Author Topic: Financial Priorities -> Car, Loans, etc.  (Read 1230 times)

shifty803

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Financial Priorities -> Car, Loans, etc.
« on: April 05, 2015, 09:31:13 AM »
Hello Mustachians, I am new and looking for a bit of advice.

My wife and I are in the 25% income bracket and have a new baby. I am basically debt-free (except for the mortgage), but my wife has $30k education debt at 6.5%. In 2015, the interest should be entirely deductible, so our effective rate on that is about ~4.5%. In a couple years she will be eligible for loan forgiveness up to $17.5k, unless Congress changes the criteria to qualify for it. Nothing is certain right now.

I max out all the tax-advantaged retirement accounts year-over-year but have had quite a few cash expenses lately related to the newborn and other misc. expenses. My current liquid assets are in savings account and i-Bonds. Besides tax-advantaged savings, I do not currently have a ton of taxable accounts. That is partly why I am here - we want to increase this aspect!

However, we currently own only one car, and my wife needs something reliable to get her on-time to and from the school where she teaches. Being late or absent is a really big deal for a teacher, so reliability is important. I estimate our driving habits to and from work would be 4-5k miles per vehicle. I ride my bike as much as possible, but I cannot muster the courage to do it in heavy rain or temperature below 40F.

A family member has a 2013 Honda Fit coming off lease with a $10.5k residual and only ~20k miles. Compared to the current used market, this seems like a fantastic deal. The downside is that the ~$11k I would pay after tax is basically all my savings account money, leaving only the i-Bonds and a little cash my wife has managed to save.

The other option as I see it is to finance the car at about 2-3% through our credit union (at least partially) and instead roll cash into student loans to pay down that debt.

I would rather not have a car payment, but is this a situation where it may be more prudent to get a loan? Or should I be looking for 4-5k, high-mileage vehicles for her? Reducing retirement savings to increase cash savings is not an option - IMHO you have a certain amount of tax-advantaged money per year, and if you do not take advantage the opportunity is gone forever.

Advice is much appreciated.
« Last Edit: April 05, 2015, 10:45:25 AM by shifty803 »

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Re: Financial Priorities -> Car, Loans, etc.
« Reply #1 on: April 05, 2015, 01:53:02 PM »
... A family member has a 2013 Honda Fit coming off lease with a $10.5k residual and only ~20k miles. Compared to the current used market, this seems like a fantastic deal. The downside is that the ~$11k I would pay after tax is basically all my savings account money, leaving only the i-Bonds and a little cash my wife has managed to save.

The other option as I see it is to finance the car at about 2-3% through our credit union (at least partially) and instead roll cash into student loans to pay down that debt.

I would rather not have a car payment, but is this a situation where it may be more prudent to get a loan? Or should I be looking for 4-5k, high-mileage vehicle for her? Reducing retirement savings to increase cash savings is not an option - IMHO you have a certain amount of tax-advantaged money per year, and if you do not take advantage the opportunity is gone forever.

Advice is much appreciated.

Look for an older, less expensive car.  An older car is not necessarily less reliable.  My wife drives a 1998 Subaru Forester and I drive a 1996 Dodge Dakota and neither one of us has ever been left stranded by either vehicle.  Never even missed an appointment or work due to any vehicle issues.

So, yes, keep looking for a more economical car in that $4000 plus-or-minus area.

And... as far as high mileage goes, my Dakota has 140,000+ miles on it and my wife's Subaru has 240,000+ miles on it.  So...

Good luck.