Where to save money to buy a car

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Calico
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Where to save money to buy a car

Post by Calico » Mon Dec 12, 2016 12:17 pm

I hope this is the right forum since I am not really asking about investing, I am talking about saving money/holding it. If this is the wrong forum, please move my thread.

I recently met my emergency saving fund goal of 6 months living expenses socked away. It's in a savings account.

Since doing so I increased my 401k contribution another to 10% with an employer matching 6% (for a total of 16% now). I also put money in a Roth IRA each month for a max of $5500 a year. I didn't change that since the Roth is maxed right now.

My car is 12-years-old and I don't think it will last forever (even if I want it to!) So my though is to start saving up to buy a replacement. Since I don't have a lot of money to spare and I drive my cars until they die, I will probably buy a used car for cash (if I have the time to build up the cash). With the increase in my 401k, I can only save $600 a month.

I really hate the savings account since it really isn't keeping up with inflation (but it's safe and easy enough to access in an emergency). My thought is to keep putting $600 a month into savings, but to maybe put a chunk of money from the savings into something else--either at once or maybe over the course of a year, a set amount every month.

That's where the problem lies. What else is there? I don't know when the car will die, but I suspect within 2-5 years, so I don't want to put the money into stocks. I need something low volatility and accessible. I thought maybe a short term bond, but I am having trouble figuring out how to even do that (or if there are even any bonds out there short enough for my purposes.. I figure I will need the money in about a month's notice). I don't want bond funds though since I don't want to risk losing principle if I need to pull the money out. I've only found products though the U.S. Treasure at this point (such as T-Bills).

CDs aren't much better than the savings account, so they aren't worth the trouble of tying the money up that long (and I wonder if bonds will even be much better). A money market account might work although, again, they don't seem to keep up with inflation either but maybe it would be better than the savings account.

Any suggestions? Thanks!

Rainmaker41
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Re: Where to save money to buy a car

Post by Rainmaker41 » Mon Dec 12, 2016 12:43 pm

I keep cash savings earning 1% APY in an online savings account.

https://www.ally.com/bank/online-savings-account/

2-5 years means you might need it earlier that the suggested time horizon for many investments, even bond-heavy ones.
My username is not about money, but is my old online gaming username. I can't say that I make a great deal of money; I just hate spending it. Married the most loving woman in the world October 2017.

b42
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Re: Where to save money to buy a car

Post by b42 » Mon Dec 12, 2016 12:46 pm

With your anticipated need for the funds (2-5 years), your options are limited. Stocks have too much volatility, and with interest rates being low for an extended period, you won't get much of a return in a bond fund over the short term. Something like the Vanguard Short-Term Treasury Fund (VFISX) may be an option.

Your best options appear to either leave the money in savings (thankfully inflation has been relatively low over the last 5 years), or to put the funds in some CDs that offer early withdraw (with the sacrifice of the last three months of interest or something similar). A money market fund may earn marginally more than the savings.

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dm200
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Re: Where to save money to buy a car

Post by dm200 » Mon Dec 12, 2016 12:52 pm

Here is another "approach" that might offer long term benefits (all according to your circumstances):

For most auto purchasers, the interest rates on loans for new vehicle purchases are among the loweest rates available. This "approach" would be to bump up higher return savings, such as 401k contributions, other retirement savings, etc. by an amount th "save" for the new car, BUT then WHEN the car is needed, take out a low rate loan and then cut back such contributions to make the loan payments.

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Pranav
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Re: Where to save money to buy a car

Post by Pranav » Mon Dec 12, 2016 12:59 pm

If you decide to use the bank account route, then you can consider All America Bank with their 1.25% interest rate for balances under $35,0000.
https://www.bogleheads.org/wiki

Jags4186
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Re: Where to save money to buy a car

Post by Jags4186 » Mon Dec 12, 2016 1:02 pm

If you're willing to jump through some hoops Consumers Credit Union offers a 4.59% APY checking account up to $20,000.

emoore
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Re: Where to save money to buy a car

Post by emoore » Mon Dec 12, 2016 2:15 pm

My strategy is a bit different and probably looked at as aggressive. I have all my medium term savings (3-10 years) in a taxable account in an index fund. I contribute to it monthly. When I need to buy a new car or want to renovate the house I look at how much is in there and decide what I can buy. So if the market has done well in the past few years then I'll buy a nicer car, if not I'll either buy a cheaper car or wait for a few more years to buy one. This is just a bit of different way of saving for something compared to the case where you know you want to spend $30k on a car in 5 years then you have to save $500 per month. I'd like to take a little more risk with the money understanding I can wind up with $20k or $40k and adjust from there.

