Author Topic: Money for car in savings or index fund  (Read 553 times)

merlin7676

  • Stubble
  • **
  • Posts: 186
Money for car in savings or index fund
« on: February 01, 2019, 07:21:26 AM »
Good Morning,
   Need some advice from you more savvy experts than myself.
   We're moving next year (sometime spring 2020). Going to be selling our condo in the city and getting a townhouse just outside the city that will be much cheaper even though it'll be bigger (and taking on a roommate/renter for additional income).
   However the public transportation in the area isn't conducive to me to commute to/from work as it would mean 3 buses and over 1 1/2 hours each way due to the routes. I've playing with different forms of transportation and it just makes sense to drive as that will only be about 30 minutes each way. So I will need to get a car.
    So in addition to "normal savings that go into the 401/index etc, I've created a separate "fund" for that.

    My target is $5-6K and I'm half way there.  It's currently sitting in my savings account. Question is: would it be better to put that in the index fund, then take it out a year from now when I want it and pay the capital gains tax or better to just keep it in the savings account since it's only a year. I'd prefer the money to work for me during the year but I'm not sure it's worth the hassle or if it's better to keep the low savings account interest vs. paying the any gains on it in the fund. For reference the savings is 1.9% and the fund is VTSMX.

thanks

The Guru

  • Stubble
  • **
  • Posts: 208
  • Age: 63
  • Location: Great Lakes
Re: Money for car in savings or index fund
« Reply #1 on: February 01, 2019, 07:43:43 AM »
Generally speaking if you need the money in 5 - some even say 10-  years or less as you do, leave it in savings. The rationale is that the market could go up... but it could also go down, leaving you to sell more shares than you'd like if you're selling on a downswing. In other words for that particular goal you should opt for capital preservation, not appreciation.

merlin7676

  • Stubble
  • **
  • Posts: 186
Re: Money for car in savings or index fund
« Reply #2 on: February 01, 2019, 07:48:16 AM »
oh yeah I didn't think about it that way. Good point. Thanks

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1531
Re: Money for car in savings or index fund
« Reply #3 on: February 01, 2019, 08:35:51 AM »
would it be better to put that in the index fund, then take it out a year from now when I want it and pay the capital gains tax or better to just keep it in the savings account since it's only a year.
What about having capital losses instead?
From May to September 2011 the U.S. stock market dropped -17.7%.  The market can turn your $5k into $4k, making you unable to afford the car right when you need it.  Money that must be all there 1 year from now needs to be somewhere less volatile than the stock market.  An online savings account (~2%) is fine for that.

The_Big_H

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Money for car in savings or index fund
« Reply #4 on: February 03, 2019, 09:37:26 PM »
Im a big believer in the "comprehensive emergency / big purchase" cash fund.

It should be able to cover any of the 2 biggest possibilities:
1) purchase of a vehicle (min $5000, could also be as a repair bill)
2) your health insurance out of pocket maximum
3) coverage of the combined deductibles for your renters/homeowners/car insurances ("you crash your car into your house").  A nice side effect of having a big emergency fund = you can carry higher deductibles and pay alot less in insurance, allowing you to invest more).
4) large ticket house item going down (roof, A/C, heating) or your place catches on fire / floods / tornado / total loss (big evac fund), min $5,000... even for renters. Yes you may get paid back, but not immediately.
5) no job for 3 months (take what you need to live w/o investments, make sure to ADD what COBRA will cost you!, do not count on UI).
6) no income for 3 months (repeated twice intentionally, so that it covers a short job loss and one other disaster, or just a long term job loss).
7) cost of a good lawyer if you get into a little legal trouble, I say $10,000, but if you are a more 'spirited' type... more!

Figure the numbers for #1 - #7 and add the two biggest ones together, that should be your emergency fund size.  Odds are more than 2 of the above disasters will not strike in the same year.  Any use of emergency fund: when the event is over, no investing until this fund is recharged.

So, with that in mind, I definetly dont think short term money should be invested, you have this stockpile of cash set aside to cover a car, or many other disasters.  Nowadays it can earn 2% which isnt too terrible for money with instant access.  THis also allows you to safely invest the rest, knowing you wont need it for a LONG time.
« Last Edit: February 03, 2019, 09:39:23 PM by The_Big_H »

SwitchActiveDWG

  • Stubble
  • **
  • Posts: 134
Re: Money for car in savings or index fund
« Reply #5 on: February 04, 2019, 06:42:29 AM »
For me there's two categories: money designated for a long time horizon (ER) and money not. The money not for retirement doesn't go into equities or bonds because, as others have said, the market is volatile. With money market accounts, treasury notes, high yield savings, etc... there's plenty of options out there.

If you have a minute, read this article:

https://www.actuaryonfire.com/how-should-you-invest-short-term/

Well worth your time.

Car Jack

  • Pencil Stache
  • ****
  • Posts: 951
Re: Money for car in savings or index fund
« Reply #6 on: February 04, 2019, 01:03:49 PM »
Let's assume you get to the $6k level.

If you really need that $6k for an acceptable car, keep it in a savings account.  Something like Redneck Bank gives you 2.5%.  Some credit unions give you good interest on the first $1000.  Mine (DCU) pays over 6% on the first $1k.

If you want to take chances on index funds and would be ok with a $3k car after a big downturn, when you really need the car, then it's your right to do so.

A co-worker saw exactly this.  He decided to buy a new truck and sold $10k in stock (DEC).  Then black monday hit.  I saw him later, after the stock had tanked and not come back and said "You lucked out.  Had you waited a few days, you'd have bought yourself a $5k truck".