Saving to pay cash for car

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Catt
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Saving to pay cash for car

Post by Catt » Thu Jan 19, 2012 4:19 pm

I fully fund my 401k and Roth IRA and have an emergency fund. Most likely I'm about 5-6 years away from purchasing another vehicle which I'd like to do with cash and not take on any debt. If I put aside a certain amount from each pay check to meet that goal in that time frame what should I do with the money over that time? Should I put it in with my emergency fund which is in an online savings account earning about .80% currently or invest it in some other way? I don't currently have any other taxable accounts.

In general what do you think about paying for a car with cash? Do people actually do it and is it a worthy goal? I've worked hard to eliminate all my other debts besides my mortgage at this point and don't want to take on any additional debt in the future.

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englishgirl
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Re: Saving to pay cash for car

Post by englishgirl » Thu Jan 19, 2012 5:22 pm

I just save for my car in an online savings account. Boring, and it doesn't earn much, but it is safe.

When I bought my current car, I paid cash. Last time, I didn't really save up every month, but started putting money away a few years before I wanted a car, then had a mad dash to save enough in the last year when I knew the old car was flaking out on me. This time, I started saving the next month after I bought the car. I initially started with $150 per month, but have bumped it up to $175 after I figured out that I wasn't saving enough.

I think it's definitely a worthy goal! Even with my pathetic $2.85 (or whatever) per month interest that my savings are currently earning, I like to see how this way the bank pays me rather than me paying interest to them.
Sarah

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Re: Saving to pay cash for car

Post by The Wizard » Thu Jan 19, 2012 5:34 pm

I think I'd probably go to a short-term bond fund after the first $10K in a 1% savings account.
If you don't have all the $$$ needed when the time comes, do a HELOC for 3.5% or less for the remainder.
Eventually, you'll find it easier to save the entire amount in advance...
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staustin
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Re: Saving to pay cash for car

Post by staustin » Thu Jan 19, 2012 5:56 pm

well, congrats to you first of all for accomplishing the "no debt except the mortgage" point. That's a big one. Not that many people have the necessary wisdom and discipline. You absolutely should pay cash for a car. Never put debt on a depreciating asset.. never have any debt except for your mortgage! Personally, i've set up an online money market and I stash money in it monthly. That's the best bet.

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Re: Saving to pay cash for car

Post by Fallible » Thu Jan 19, 2012 6:03 pm

I agree with your plans as this is what I've done: save bit by bit, put it in a regular savings account no matter the interest because it is "safe" money needed fairly soon, and paying cash. It's a money saver all the way. How much you need to save, of course, depends on how much you want to pay for a car and whether it's new or used.
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CarlZ993
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Re: Saving to pay cash for car

Post by CarlZ993 » Thu Jan 19, 2012 8:48 pm

I have a separate savings account titled 'New Car' @ ING. I put money in it every month. I find it's easier that way. If you combine if with your 'Emergency Fund,' you'd have to create a spreadsheet or something (not too difficult I must admit) to keep track what is the 'Emergency' portion and the 'New Car' portion.

Anyway, my next car purchase will be the 7th vehicle I've paid cash for. It's tough to get to the first cash purchase. If you save and keep your cars a long time, it gets easier.
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Catt
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Re: Saving to pay cash for car

Post by Catt » Thu Jan 19, 2012 9:55 pm

Thanks I'll probably put the money into the same account as my emergency fund and keep track of how much I saved for each purpose unless it is easy to create another account with the same bank to keep them separate. Set up the automatic deposit and forget about it.

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Re: Saving to pay cash for car

Post by Agent9 » Thu Jan 19, 2012 10:13 pm

Catt wrote:Thanks I'll probably put the money into the same account as my emergency fund and keep track of how much I saved for each purpose unless it is easy to create another account with the same bank to keep them separate. Set up the automatic deposit and forget about it.

Every bank that I have ever used has had this feature. In fact it's easier at the same institution to make changes to the auto deposit.

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AustenNut
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Re: Saving to pay cash for car

Post by AustenNut » Thu Jan 19, 2012 11:47 pm

I'm doing the same thing. I've been putting money in a low-risk bond fund, and that's been working out for me. Hopefully I still have many years to go before I'll need to replace my car, but I plan to pay cash for it. I hate paying interest!

