Best way to fund large expense? Taxable, EF, btc, loan?

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Topic Author
lolbatross
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Joined: Thu Feb 20, 2014 10:36 pm

Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

I'm thinking of buying a new car for 55k. For large purchases I usually cash flow or borrow from the EF when I can and avoid touching the taxable. However, in this case its probably large enough I need to pull from the taxable or get a loan.

Situation
Age 37, DW & 2 young kids
2M NW, 250k income, IL, 24% fed
1M retirement
450k taxable (all ltcg)
50k Cash (EF & buffer)
30k btc (50/50 ltcg)
about 4k/mo positive cash flow (doesn't include retirement inflows)
For 2021 & beyond I will be paying NIIT.
My current car is worth maybe 5k.

Option 1 - Sell some taxable and pay cash for the car. Pay IL+LTCG+NIIT
Option 2 - Loan at 2.5% & Pay off early with future cash flows
Option 3 - Wait & save fully then buy (1year)
Option 4 - Raid the EF (Who needs it!) & BTC and pay cash now

I also have about 95k left on a mortgage and I have some desire to be done with it. However paying IL + LTCG+NIIT seems painful. If my desire is to pay this off I am probably better off redirecting cash flows for 1.5 years.

I'm curious to see which option bogleheads think is best or if it just doesn't matter. Thanks in advance.
scout1
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by scout1 »

Raid the EF and replenish it with cash over time.
fyre4ce
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by fyre4ce »

Is there a less expensive car that meets your needs?
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goingup
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by goingup »

scout1 wrote: Tue Jun 22, 2021 1:31 pm Raid the EF and replenish it with cash over time.
Agree. If an emergency came along in the meantime, use a CC or use some of taxable.
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

fyre4ce wrote: Tue Jun 22, 2021 1:36 pm Is there a less expensive car that meets your needs?
Yes my current car is fine. 10 years old. We bought it new for 25k. It has 105k miles on it. It is likely to survive for several more years.

New car being evaluated is an EV. Within the EV market there are some less expensive options that don't quite do it for me. Some are too small and some have more limited range. PHEVs bring added complexity and are a half measure. Clearly at least half the cost of the planned vehicle is luxury as it is about 2x the prior vehicle.
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goingup
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by goingup »

Another benefit to using cash is that focuses the mind to get best deal for car and best value for trade-in. That's been my experience at least. :D
tashnewbie
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by tashnewbie »

At your NW, I don’t think you need a separate EF. Your taxable account is your EF. Even if stuff really hit the fan, that account should be adequate to address whatever funding needs you have.

Check out Big ERN’s blog series about going with 0 EF for more information on that perspective.

I would liquidate the BTC and EF. If you really want to hold onto the EF, just replenish it over time.

ETA: I’m not saying you should buy the car right now (not saying you shouldn’t either). But if you decide to buy, I’d just pay cash and be done with it.
Last edited by tashnewbie on Tue Jun 22, 2021 2:17 pm, edited 1 time in total.
fyre4ce
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by fyre4ce »

lolbatross wrote: Tue Jun 22, 2021 1:45 pm
fyre4ce wrote: Tue Jun 22, 2021 1:36 pm Is there a less expensive car that meets your needs?
Yes my current car is fine. 10 years old. We bought it new for 25k. It has 105k miles on it. It is likely to survive for several more years.

New car being evaluated is an EV. Within the EV market there are some less expensive options that don't quite do it for me. Some are too small and some have more limited range. PHEVs bring added complexity and are a half measure. Clearly at least half the cost of the planned vehicle is luxury as it is about 2x the prior vehicle.
My general guideline is no more than 25% of household income in the value of cars. In your case that’s $62,500. Depending on the value of your spouse’s car, this purchase may put you over the limit. If so, I’d look into a cheaper model, or buying low-mileage used.

I like EV’s, but it’s important to recognize this is a luxury, discretionary purchase. My suggestion is to save up and pay cash. If you want to dip into your EF by $10-20k that’s probably ok, if you replenish it. But saving up will force you to confront the true psychological impact of the purchase in a way that borrowing the money will not. You can clearly wait 6mo-1yr, so that’s my suggestion.
Tingting1013
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by Tingting1013 »

Get a 5 year loan from DCU for 1.24%, do not pay off early, keep your money invested.

