Author Topic: save for new car or invest? interst rate vs returns  (Read 2651 times)

ETBen

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save for new car or invest? interst rate vs returns
« on: November 24, 2015, 10:20:31 PM »
Do you prioritize the investment return rate (expected) or the interest rate of a monthly payment?  I know its discussed a lot in respect to paying off mortgages.

I want to save for a new car over the next 12months. I have a 2009 Prius going strong with 150k miles, but I think its a good time to sock away funds for it.  My gas and mileage is paid by work, so I'm making money driving.  I've never needed anything beyond routine maintenance.

I can put away 15-20k for a newer car by Xmas next year. Not really sure what I want, so wide price range.

OR I can put that money into investments and get a car with a low interest rate when the time comes.

I know the investment return is higher than the interest rate on the car. But then a car payment is for 3 yrs and what if I had a job loss or  something?  that makes owning a car outright a better situation. 

AND if I don't need a new car at that point, I was thinking I should take half of it, invest, and continue to rebuild that car fund each month. 

Money Badger

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Re: save for new car or invest? interst rate vs returns
« Reply #1 on: November 25, 2015, 05:20:40 AM »
ETBen, Your plan is sound to stash now, then pay cash (with option to invest half later).   Investment risk in such short timeframe is too high (if you need money in less than 5 years it takes to recover from a market downturn).   And you have bigger fish to fry with other saving and investment of the remaining free cash flow after car saving.   Of course, You want that next car to be as small a chunk as possible...

Nice job getting the work reimbursement while having the Prius.   If they reimburse at Federal mileage rate, you should be killing it financially on that perk.   We still love our Prius V at almost 100K miles!

matchewed

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Re: save for new car or invest? interst rate vs returns
« Reply #2 on: November 25, 2015, 06:12:54 AM »
Depending on the investment you can't guarantee that the return will be greater than the interest rate on the car.

Reasons - It's next year, you don't know what the interest rate is a year from now. And as said above you don't know your returns over the course of that year while saving and the next three years after that. You can't compare two unknowns.

What you can do is set a target amount to save and just use that money. If you really need a 20k car (you probably don't) then just save that money and buy the 20k car (seriously you don't need a 20k car, shoot for much less).

Jack

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Re: save for new car or invest? interst rate vs returns
« Reply #3 on: November 25, 2015, 08:38:55 AM »
I want to save for a new car over the next 12months. I have a 2009 Prius going strong with 150k miles, but I think its a good time to sock away funds for it.  My gas and mileage is paid by work, so I'm making money driving.  I've never needed anything beyond routine maintenance.

You realize your Prius still has half its life left, right? It's barely broken in!

IMO, saving for a car is a little silly because you should almost be able to cash-flow it. And by that I'm not trying to claim everyone is making $20K/month so they can cash-flow a new car; I'm claiming they should be able to save up $1K/month for a couple of months to buy a car in the $3K range. By that standard, you've got at least five more years of driving your Prius before you even need to worry about it.

Cougar

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Re: save for new car or invest? interst rate vs returns
« Reply #4 on: November 25, 2015, 09:30:40 AM »

you should continue to save and put money to work, even if you do not know the return on your investments over the next year, nobody does unless you have an annuity.

i also have a problem with the word "new". if youre considering buying new, please find a car depreciation calculator and find out how much money you will give up by buying new. i suggest finding a car at least 5 years old with low miles. you should have over 60% of the depreciation gone by then. i don't have a problem with dropping 20k on a car over something like a ford fiesta that you dread driving on the freeway, but giving away money for "new" is a bad idea.

Jack

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Re: save for new car or invest? interst rate vs returns
« Reply #5 on: November 25, 2015, 09:46:10 AM »
i don't have a problem with dropping 20k on a car over something like a ford fiesta that you dread driving on the freeway

Hey, new Ford Fiestas (especially the Fiesta ST) are really nice. They're not at all like the old '80s Fiestas.

Of course, it's not surprising that they're really nice, since a top-of-the-line Fiesta is a $20K car.

ETBen

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Re: save for new car or invest? interst rate vs returns
« Reply #6 on: November 25, 2015, 12:21:44 PM »
Some confusion on my part.

For investment I meant for the long term to continue building that bucket, and then finance a car bc that rate is lower than long term investment.  But I think I value not having a car payment more and agree with you all on the rest.

New car being new to me, not new from the lot.  But id probably still spend at least $15k for what I like.

I do hear that they run forever.  I think I need to look at better tires. I hate how it handles.  But love it otherwise and will keep it. And yes, I make an extra $100+ per week from the mileage.  I love a hatchback too. So easy to pack for a trip.  And tailgating in the Prius lol

If I get to December and car seems to be going strong, then I might consider refinancing to a 20yr to get rid of PMI.  I have FHA (bought my dream house that I can afford right after leaving my husband, but couldn't free up enough for a bigger down payment.) You can't request PMI to be dropped at 78% with FHA anymore.  PMI is not tax deductible as far as I know.

I have no other debts besides the mortgage.

zephyr911

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Re: save for new car or invest? interst rate vs returns
« Reply #7 on: November 25, 2015, 12:25:06 PM »
Invest and cross that bridge when you come to it. Just don't let the lower APRs on newer cars dictate your buying decision. Decide what you want, look at financing vs. cashing out investments, and make the call.

I'm pretty apathetic about cash vs financing when it comes to cars, and I know that's not typical here. Just make sure the decision comes down to math and logic.

 

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