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Liquid
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Re: Saving to pay cash for car

Post by Liquid » Thu Jan 19, 2012 11:48 pm

Pay cash.

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tyrion
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Re: Saving to pay cash for car

Post by tyrion » Fri Jan 20, 2012 12:48 am

I guess I'll be different and say my new car fund is in a stable value fund in my 401k.

I have 20-something thousand dollars in a tax-managed small cap fund in taxable. I'd like to say I'm adding to it monthly, and I would if I had the extra income. Maybe when the youngest is out of preschool for good this summer.

I also put 15% of my 401k contribution in the stable value fund of my 401k. When it's time to buy a car, I will sell the tax-managed small cap to free up cash, and at the same time exchange the stable value fund for Vanguard small cap index fund.

So I get the advantages of 3ish% interest on the stable value fund, no taxes on the interest. On the taxable side I'll pay some LT capital gains (although not really if it happens this year, 15% tax bracket), dividends (again, 15% tax bracket so not this year), and maybe a little on ST capital gains.

I don't mind doing the mental accounting. I'm sure it's not for everyone.

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CaliJim
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Re: Saving to pay cash for car

Post by CaliJim » Fri Jan 20, 2012 1:34 am

Catt wrote:In general what do you think about paying for a car with cash?


I think cash (or rather - a check) is a very good idea, and preferably my cash, rather than borrowed cash.

sport
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Re: Saving to pay cash for car

Post by sport » Fri Jan 20, 2012 1:42 am

Keep in mind that there is always a possibility of you needing a car sooner than you plan. The old one could die, get stolen, or wrecked. Therefore, IMO, the money for a replacement should be kept where it is available at any time on short notice.

Jeff

Lollytiger
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Re: Saving to pay cash for car

Post by Lollytiger » Fri Jan 20, 2012 1:52 am

jsl11 wrote:Keep in mind that there is always a possibility of you needing a car sooner than you plan. The old one could die, get stolen, or wrecked. Therefore, IMO, the money for a replacement should be kept where it is available at any time on short notice.

Jeff


Does that mean then that one's emergency fund should not only include 1 year's living expenses, but also enough money to buy a car? It seems not necessary as if you need the car on short notice, you can always finance the car and the extra money you must pay this way is not necessarily greater than the amount you lost by having your money tied up in a savings account. However, I personally might need to replace my car the next time it has some kind of major problem and I haven't thought much yet about how I would pay for the new car.

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Re: Saving to pay cash for car

Post by TheEternalVortex » Fri Jan 20, 2012 2:02 am

I bought my last car with cash, but I just saved it in a checking account ($30k). I didn't have the money for 5 years, though, or else I would consider something with a higher yield. I Bonds might be a good choice.

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CaliJim
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Re: Saving to pay cash for car

Post by CaliJim » Fri Jan 20, 2012 2:05 am

jsl11 wrote:The old one could die, get stolen, or wrecked.


Some of this is insurable. Carry comprehensive insurance if you can't afford replacement out of pocket.

Expensive repairs are somewhat predictable. The older the car - the more money you might want to have saved and earmarked for repairs or replacement.

A safe drivable heap (say a 10 year old camry) is $6k. It's not like you need $30k in your e-fund just for a car.

sport
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Re: Saving to pay cash for car

Post by sport » Fri Jan 20, 2012 2:08 am

Lollytiger wrote:
jsl11 wrote:Keep in mind that there is always a possibility of you needing a car sooner than you plan. The old one could die, get stolen, or wrecked. Therefore, IMO, the money for a replacement should be kept where it is available at any time on short notice.

Jeff


Does that mean then that one's emergency fund should not only include 1 year's living expenses, but also enough money to buy a car? It seems not necessary as if you need the car on short notice, you can always finance the car and the extra money you must pay this way is not necessarily greater than the amount you lost by having your money tied up in a savings account. However, I personally might need to replace my car the next time it has some kind of major problem and I haven't thought much yet about how I would pay for the new car.