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Toons
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Re: Where to save money to buy a car

Post by Toons » Mon Dec 12, 2016 2:23 pm

Online savings.
Safe Secure
No Need to chase yield for a few bucks.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

mmmodem
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Re: Where to save money to buy a car

Post by mmmodem » Mon Dec 12, 2016 2:44 pm

dm200 wrote:Here is another "approach" that might offer long term benefits (all according to your circumstances):

For most auto purchasers, the interest rates on loans for new vehicle purchases are among the loweest rates available. This "approach" would be to bump up higher return savings, such as 401k contributions, other retirement savings, etc. by an amount th "save" for the new car, BUT then WHEN the car is needed, take out a low rate loan and then cut back such contributions to make the loan payments.
+1
With auto loan interests rates so low, I'd bump up 401k contributions and take out a loan when you need it. I currently have a 60 month, 0%, 0 down auto loan. I see no reason to pay cash with such a loan. Even used car loans can be had for under 2% these days.

miamivice
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Re: Where to save money to buy a car

Post by miamivice » Mon Dec 12, 2016 2:56 pm

mmmodem wrote:
dm200 wrote:Here is another "approach" that might offer long term benefits (all according to your circumstances):

For most auto purchasers, the interest rates on loans for new vehicle purchases are among the loweest rates available. This "approach" would be to bump up higher return savings, such as 401k contributions, other retirement savings, etc. by an amount th "save" for the new car, BUT then WHEN the car is needed, take out a low rate loan and then cut back such contributions to make the loan payments.
+1
With auto loan interests rates so low, I'd bump up 401k contributions and take out a loan when you need it. I currently have a 60 month, 0%, 0 down auto loan. I see no reason to pay cash with such a loan. Even used car loans can be had for under 2% these days.
-1

Loans are repaid by future earnings. A person buying a car with a loan is spending future money today.

I would not encourage someone to take out a loan in lieu of saving for a car.

Loans restrict future opportunity because they have to be paid back.

Cash is king in my book.

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dm200
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Re: Where to save money to buy a car

Post by dm200 » Mon Dec 12, 2016 3:21 pm

miamivice wrote:
mmmodem wrote:
dm200 wrote:Here is another "approach" that might offer long term benefits (all according to your circumstances):
For most auto purchasers, the interest rates on loans for new vehicle purchases are among the loweest rates available. This "approach" would be to bump up higher return savings, such as 401k contributions, other retirement savings, etc. by an amount th "save" for the new car, BUT then WHEN the car is needed, take out a low rate loan and then cut back such contributions to make the loan payments.
+1
With auto loan interests rates so low, I'd bump up 401k contributions and take out a loan when you need it. I currently have a 60 month, 0%, 0 down auto loan. I see no reason to pay cash with such a loan. Even used car loans can be had for under 2% these days.
-1
Loans are repaid by future earnings. A person buying a car with a loan is spending future money today.
I would not encourage someone to take out a loan in lieu of saving for a car.
Loans restrict future opportunity because they have to be paid back.
Cash is king in my book.
Over the long run, though, on average, it seems to me that the return (especially taking into account possible tax savings from retirement investments) would likely be greater on the beefed up investments than on the cost of a new vehicle loan.

miamivice
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Re: Where to save money to buy a car

Post by miamivice » Mon Dec 12, 2016 3:29 pm

dm200 wrote:
miamivice wrote:
mmmodem wrote:
dm200 wrote:Here is another "approach" that might offer long term benefits (all according to your circumstances):
For most auto purchasers, the interest rates on loans for new vehicle purchases are among the loweest rates available. This "approach" would be to bump up higher return savings, such as 401k contributions, other retirement savings, etc. by an amount th "save" for the new car, BUT then WHEN the car is needed, take out a low rate loan and then cut back such contributions to make the loan payments.
+1
With auto loan interests rates so low, I'd bump up 401k contributions and take out a loan when you need it. I currently have a 60 month, 0%, 0 down auto loan. I see no reason to pay cash with such a loan. Even used car loans can be had for under 2% these days.
-1
Loans are repaid by future earnings. A person buying a car with a loan is spending future money today.
I would not encourage someone to take out a loan in lieu of saving for a car.
Loans restrict future opportunity because they have to be paid back.
Cash is king in my book.
Over the long run, though, on average, it seems to me that the return (especially taking into account possible tax savings from retirement investments) would likely be greater on the beefed up investments than on the cost of a new vehicle loan.
I have no disagreement, that with today's low interest rates, one can likely do better by taking out low interest loans and putting savings into investment vehicles (retirement or otherwise). It is a risky move and history is littered with examples of people who have done that, and things haven't turned out well.