Also, is the $55k post Federal tax credit?
Skiandswim
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by Skiandswim »

If an EV is important for the family, consider some of the newer models with better value (than say a Tesla.) VW ID.4 SUV AWD is $37.4K (after federal tax credit). RWD is even lower price. https://www.motortrend.com/news/2021-vo ... e-details/
EV launches in 2021 are great, lots of new models with strong warranties and competitive pricing. KIA EV6, Chevy Bolt EUV, Audi Q4, etc...
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

tashnewbie wrote: Tue Jun 22, 2021 2:07 pm Check out Big ERN’s blog series about going with 0 EF for more information on that perspective.
I'm familiar with that article and it definitely made me contemplate my EF. I've considered holding some bonds in taxable or iBonds or just have no EF. I think last we discussed it DW feels good with a savings EF and I didn't feel strong enough to eliminate it.
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

Tingting1013 wrote: Tue Jun 22, 2021 2:23 pm Get a 5 year loan from DCU for 1.24%, do not pay off early, keep your money invested.

Also, is the $55k post Federal tax credit?
This is intriguing. I might apply if I go the loan route.

In the past I have been a big proponent of invest in lieu of paydown, however over the past few years I have paid down my 2.875% mortgage because I don't want a mortgage forever. My oldest is 7 and I don't want a mortgage payment when my kids hit college age. I feel I have enough in the 529s to cover 50% of a state education. Combine that with having less cash flow needs (no mortgage) I should have the flexibility to support 100% private if necessary/desired.

As far as the federal tax credit - currently there is no federal tax credit and the 55k reflects that. There is pending legislation that may add a 7500 or 10k tax credit. Obviously I don't want to discuss politics but its worth noting that I knew the price and took a test drive before being aware of the potential credits.
Tingting1013
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by Tingting1013 »

lolbatross wrote: Tue Jun 22, 2021 3:44 pm
Tingting1013 wrote: Tue Jun 22, 2021 2:23 pm Get a 5 year loan from DCU for 1.24%, do not pay off early, keep your money invested.

Also, is the $55k post Federal tax credit?
This is intriguing. I might apply if I go the loan route.

In the past I have been a big proponent of invest in lieu of paydown, however over the past few years I have paid down my 2.875% mortgage because I don't want a mortgage forever. My oldest is 7 and I don't want a mortgage payment when my kids hit college age. I feel I have enough in the 529s to cover 50% of a state education. Combine that with having less cash flow needs (no mortgage) I should have the flexibility to support 100% private if necessary/desired.

As far as the federal tax credit - currently there is no federal tax credit and the 55k reflects that. There is pending legislation that may add a 7500 or 10k tax credit. Obviously I don't want to discuss politics but its worth noting that I knew the price and took a test drive before being aware of the potential credits.
I think you are referring to Tesla which has run out of the credit. Other manufacturers still offer it.
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

fyre4ce wrote: Tue Jun 22, 2021 2:09 pm My general guideline is no more than 25% of household income in the value of cars. In your case that’s $62,500. Depending on the value of your spouse’s car, this purchase may put you over the limit. If so, I’d look into a cheaper model, or buying low-mileage used.
Your guideline is twice as restrictive as Dave Ramsey's! He says 50% of income...
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galawdawg
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by galawdawg »

lolbatross wrote: Tue Jun 22, 2021 1:13 pm I'm thinking of buying a new car for 55k. For large purchases I usually cash flow or borrow from the EF when I can and avoid touching the taxable. However, in this case its probably large enough I need to pull from the taxable or get a loan.

Situation
Age 37, DW & 2 young kids
2M NW, 250k income, IL, 24% fed
1M retirement
450k taxable (all ltcg)
50k Cash (EF & buffer)
30k btc (50/50 ltcg)
about 4k/mo positive cash flow (doesn't include retirement inflows)
For 2021 & beyond I will be paying NIIT.
My current car is worth maybe 5k.