The amount of money "you lost by having your money tied up in a savings account" depends on your alternative to keeping it there. If you put it at risk, in an effort to increase yield, you may end up having less, rather than more by selling at an inopportune time. Sure, you can always finance the car, but the reason for saving money in advance is to avoid financing it.

Stock market investments are never recommended for money that is needed in less than 5 years (some people say not less than 10). Bond money should not be invested at a duration longer than the time the money will be needed. Since you never really know how soon you will need the money in the "car fund", this seems to call for a very short term investment such as a savings account or money market fund. A short term bond fund could be considered, if you want to take a little risk.

Jeff

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BHCadet
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Re: Saving to pay cash for car

Post by BHCadet » Fri Jan 20, 2012 2:10 am

tyrion wrote:I guess I'll be different and say my new car fund is in a stable value fund in my 401k.

I have 20-something thousand dollars in a tax-managed small cap fund in taxable. I'd like to say I'm adding to it monthly, and I would if I had the extra income. Maybe when the youngest is out of preschool for good this summer.

I also put 15% of my 401k contribution in the stable value fund of my 401k. When it's time to buy a car, I will sell the tax-managed small cap to free up cash, and at the same time exchange the stable value fund for Vanguard small cap index fund.

So I get the advantages of 3ish% interest on the stable value fund, no taxes on the interest. On the taxable side I'll pay some LT capital gains (although not really if it happens this year, 15% tax bracket), dividends (again, 15% tax bracket so not this year), and maybe a little on ST capital gains.

I don't mind doing the mental accounting. I'm sure it's not for everyone.


That is exactly what I would have done.
It doesn’t matter what account the money is from.
Once a year during portfolio re-balancing, I would just re-balance the cash out to buy a new car.

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Re: Saving to pay cash for car

Post by sport » Fri Jan 20, 2012 2:13 am

CaliJim wrote:
jsl11 wrote:The old one could die, get stolen, or wrecked.


Some of this is insurable. Carry comprehensive insurance if you can't afford replacement out of pocket.

Expensive repairs are somewhat predictable. The older the car - the more money you might want to have saved and earmarked for repairs or replacement.

A safe drivable heap (say a 10 year old camry) is $6k. It's not like you need $30k in your e-fund just for a car.

It depends on what kind of replacement car you wish to buy. If you buy a new car and plan to keep it for 10 years, or so, then you don't want to have only enough money for a "safe drivable heap". If the insurance company pays you 6k when it is wrecked or stolen, and you want to spend 25k on a new one, you will need to come up with 19k if you wish to pay cash. Like many things, it depends on what you want to do and how you want to go about doing it.

Jeff

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Re: Saving to pay cash for car

Post by interplanetjanet » Fri Jan 20, 2012 2:21 am

jsl11 wrote:
CaliJim wrote:Some of this is insurable. Carry comprehensive insurance if you can't afford replacement out of pocket.

Expensive repairs are somewhat predictable. The older the car - the more money you might want to have saved and earmarked for repairs or replacement.

A safe drivable heap (say a 10 year old camry) is $6k. It's not like you need $30k in your e-fund just for a car.

It depends on what kind of replacement car you wish to buy. If you buy a new car and plan to keep it for 10 years, or so, then you don't want to have only enough money for a "safe drivable heap". If the insurance company pays you 6k when it is wrecked or stolen, and you want to spend 25k on a new one, you will need to come up with 19k if you wish to pay cash. Like many things, it depends on what you want to do and how you want to go about doing it.

I would consider the desire for a new car to not really qualify as an emergency. Emergency to me = I have to spend money to have my life function reasonably normally. If my roof falls in I need to get it fixed so that my house is habitable. If my car dies, I need something that will let me drive to where I need to go and is reasonably safe. I might certainly like something new, but in an emergency I could make do for some time with what I could afford.

-janet

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Re: Saving to pay cash for car

Post by Wolkenspiel » Fri Jan 20, 2012 4:07 am

I have recently become fascinated with I Bonds, so I'd second the I Bond suggestion. If the time frame is 5-6 years, you're not using your I Bond purchase limit so far and the goal for the savings is to keep up with inflation with no risk to principal, this seems like a reasonable option (unless you're saving for a Ferrari with no spouse or kid's SSN to use for I Bond purchases).

