Save for future vehicles vs. pay down mortgage

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Shem002
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Joined: Wed Nov 07, 2018 11:49 am

Save for future vehicles vs. pay down mortgage

Post by Shem002 » Wed Nov 07, 2018 11:59 am

In general, should I transfer money to a "car" savings account each month or throw that money towards the principal of mortgage (fixed 3.99%) and finance future car which I don't plan anytime soon. Mortgage is only debt.

Credit Union currently offers 1.8% for new vehicle/48 month term purchases. Not sure what future rates will be but likely low.

I have fully funded 3-6 months emergency fund.

PFInterest
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Re: Save for future vehicles vs. pay down mortgage

Post by PFInterest » Wed Nov 07, 2018 2:07 pm

are those your only options?
retirement accounts, IRAs, vacation?

Dottie57
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Re: Save for future vehicles vs. pay down mortgage

Post by Dottie57 » Wed Nov 07, 2018 2:10 pm

Do all three. It is not an all or nothing decision.

Shem002
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Re: Save for future vehicles vs. pay down mortgage

Post by Shem002 » Wed Nov 07, 2018 2:34 pm

PFInterest wrote:
Wed Nov 07, 2018 2:07 pm
are those your only options?
retirement accounts, IRAs, vacation?
This is for money outside of retirement funding, I am in my 20's.
Dottie57 wrote:
Wed Nov 07, 2018 2:10 pm
Do all three. It is not an all or nothing decision.
What do you mean by all 3? I only provided 2 options.

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GerryL
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Re: Save for future vehicles vs. pay down mortgage

Post by GerryL » Wed Nov 07, 2018 2:34 pm

Shem002 wrote:
Wed Nov 07, 2018 11:59 am
In general, should I transfer money to a "car" savings account each month or throw that money towards the principal of mortgage (fixed 3.99%) and finance future car which I don't plan anytime soon. Mortgage is only debt.

Credit Union currently offers 1.8% for new vehicle/48 month term purchases. Not sure what future rates will be but likely low.

I have fully funded 3-6 months emergency fund.
Not an either-or proposition. I did both. After you have maxed out your long-term savings, compute what you have left that can go to savings then assign a portion to each goal: early mortgage payment and future car.

Dottie57
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Re: Save for future vehicles vs. pay down mortgage

Post by Dottie57 » Wed Nov 07, 2018 2:35 pm

Shem002 wrote:
Wed Nov 07, 2018 2:34 pm
PFInterest wrote:
Wed Nov 07, 2018 2:07 pm
are those your only options?
retirement accounts, IRAs, vacation?
This is for money outside of retirement funding, I am in my 20's.
Dottie57 wrote:
Wed Nov 07, 2018 2:10 pm
Do all three. It is not an all or nothing decision.
What do you mean by all 3? I only provided 2 options.
Ok. Do both!

Shem002
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Re: Save for future vehicles vs. pay down mortgage

Post by Shem002 » Wed Nov 07, 2018 2:39 pm

Ok thanks everyone. I guess I was overthinking it based on interest rates.

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Watty
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Re: Save for future vehicles vs. pay down mortgage

Post by Watty » Wed Nov 07, 2018 2:59 pm

Shem002 wrote:
Wed Nov 07, 2018 2:39 pm
I guess I was overthinking it based on interest rates.
+1

For a $20,000 car loan the average balance would be $10,000 between the time you buy the car and pay it off. If you manage to get an extra 2% that is $200 which is hardly a life changing amount.

That is nice enough but when you look at commiting the money for 30 years I am not sure that is worth it.

I would save money in a car fund, you can always change your mind later if you want. If you pay extra on the mortage that be an unchangeable decision.

Saving up enough to pay cash for a really something you only need to do once in your life if after buying a car for cash you also make your "car payment" into a fund for buying your next car.
Shem002 wrote:
Wed Nov 07, 2018 11:59 am
Not sure what future rates will be but likely low.
I would disagree with the "likely" part of that statement. it was not all that long ago that you could get 5% in a money market account. Ten years from now the rate could be a lot higher than 3.99%.

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Nestegg_User
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Re: Save for future vehicles vs. pay down mortgage

Post by Nestegg_User » Wed Nov 07, 2018 3:06 pm

Shem002

with an interest rate of ~4%, if you can itemize the effective cost is lower.... but no such advantage occurs with consumer debt (..cars..) so having enough to pay in cash, or to be able to pay a substantial portion, is likely more advantageous... especially since those rates are higher (consider all costs when looking at those 1.5% rates, do they include the requisite markups that they put in, plus the extra (gap) insurance, etc?)

In my first house, I didn’t pay extra principal... but it was most certainly a cheaper cost than yours today (my first was $71k for a SFH). I would also up your emergency fund to longer than six months and keep it in a CD ladder (you would have an option then to break the CD if really needed for emergency but put the money to work for slightly above inflation). If you needed to pull money out of the house (i.e. you prepaid mortgage principal) that would likely cost you more than what you give up from the prepayment, especially if you can itemize and thus have a lower effective rate.

Shem002
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Re: Save for future vehicles vs. pay down mortgage

Post by Shem002 » Wed Nov 07, 2018 3:19 pm

The extra money that I have been "throwing" towards mortgage principle is actually just getting transferred automatically to a separate bank account so it's still liquid. I don't see the point of actually transferring it to the mortgage because in the event I need to borrow the money I would then have to take out a loan. I would much rather save until I can pay it off mortgage.

Nissanzx1
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Re: Save for future vehicles vs. pay down mortgage

Post by Nissanzx1 » Wed Nov 07, 2018 3:20 pm

The replacement of your car is just a matter of time, save for it now. We eliminated mortgage a year ago and have always held $300/mo back for vehicle fund during the entire process.

Even at 1.8%, it makes more sense not to borrow because it's cheaper overall and you will earn interest on your savings along the way.

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willthrill81
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Re: Save for future vehicles vs. pay down mortgage

Post by willthrill81 » Wed Nov 07, 2018 3:24 pm

Another option is to create what's referred to as a sinking fund for all of your debt. This can be invested however you wish (high-yield savings account [currently about 2%], all bonds, all stock, or anywhere in-between, etc.). When you need the money or just want to pay off your mortgage or buy a car outright, do so from the fund. This preserves liquidity that you would not have if you just put the money directly toward the mortgage. Yes, your returns from this sinking fund could be lower than your mortgage rate, but that may be a small price to pay to maintain liquidity and keep your options open for the future.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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