Option 1 - Sell some taxable and pay cash for the car. Pay IL+LTCG+NIIT
Option 2 - Loan at 2.5% & Pay off early with future cash flows
Option 3 - Wait & save fully then buy (1year)
Option 4 - Raid the EF (Who needs it!) & BTC and pay cash now

I also have about 95k left on a mortgage and I have some desire to be done with it. However paying IL + LTCG+NIIT seems painful. If my desire is to pay this off I am probably better off redirecting cash flows for 1.5 years.

I'm curious to see which option bogleheads think is best or if it just doesn't matter. Thanks in advance.
It sounds as though this an unplanned purchase that is not time-critical. If so, just save up your ~$4k monthly surplus cashflow until you have the cash to purchase without raiding your EF or selling investments. I recommend option 3.
Rainmaker41
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by Rainmaker41 »

lolbatross wrote: Tue Jun 22, 2021 4:16 pm
fyre4ce wrote: Tue Jun 22, 2021 2:09 pm My general guideline is no more than 25% of household income in the value of cars. In your case that’s $62,500. Depending on the value of your spouse’s car, this purchase may put you over the limit. If so, I’d look into a cheaper model, or buying low-mileage used.
Your guideline is twice as restrictive as Dave Ramsey's! He says 50% of income...
Percentage based guidelines are approximations. Dave Ramsey’s typical listener has a smaller income than the typical Boglehead. I suspect if we control for that the vague dollar amount they typically get to for cars are similar.
80% Global Stock, 20% US Fixed Income
econalex
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by econalex »

Maybe a margin loan on taxable? Would be a very small % so really no worry about margin call. I heard IB has the best rate. Schwab may match it with their security back line of credit.

May also want to go liability only for insurance since you’re “paying cash”. Also why the relatively high rate for car loan?
epictetus
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by epictetus »

if your current car is reliable option 3
Focus on what you can control
fyre4ce
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by fyre4ce »

lolbatross wrote: Tue Jun 22, 2021 4:16 pm
fyre4ce wrote: Tue Jun 22, 2021 2:09 pm My general guideline is no more than 25% of household income in the value of cars. In your case that’s $62,500. Depending on the value of your spouse’s car, this purchase may put you over the limit. If so, I’d look into a cheaper model, or buying low-mileage used.
Your guideline is twice as restrictive as Dave Ramsey's! He says 50% of income...
Not necessarily. He says <50% of your gross income on anything with a motor, which also includes motorcycles, boats, jet skis, ATVs, private planes, race cars, etc. But I do think over-spending on cars is a major obstacle to building wealth for many people. A car doesn't need to be anything more than comfortable, reliable transportation, which can easily be had for $5,000. The auto industry has spent tons of money turning them into a status symbol, and most people buy way more car than they need. White-collar folks tend to buy sports cars, Teslas, and SUVs, and blue collar folks buy big pickup trucks. In reality, it's a rare case when a 4-door sedan can't get the job done.

In your case, this is clearly a luxury purchase. You asked for opinions, and I'd say you can afford it if your spouse has a <$15,000 car. If not, I'd say you're buying too much car for your income. But I'm just some person on the internet; you're free to disregard my advice.
mikejuss
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by mikejuss »

Don't buy the car until you have enough money in your emergency fund, and don't touch your taxable account until retirement.
LittleMaggieMae
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by LittleMaggieMae »

What's your "Fun Money" or "Allowance" money for the Month? Or what's the line item for Vehicle(s) in your budget? In other words those are places to get the money for the monthly loan payment...

It's a 55K cost car - I'm assuming there's taxes and other costs - so let's say the total bill is 60K and that you will finance 60K.
60K @ 2.5% for 60 payments = $1050.00 and you'll pay $3890.50 in interest.

If you pull 60K from your taxable account will it cost more or less than $3890.50?

Will you ADD $1050.00 to your savings/investing every month if you pay cash to compensate or will you just leave your current level of savings/investing and do nothing?