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CaliJim
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Re: Saving to pay cash for car

Post by CaliJim » Fri Jan 20, 2012 12:55 pm

What IPJ said - the e-fund only needs to be big enough to get you back into some wheels. Saving for a new $20k-$30-$XXX car is done outside of the e-fund.

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Re: Saving to pay cash for car

Post by bungalow10 » Fri Jan 20, 2012 1:00 pm

Paying cash is great. It will be interesting to see if your car buying priorities change when you aren't financing the car. I know a lot of people who finance cars get all the bells and whistles, while my friends that pay cash (and have access to enough to get whatever they want) tend to buy more basic vehicles or slightly used ones.

good luck!
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Re: Saving to pay cash for car

Post by Phatphoeater » Fri Jan 20, 2012 1:08 pm

tyrion wrote:I guess I'll be different and say my new car fund is in a stable value fund in my 401k.

I have 20-something thousand dollars in a tax-managed small cap fund in taxable. I'd like to say I'm adding to it monthly, and I would if I had the extra income. Maybe when the youngest is out of preschool for good this summer.

I also put 15% of my 401k contribution in the stable value fund of my 401k. When it's time to buy a car, I will sell the tax-managed small cap to free up cash, and at the same time exchange the stable value fund for Vanguard small cap index fund.

So I get the advantages of 3ish% interest on the stable value fund, no taxes on the interest. On the taxable side I'll pay some LT capital gains (although not really if it happens this year, 15% tax bracket), dividends (again, 15% tax bracket so not this year), and maybe a little on ST capital gains.

I don't mind doing the mental accounting. I'm sure it's not for everyone.


I agree with this. Depending on your monthly cash flow and current assets in taxable accounts, I would treat the needed money like the above poster. If your cash flow is such that a small amount of market fluctuation will wipe out any chance of purchasing the car then putting it in a savings account would be better.

I just bought a car in 2010 and intended to pay cash. Look around for zero down, zero% financing. I ended up doing taking this deal and get to keep my money invested.

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Re: Saving to pay cash for car

Post by gosalukis » Fri Jan 20, 2012 1:29 pm

Phatphoeater wrote:
tyrion wrote:I guess I'll be different and say my new car fund is in a stable value fund in my 401k.

I have 20-something thousand dollars in a tax-managed small cap fund in taxable. I'd like to say I'm adding to it monthly, and I would if I had the extra income. Maybe when the youngest is out of preschool for good this summer.

I also put 15% of my 401k contribution in the stable value fund of my 401k. When it's time to buy a car, I will sell the tax-managed small cap to free up cash, and at the same time exchange the stable value fund for Vanguard small cap index fund.

So I get the advantages of 3ish% interest on the stable value fund, no taxes on the interest. On the taxable side I'll pay some LT capital gains (although not really if it happens this year, 15% tax bracket), dividends (again, 15% tax bracket so not this year), and maybe a little on ST capital gains.

I don't mind doing the mental accounting. I'm sure it's not for everyone.


I agree with this. Depending on your monthly cash flow and current assets in taxable accounts, I would treat the needed money like the above poster. If your cash flow is such that a small amount of market fluctuation will wipe out any chance of purchasing the car then putting it in a savings account would be better.

I just bought a car in 2010 and intended to pay cash. Look around for zero down, zero% financing. I ended up doing taking this deal and get to keep my money invested.


I would also be interested in looking for those zero% financing and keep my money invested. I did that myself last year.

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Re: Saving to pay cash for car

Post by azanon » Fri Jan 20, 2012 2:29 pm

Catt wrote:I fully fund my 401k and Roth IRA and have an emergency fund. Most likely I'm about 5-6 years away from purchasing another vehicle which I'd like to do with cash and not take on any debt. If I put aside a certain amount from each pay check to meet that goal in that time frame what should I do with the money over that time? Should I put it in with my emergency fund which is in an online savings account earning about .80% currently or invest it in some other way? I don't currently have any other taxable accounts.

In general what do you think about paying for a car with cash? Do people actually do it and is it a worthy goal? I've worked hard to eliminate all my other debts besides my mortgage at this point and don't want to take on any additional debt in the future.


