Saving for a car....Save or Invest?

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spikeymikey12
Posts: 139
Joined: Tue Aug 28, 2007 10:12 pm

Saving for a car....Save or Invest?

Post by spikeymikey12 »

I have a spreadsheet that I use to calculate what I need to put away each month to reach my savings goal. ie: Christmas $1,200.00 every 12 months or $100 a month. A replacing my car every 7 years....$15,000.00 divided by 84 months is $178.57 I don't calculate the 4% apy because the way I figure Im only keeping up with inflation....If I opend an account and invested 178.00 a month for 7 years and my ROR was 6% I would have $22,216.75 vs $20,356.42 with ING direct.


What do you guys do?
Last edited by spikeymikey12 on Mon Oct 15, 2007 2:22 pm, edited 2 times in total.
leonard
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Post by leonard »

I am not clear what you are asking. But, perhaps it is just me.

Are you asking how we budget for known expenses? Or,
Our assumptions for rates of return and inflation? Or,
where we invest (money market, cd, etc.)?

Thanks.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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dm200
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Location: Washington DC area

Your method is fine, IMO,

Post by dm200 »

but there is another method that can make a lot of sense.

Increase your investing (according to your asset allocation) in IRAs, 401k, 403b, taxable investments, etc. by this calculated amount. Think of this amount as part of long term investments.

Then, when you need/want a new car, get an auto loan, and pay back the auto loan over 3-5 years. A new auto loan (check a credit union) is often one of the lowest interest rate loans, and (over a long period) your investments should do better.

dan
Topic Author
spikeymikey12
Posts: 139
Joined: Tue Aug 28, 2007 10:12 pm

Post by spikeymikey12 »

leonard wrote:I am not clear what you are asking. But, perhaps it is just me.

Are you asking how we budget for known expenses? Or,
Our assumptions for rates of return and inflation? Or,
where we invest (money market, cd, etc.)?

Thanks.
Do you save for large purchases or invest?
leonard
Posts: 5993
Joined: Wed Feb 21, 2007 11:56 am

Post by leonard »

Do you save for large purchases or invest?
I tend to qualify save (money market, cd, etc) vs invest (mutual funds) along 3 factors:

1. When do you need the money? 1 (or maybe 2 years)? Or >2 years?
2. How much flexibility do you have on the price of the purchase? What would happen if you didn't have the full amount to make the purchase, could you lower the cost by taking less/fewer features?
3. How material is the purchase amount relative to your portfolio? Or, what is "large"?

So, if it is a short term need where you must have the full amount when due - like a quarterly or yearly tax payment, for example, I would "save" in a Money Market.

If the term was longer - say 5 years - AND I could assume principle risk, I would likely invest the money in an appropriate duration bond fund, taking the risk that interest rates go up, the bond fund value drops and I effectively lose some of the principle with which I was going to make the purchase.

If the term was longer AND I did not want principle risk, I would likely target buying individual Treasury securities of the right duration to match the anticipated expense and hold to maturity. This would ensure you get back your principle in the amount you need to make your purchase. obviously, you would have to be able to do a lump sum to buy the securities at auction. If I couldn't buy the treasury in a lump sum, I would likely DCA in to Money market, then purchase the Treasury.

Remember, a very important issue is defining a "large" purchase with respect to your portfolio for you. If a large purchase is only a 1% or less of your portfolio, the principle risk may be less an issue and you may not want the hassle of doing anything more complex than saving in a money market.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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BogleFan
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Re: Saving for a car....Save or Invest?

Post by BogleFan »

spikeymikey12 wrote:I have a spreadsheet that I use to calculate what I need to put away each month to reach my savings goal. ie: Christmas $1,200.00 every 12 months or $120 a month.
I am not sure what spreadsheet you use. But $1200 for christmas will be $100 a month (not $120)
Topic Author
spikeymikey12
Posts: 139
Joined: Tue Aug 28, 2007 10:12 pm

Re: Saving for a car....Save or Invest?

Post by spikeymikey12 »

BogleFan wrote:
spikeymikey12 wrote:I have a spreadsheet that I use to calculate what I need to put away each month to reach my savings goal. ie: Christmas $1,200.00 every 12 months or $120 a month.
I am not sure what spreadsheet you use. But $1200 for christmas will be $100 a month (not $120)


My bad...
sport
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Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Post by sport »

Mikey,
Keep in mind that a car purchase may not happen according to your planned schedule. Your present car could be stolen, or wrecked, and even with insurance paying what your present car is worth, you might want to get a newer one as long as you have to buy one. In that case, you might want your "car money" to be available on short notice. Similarly, your present car might suddenly need expensive repairs and you could decide not to put that much into the old wheels. For these reasons, I keep my "car money" in a MM fund for immediate availability without concern about market conditions.

The only thing I am confident in is that I will need to replace my car (and my wife's car) at some time. I am never sure when that might be.

Best wishes,
Jeff
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