I always assume that when someone sez they will be drawing down their taxable account for some big item and then saving the monthly payment -that they will literally pull additional money from their monthly cash flow (adjust their spending) and transfer it to savings/investments. In reality I doubt that happens. The other assumption I make is that they have a "new car sinking fund" and put money into it monthly and when they go to buy a new car they use that money - and maybe 'convert' the amount they were saving monthly into any car payment they may need to make if they don't have enough saved. (I've got a $300 a month amount that goes to my 'new car sinking fund" - when I need a new car I have a down payment and upto $300 a month I can use on a loan payment... buying a new car doesn't change my fixed "expenses" as per se it just changes were an amount goes every month. ) If I save enough to pay cash for a new car - then I can decide if I want to pay cash or not.

Does your current "savings/investing" monthly amount have an amount for a "new car expense"? Do you have a sinking fund for a new car? is that were the 60K comes from if you pay cash? If you've been filling a "new car sinking fund" and you've got 60K in it - then pay cash for the car -- and keep your budget as is - nothing in your monthly spending needs to change (your "new car sinking fund" starts to replenish immediately).

If you don't have 60K in your "new car" sinking fund and will pay cash for the car - then you'll need to find the difference in your monthly spending. What will you cut back on? I assume you will continue to fund your "new car sinking fund" at a new higher amount to compensate.

If you don't have a "new car" sinking fund at all... then you'll need to find $1050.00 in your monthly spending - if you pay cash or if you take a loan.
(you will need to replenish your savings that you spent on the car - otherwise the car made you 60K poorer...OR you will need to make monthly car payments (to keep the 60K in wealth you built)). What will you have to cut back on?

At the end of the day - a car is an expense.
edudad
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by edudad »

BTC just crashed, so it might need to sit.

Take a margin loan from your brokerage if the rate is cheaper than your car loan and cash flow as much as possible to fill the hole. IB rates are lower.

BTW, what other assets you have that brings your NW to 2M? Do you have equity elsewhere than what's listed here? Can you tap into that? Just a thought.
TheDDC
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by TheDDC »

This is not the site to talk crypto... so there's that. Don't waste your time with junk.

Don't take a loan for a declining asset like a car (or anything else with wheels/motors). I would pay for it with a combo of cash and mutual fund withdrawals. Then build it back up again. If you listen to the "mom's basement financial advisor" types then the market will drop 80% soon and stay that way for a decade or more and you'll soon have a good deal on buying back in soon anyway.

Okay, the last part was sarcasm, but seriously... just pay cash for a car. Use your mutual funds like you would a savings account.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

edudad wrote: Tue Jun 22, 2021 7:30 pm BTC just crashed, so it might need to sit.

Take a margin loan from your brokerage if the rate is cheaper than your car loan and cash flow as much as possible to fill the hole. IB rates are lower.

BTW, what other assets you have that brings your NW to 2M? Do you have equity elsewhere than what's listed here? Can you tap into that? Just a thought.
My brokerage is Fidelity which has terrible margin rates (6.575% for me). Moving to IB would be a hassle just to buy a car. I'm not seeing a big sign up bonus offer though I didn't look too hard.

Of the 2M, 1.75 is investments/cash/btc. The other .25 is home equity. I could do a cash out refi and get a similar rate for a longer term. I could pull much more than the 55k. I've been actively trying to eliminate my mortgage in the next 10 years to improve my cash flow. However, arguably a good inflation play would be to cash out refi for the max.
Topic Author
lolbatross
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Re: Best way to fund large expense? Taxable, EF, btc, loan?

Post by lolbatross »

Based on feedback in this thread I've decided:
  • Not to purchase a 55k car. My 5k car works.
  • Shift my near term focus to eliminating my remaining mortgage
  • Sell remaining btc and put towards mortgage
  • Get rid of traditional Emergency Fund. Liquidate savings account. Throw most towards mortgage. Keep 20k in checking for now vs my historical 5k
    checking+50ksav
  • Put monthly savings towards mortgage for remainder of 2021. Previously this had been taxable
I'm sure I traded some various hotly debated boglehead positions for others, but -btc, -EF, -mortgage, -consumption(or at least deferred) seems like it aligns with more of my family's goals (own my home, retire early, build wealth).

In the future I still plan to purchase btc and I'll probably buy an EV and even solar. For now though I'll use the feedback here to improve my overall financial health. Thanks everyone for your feedback.
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