Is the $30k a decent sized portion of you investments? If so I would just add it to my investments based on my AA. In a few years when the debt is under $10k I would just pay it off to eliminate the payment. I would also keep the car for about 10 years and start looking to replenish my car buying fund to reach that goal when I am getting close to the 10 year mark.

If the $30k is a small portion of your wealth 5% or less, I would just pay it off and be done with it.
It is about 1/3rd of my investment. I plan to own this car for at least 6 years.
Should I do something like VALIX?
I would stick with simple index funds and away from high expense ratio funds like VALIX. The fact that you threw out VALIX as an option tells me that you would strongly benefit from checking out the wiki of this message board particularly regarding index funds.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

Outer Marker
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Re: investng for 6 years while paying off car loan

Post by Outer Marker » Fri Jul 31, 2020 5:41 pm

tehslax wrote:
Fri Jul 31, 2020 10:51 am
I do not expect I will need the money in 6 years as I am set on savings.
I set it aside to invest while taking advantage of the 0 APR.
It may even stay invested longer than 6 years.
This time frame of 6 years is just to match the duration of the loan so if I go over it's not a problem.

What funds or ETF would you recommend?
The 6 year time horizon makes no sense. You're paying the car note monthly, so you're not going to be faced with a balloon payment at the end. In fact, you'll have more in monthly income to spend or save when the note is gone. Unless you're saving for a short-term goal like a down payment on a house, this should be invested for the long haul, potentially for 50 or more years. Determine your long term asset allocation and invest accordingly. A vanguard target retirement fund appropriate to your age while you learn the ropes. Be sure to take advantage of tax-advantaged accounts like IRAs and 401Ks.

Xrayman69
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Re: investng for 6 years while paying off car loan

Post by Xrayman69 » Fri Jul 31, 2020 9:26 pm

tehslax wrote:
Fri Jul 31, 2020 10:37 am
Hi Everyone,

I recently purchased a car for 0% APR but have the cash on hand. Making monthly payments on the car is not a problem to me while investing the lump sum. The total cash on hand is $30k, with additional savings untouched. So basically, I can invest this money freely for 6 years or so.
What would be a good investment for this money?
My goal is to make at least 4% after taxes.
Risk tolerance I assume is moderate to nearly high.

thanks!
We did this same exercise from 2013-2019 with 1% APR on 60K. Put 60K that same day into S&P 500 fund. Kept mental exercise and paid payment every month of 1K and change and deducted that same amount from the investment account (without selling so as to not have to pay capital gains). Essentially doubled during these years of bull run.

However, the next 6 years may not have this run.

Ed_Sandwich
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Re: investng for 6 years while paying off car loan

Post by Ed_Sandwich » Fri Jul 31, 2020 9:41 pm

If you think you can beat 0% by investing then you should do it. I also never understood why anyone would rush to pour money into something that depreciates in value 10% a year. I would take as long as possible to pay it off at that rate.

MrJedi
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Re: investng for 6 years while paying off car loan

Post by MrJedi » Fri Jul 31, 2020 9:51 pm

Make normal payments and maintain the same target AA.

You are still making use of the free leverage since you didn't have to deplete cash savings and then build it back up before freeing up excess cash flow back into investments

EnjoyIt
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Re: investng for 6 years while paying off car loan

Post by EnjoyIt » Fri Jul 31, 2020 10:21 pm

Ed_Sandwich wrote:
Fri Jul 31, 2020 9:41 pm
If you think you can beat 0% by investing then you should do it. I also never understood why anyone would rush to pour money into something that depreciates in value 10% a year. I would take as long as possible to pay it off at that rate.
Simple, the benefit of the arbitrage on 30K is not worth even the minimal effort.
Keeping expenses down in retirement decreases the need to take out funds and pay taxes on them.
Living a life debt free provides a personal satisfaction. Writing one check and buying a $30k car outright provides personal satisfaction.
Owning a car outright may allow one to have higher deductibles on car insurance and pay less yearly depending on the insurer.
Paying cash for a car has the psychological benefit of keeping someone from buying more car than they need or get sucked into useless upgrades.
I’m sure there are other good reasons.
A time to EVALUATE your jitters. | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418

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grabiner
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Re: investng for 6 years while paying off car loan

Post by grabiner » Sat Aug 01, 2020 11:24 am

You could create a sinking fund, which is intended to cover the car loan payments. Invest an amount equal to the car loan balance in a bond fund, make the loan payments from the bond fund, and count the loan as a negative bond (so that the two combined don't count in your retirement allocation). Your net gain would be the bond yield.

Since the car loan has a duration of three years (average time to payment), a fair comparison would be a low-risk bond fund with a three-year duration. Admiral shares of Vanguard Limited-Term Tax-Exempt ($50K minimum, so you would only get this if you have other investments in this fund) yield 0.87% tax-free; in a lower tax bracket, you could use Vanguard Short-Term Investment Grade, for a 1.33% pre-tax yield but somewhat more risk. These are not necessarily the funds you would use; it's fine to hold the sinking fund in Total Bond Market or Intermediate-Term Tax-Exempt as long as you recognize that you are taking a bit more interest-rate risk.
Wiki David Grabiner

02nz
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Re: investng for 6 years while paying off car loan

Post by 02nz » Sat Aug 01, 2020 11:31 am

Ed_Sandwich wrote:
Fri Jul 31, 2020 9:41 pm
If you think you can beat 0% by investing then you should do it. I also never understood why anyone would rush to pour money into something that depreciates in value 10% a year. I would take as long as possible to pay it off at that rate.
OP bought the car. OP took out a loan. It is then completely irrelevant whether the car depreciates at 1%, 10%, or 50% a year, or even appreciates at 10% a year. The loan has to be paid off regardless; do so more quickly or more slowly does nothing to change the value of the car. I agree that it makes sense to hold the loan and pay with inflated future dollars; if nothing else the extra liquidity is worth something. I would not however increase my exposure to the stock market beyond what I would've done without the loan.

(There are sometimes - but not always - cash incentives that are available in lieu of 0% financing. In that case, choosing the 0% financing has a nonzero cost. But OP is past that point anyway.)

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