Author Topic: [Canada] Car replacement fund  (Read 718 times)

BSL18

  • 5 O'Clock Shadow
  • *
  • Posts: 31
[Canada] Car replacement fund
« on: November 09, 2018, 11:34:55 AM »
Hi everyone. I'm picking your brains about my car replacement strategy. We are a 2 car family mainly because we live in the countryside, meaning both the SO and I need our own car. Mine is at 180k and hers at 215k. I'm stashing a bit aside from my long term investment both based on our annual mileage it won't be enough to cover the next cars price. I could stash more but some of it would be at the expense of the retirement accounts (that are not maxed out yet, working on that).

So right now the car stash is in a savings account, barely keeping up to inflation. On the other hand, I have a handy credit line that would easily allow me to buy the two next cars. Currently it's at 3.74%, but it's variable (and Canada's government has been pretty clear that it is going up for next few years).

So what would you do? Forget about the car replacement fund and max out the retirement accounts, and pay for the cars with the 3.74% credit line (hoping to get 7% a year from the investment)? Or stash less for retirement and make sure that we have enough funds to buy the cars upfront when the time comes?

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1642
Re: [Canada] Car replacement fund
« Reply #1 on: November 09, 2018, 11:47:11 AM »
IMHO, playing a variable rate against a POTENTIAL long term return of 7% is poor risk management. 

Under a longer time span (like if you just bought a car and figured it would last 10 more years), I would suggest contributing to a designated balanced fund for car replacement (instead of loan payments).

It sounds like 2 cars need replacing soon.  You might estimate how much and when their replacements will be, then just fund high yield savings account accordingly. 

daverobev

  • Magnum Stache
  • ******
  • Posts: 3322
  • Location: UK
Re: [Canada] Car replacement fund
« Reply #2 on: November 09, 2018, 05:46:52 PM »
How much are the cars you're looking at/ballparking, vs everything else?

If you're talking a relatively small amount of money vs your net worth/income, your net worth becomes your own insurance - you just buy on credit and pay it off in a couple of months from income.

If you're financially tight it's different. It also depends on the cars - 180k isn't all that much, and neither is 215k, if you have good solid generally maintained cars (I'm presuming you're talking kms here not miles). And of course it depends on how much you drive, etc, etc.

It is very 'hand wavey'. Have enough in cash that you feel comfortable. Remember there are good short term savings accounts if you can be bothered (EQ Bank are doing a 3 month GIC, Simplii and Tangerine have temporary bonuses, all at greater than 3%; and EQ Bank's general account is at 2.3%). Invest the rest. Or just have it as part of your general emergency fund, assuming you have enough slack.

BSL18

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: [Canada] Car replacement fund
« Reply #3 on: November 10, 2018, 07:02:07 AM »
I'm talking in km indeed. We are saving around 35% of our net income, so it would'nt be a problem to switch some funds. Both cars will probably last probably last us 3 or 4 more years, but I want to plan replacement now to avoid taking a quick decision when we'll need to buy new ones. Next cars will be between 6 and 10k$ depending on the market at that time. So overall not that much of a pain to save that cash, but it'd have an impact on our savings ratio.

I should maybe go back to the first thought, which was "I want to stash as much as possible for retirement". We'd fund our TFSA as much as possible, so the first idea was basically let's put the car fund in the TFSA's, and if by the time we need the next cars the market is down, we'll use the credit line.


Stashasaurus

  • Stubble
  • **
  • Posts: 138
  • Location: Regina SK, Canada
Re: [Canada] Car replacement fund
« Reply #4 on: November 10, 2018, 07:32:35 AM »
I would caution using the TFSA as a short term savings vehicle. Remember that taxes have been paid going in, so you are getting a break on the taxes coming out. Personally, the TFSA is the last funds I will be taking out in retirement. Let that sucker grow. For your investment horizon cash/CD's seem appropriate.

What make/model of cars are we talking about? 215k on a Chrysler Neon is a lot different than on a Corolla.
Do you know how many km you are putting on the vehicles each year?
Are the cars going to be replaced in 3-4 years based on km or on a different condition?

BSL18

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: [Canada] Car replacement fund
« Reply #5 on: November 10, 2018, 12:00:56 PM »
Well, if I take out some of the TFSA stash all gains will remain inside and keep on coumpounding, and I get the space back after one year. Not optimal, but better than RRSP.

We have an Elantra (180) and an Impreza (215), putting 30000 and 20000 on each every year, so replacement will be based on their end of line. If they both go further, we'll keep them.

Anyway I guess I'd be basically gambling if I tried to use the TFSA (basically trying to time the market retrospectively, if that's a thing). Saving account seems to be the simple answer, I thought about GIC or CD but I need to be able to access the funds anytime as we target the cars end of life.


daverobev

  • Magnum Stache
  • ******
  • Posts: 3322
  • Location: UK
Re: [Canada] Car replacement fund
« Reply #6 on: November 10, 2018, 12:20:42 PM »
You're over thinking. 6-10k over 3-4 years is ~$200 a month each. Stick $100 each into EQBank, and be done with it, IMHO. You have credit available, you absolutely want to get the TFSA full each year as well... Need to post a full budget so we can cut some other stuff :P

BSL18

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: [Canada] Car replacement fund
« Reply #7 on: November 10, 2018, 06:09:45 PM »
You're over thinking. 6-10k over 3-4 years is ~$200 a month each. Stick $100 each into EQBank, and be done with it, IMHO. You have credit available, you absolutely want to get the TFSA full each year as well... Need to post a full budget so we can cut some other stuff :P

Working on that too! I'll stop overthinking the car replacement and get back to the drawing board to see where we can make up for that 200$. Thanks all!