The idea of taking out a car loan to maximize retirement savings is a riskier proposition that I am comfortable with. YMMV

(The problem happens when someone who borrows heavily to maximize retirement savings loses their job. They still have to pay the loan back but don't have income to do so. It can result in the car, house, or snowmobile getting foreclosed which may have dire consequences.)

Calico
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Re: Where to save money to buy a car

Post by Calico » Mon Dec 12, 2016 3:40 pm

Thank you for the advice so far. My current savings account pays 1% as well. I am just not very happy about that (who is?) lol.

I am a bit debt adverse--except for things that can generate money like real estate (I have a mortgage for example). I don't like to take out consumer debt, even for a car. I'll use a credit card, but I pay it off every month. I can see the point of the 0% financing and maybe I am not logical, but I rather pay cash and own the car outright. Especially a used one like I am looking at.

It looks like there are some other savings and money market accounts I can look in to. I will start there. I can hardly believe one pays 4.59%, it seems too good to be true (so I am a bit wary, but appreciate the tip and will look into it). I know most aren't looking forward to interest rates going up this month, but that might be a good thing for people like me.

CheeseFlip
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Re: Where to save money to buy a car

Post by CheeseFlip » Mon Dec 12, 2016 9:23 pm

I use emoore strategy personally. One other idea for you: I-bonds. Guaranteed principal plus inflation. Check the wiki.

guyesmith
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Re: Where to save money to buy a car

Post by guyesmith » Fri Mar 23, 2018 11:19 am

emoore wrote:
Mon Dec 12, 2016 2:15 pm
My strategy is a bit different and probably looked at as aggressive. I have all my medium term savings (3-10 years) in a taxable account in an index fund. I contribute to it monthly. When I need to buy a new car or want to renovate the house I look at how much is in there and decide what I can buy. So if the market has done well in the past few years then I'll buy a nicer car, if not I'll either buy a cheaper car or wait for a few more years to buy one. This is just a bit of different way of saving for something compared to the case where you know you want to spend $30k on a car in 5 years then you have to save $500 per month. I'd like to take a little more risk with the money understanding I can wind up with $20k or $40k and adjust from there.
This is a lot like my plan. I'd like to open a taxable account and use an index fund (probably the conservative lifestrategy fund) to save for cars. My plan is to make a car payment into the fund every month, possibly forever. Then when I need a car, whether it in 3 years or 6 years or 10 years, I can pull it out, pay my 15% capital gains, and pay cash for the car. Even with the risk and taxes I should be way ahead of a savings account. The funds are conservative enough. If I can only get a 10k car that's just fine. The goal is to never drain it.

guyesmith
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Re: Where to save money to buy a car

Post by guyesmith » Wed May 09, 2018 8:55 am

Thoughts on 'car savings' in a tax-exempt bond fund? Pennsylvania for me. If anyone has seen a thread on this please let me know.

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lthenderson
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Re: Where to save money to buy a car

Post by lthenderson » Wed May 09, 2018 9:07 am

My emergency fund is a range with a minimum and maximum where I start transferring funds into higher yielding accounts like a taxable index fund. The minimum amount is about six months of expenses. The maximum amount includes enough cash to get a new vehicle at a moments notice or for some other major cash need like house repair etc. It then substitutes as a year's worth of expenses should need be. My emergency fund is in a simple savings account.

Generally I find those who worry about losing money by low interest rates are those who are just starting to save for retirement. Once you have your retirement accounts built up, the money you are "giving up" by keeping your emergency fund in a savings account are literally a few peanuts compared to your overall portfolio and not something that keeps me awake at night.

Nearly A Moose
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Re: Where to save money to buy a car

Post by Nearly A Moose » Wed May 09, 2018 8:41 pm

You can get a little more yield now in a money market find. 1.8% or so I think. That's something.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

guyesmith
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Re: Where to save money to buy a car

Post by guyesmith » Wed May 09, 2018 9:46 pm

miamivice wrote:
Mon Dec 12, 2016 2:56 pm

-1

Loans are repaid by future earnings. A person buying a car with a loan is spending future money today.

I would not encourage someone to take out a loan in lieu of saving for a car.

Loans restrict future opportunity because they have to be paid back.

Cash is king in my book.
+100 Yes! I’m right there with you.

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