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I will be in the market for a new car likely sometime in the next year or so. My ’05 Corolla runs just fine, but we are trying for baby #2 and it will be impossible to fit two carseats in the Corolla without my knees being in the steering wheel. I’m looking at a minivan (gasp) which will likely be in the ~$40k range, and I plan to drive it for at least the next 10 years. Right now we have too much cash (e-fund plus another 30k making nothing in checking), and by the time we pull the trigger on the new car should have enough cash to pay for it up front. But that means I have cash sitting around for months doing nothing. What should I do?
A: Keep cash where it is, save enough to pay for the new car in cash. Cash makes virtually nothing (but doesn’t lose value) in the meantime
B: Invest cash and when it’s time to buy the new car sell investments and pay cash. Risk losing money invested
C: Invest cash and when it’s time to buy the new car finance it, leaving investments alone
I know WCI is not a proponent of car payments, but it feels weird to have such large sums of cash sitting in checking for months on end, especially while car loan interest rates are low. Thoughts?
You lost me. You have $30K. You want a minivan. You have the money for it or soon will. But you’re thinking of financing it because you’re worried you’ll miss out on the difference between what the market gives you and what you can finance a car for over a 9 month period on $30K? Maybe if you quantify it then you’ll find the decision easier.
Let’s say you make 5% in the market over 9 months but would only get 1% in the savings account. 4% of $30K = $1200. Not exactly life changing money.
If $30-40K is such a huge chunk of your net worth that having it earn a low return is a big deal and such a large percentage of your income that it would take many months to save it up, maybe you need to rethink about whether you should be spending that much on a car, especially when a reliable minivan can be purchased so much cheaper. For example, a 5 year old Sienna in nice condition runs $12-13K. So you could invest $25K of your $30K now, leaving $5K in a car fund, add $1K a month to it over the next 9 months, and buy a used, but still very reliable Sienna.
But it’s beyond me why a doc would want to make car payments. Most docs should be putting enough money toward building wealth that they could buy a $5K car every month without having to eat Ramen. Want a $10K car? Okay, save for two months. $15K? Three months. etc. Just stop your 401(k) contributions and additional student loan payments while saving up for a few months. Voila- you can now pay cash. Too painful to stop the 401(k) contributions? Then you’re probably buying too expensive of a car relative to your financial situation.
Just some random late night thoughts. It’s your money and your life, do what you want. But I think my commitment to never have a car payment has paid rich dividends in my life.
Yeah, when you do the math I'm not missing out on THAT much in the grand scheme of things by keeping extra cash for up to a year or so. Student loans are gone, and we're already on track to hit over 20% in retirement savings this year (401k contributions auto-deducted with each paycheck- we miss out on some matching if max'd out early). $30-40k hurts somewhat, but less so when you consider I plan on driving it for 10+ years.
I suppose I should look into buying used- but I'm hesitant to inherit a car's problems, plus I want the latest safety features for my kid(s).
), then you can just write the check and pay it off. I was about to refi my wife's student loan, and I didn't want one of our car payments to affect our debt-to-income ratio, so I just wrote a check. Easy peasy. There's no prepayment penalty or fee, so you can change your mind anytime.
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