What the heck! Be gutsy and pick that 100% international, tax-managed, stock mutual fund that Vanguard sells. Your monthly purchases will buy low and sell high during the volatility. I'd rather do that than get a guaranteed ~ 0% in a cash equivalent, or risk a bond fund possibly near the end of a 30-year bull bond market. I prefer international over domestic because I like the valuations better. I usually try to buy what everyone else doesn't want.

Paying for a car with cash is great. I just bought 2 with cash this year. Sure I do it, and I've done it, and it rocks.

The only thing you should finance is your house. At 3.8% or so, BEFORE the tax deduction, I'll definitely take that borrowed. If I can't be a tax-deduction adjusted 3.8% return long-term (meaning ~ lower 3.x% annual), then I have much bigger problems! Besides, I suspect paying my home note on time over the years has something to do with my ~ 820 credit score. Also houses typically appreciate (emphasis on typically), so I think financing them isn't so bad. Mine has appreciated about 33% since I bought it about 9 yrs ago.

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englishgirl
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Re: Saving to pay cash for car

Post by englishgirl » Fri Jan 20, 2012 3:20 pm

Lollytiger wrote:
jsl11 wrote:Keep in mind that there is always a possibility of you needing a car sooner than you plan. The old one could die, get stolen, or wrecked. Therefore, IMO, the money for a replacement should be kept where it is available at any time on short notice.

Jeff


Does that mean then that one's emergency fund should not only include 1 year's living expenses, but also enough money to buy a car? It seems not necessary as if you need the car on short notice, you can always finance the car and the extra money you must pay this way is not necessarily greater than the amount you lost by having your money tied up in a savings account. However, I personally might need to replace my car the next time it has some kind of major problem and I haven't thought much yet about how I would pay for the new car.


Personally, my emergency fund has always been 3 months of expenses, and then I regard my car fund as an additional layer to my emergency fund. If I lost my job and couldn't find a new one quickly, I would use my car savings for living expenses. If I had a car emergency (although if it got wrecked or stolen, insurance should pay out), and I didn't have the money on hand, I'd get an old beater. Like InterplanetJanet, I'd just get whatever I could afford that'd get me safely from A to B. I don't have $20k sitting around in a taxable account just in case.
Sarah

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Re: Saving to pay cash for car

Post by trigger455 » Fri Jan 20, 2012 4:35 pm

I'm just going to throw this out there...I haggled with Toyota dealerships that were offering 0% last year. I got them down to the total they wanted if i had paid cash, so i just kept my cash and financed the car (i went to 3 diff dealerships before getting someone to take the bait). I got a good deal (because we all know 0% is NOT a good deal unless you get that plus they lower the price of the car) and i earn interest on that money i kept and pay monthly to Toyota.

If you are not disciplined and lucky enough to do this, then pay cash. :sharebeer

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Re: Saving to pay cash for car

Post by chipmonk » Fri Jan 20, 2012 4:54 pm

trigger455 wrote:I'm just going to throw this out there...I haggled with Toyota dealerships that were offering 0% last year. I got them down to the total they wanted if i had paid cash, so i just kept my cash and financed the car (i went to 3 diff dealerships before getting someone to take the bait). I got a good deal (because we all know 0% is NOT a good deal unless you get that plus they lower the price of the car) and i earn interest on that money i kept and pay monthly to Toyota.

If you are not disciplined and lucky enough to do this, then pay cash. :sharebeer
+1. I did this on my car purchase in October 2010 as well. I got the dealer to agree to my desired price and then I got them to agree to tack on their 0% promotional financing.

I could have paid cash, but why should I when I can take the money and invest it in the meantime? To avoid taking on too extra risk by use of this leverage, I count my 0% loan as a negative bond and therefore increase my bond allocation accordingly to maintain my desired asset allocation.

I understand the behavioral argument against taking on debt: one can usually be more disciplined and save up to pay cash instead, saving in the long run. However, I don't think this makes sense for disciplined savers who are offered subsidized/promotional rates. In fact, the Bogleheads wiki recommends this approach:
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)

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