Author Topic: Pay off car or save/invest?  (Read 5066 times)

jestered

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Pay off car or save/invest?
« on: May 30, 2013, 04:18:41 AM »
I'm 27.  I financed a new car about a year ago that has $20000 left owing with a 2% interest rate.  This is my only debt.

I have a $8500 emergency fund, $12000 in registered accounts, and $6600 sitting around in miscellaneous savings accounts under the names as "Travel", "Gifts/Christmas", and "Downpayment". Most of it's in downpayment. A fourth of it was in Travel but I can't justify travelling when I'm carrying debt so no matter what I end up choosing to do, I ain't going anywhere, don't worry.

I have new job where I make $4600/month and manage to faithfully save $2000-2500 every month.  I hope to increase that significantly.  I'm cutting cable tomorrow, getting a roommate soon, trying to curb lifestyle inflation, etc etc.

I've decided that I don't want to buy a house.  It doesn't fit my lifestyle.  I don't want to be tied down.  I don't want the work that home-owning demands.  I'm not going to have kids no matter how many times I get asked when I will.  I don't care to be in one place for a long time.  I want to travel and eventually live overseas for parts of the year.  I want to keep my expenses as low as I can (working on it!) and savings high so I can reach FI by the time I'm 45-50 or earlier if at all possible.

I really want this car paid off.  (I don't know if you can tell, but I recently re-read MMM's debt emergency post!) Instead of putting the $2500/month in savings, I want to throw it at the car debt and have it GONE in a few months, instead of making payments until 2018 as it's currently scheduled.  Once the car is paid off I could sell it and get a cheaper car. Or maybe not.  I really like this car.  I will probably keep it. Feel free to face-punch me, I know it's coming.

So my question is, should I use that $6600 to wipe some of that car debt and/or attack the debt with my monthly savings instead of investing it?  Then after it's done before the end of the year I can start putting not only the $2500/month but the monthly car payments into investments.

(Sidenote: I'm getting pitiful returns as my registered funds are only in mutual funds with ridiculous MERs (the cost of being Canadian, speaking of which, I wonder if there is a forum thread for Canadians?).   I've been reading up on investing and I want to invest in low-cost ETFs and index mutual funds; however, I'm told I need to have at least $25000 to invest through TD Waterhouse, or else I'll get hit with a $100/year fee. So I may have to wait until next year to dip my toe into ETFs/index funds.)

SnackDog

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Re: Pay off car or save/invest?
« Reply #1 on: May 30, 2013, 04:33:44 AM »
2% is a good rate but probably just means the dealer got his pound of flesh on the price instead. $20,000 tied up in a car is going to quickly depreciate into $10,000 tied up in a car. $20,000 in an index fund could get work its way up to $25000 in three years. If you are determined not to sell, stick with the payments and invest. You are a fabulous saver!!  $25000 invested at your age will be worth a fortune when you are 65.

extole

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Re: Pay off car or save/invest?
« Reply #2 on: May 30, 2013, 04:54:32 AM »
I agree with sloanbj. If you love the car and don't see yourself selling it anytime soon, then live with the 2% interest rate and don't pay it off early. The opportunity cost of 20K in capital is substantial.

And don't sweat the $100 account fee. Generally speaking, the best time to invest is almost always "yesterday", second best is "now". You'll likely pass 25K in account value in no time if you hit the savings rate you anticipate.


MorningCoffee

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Re: Pay off car or save/invest?
« Reply #3 on: May 30, 2013, 07:48:08 AM »

(Sidenote: I'm getting pitiful returns as my registered funds are only in mutual funds with ridiculous MERs (the cost of being Canadian, speaking of which, I wonder if there is a forum thread for Canadians?).   I've been reading up on investing and I want to invest in low-cost ETFs and index mutual funds; however, I'm told I need to have at least $25000 to invest through TD Waterhouse, or else I'll get hit with a $100/year fee. So I may have to wait until next year to dip my toe into ETFs/index funds.)

Check out TD Canada Trust e-series. It's different from their TD Waterhouse brokerage accounts. I'm in Canada and looking into this at the moment. They have low MER index funds. They seem to have no annual fees. (I thought you needed to have an automatic  payment plan to waive the fee but I can't find that anywhere.) I'm starting to set mine up tomorrow so will have more info soon.

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp?tab=what-is-it

With only a 2% interest rate, I would invest the money instead. Since you have no mortgage or other debt, and 2% rocks. Treat it like you would a mortgage if it bugs you that it's for a car.


Self-employed-swami

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Re: Pay off car or save/invest?
« Reply #4 on: May 30, 2013, 08:17:51 AM »
How much could you sell the car for, right now?

Could you sell it for somewhere near $15,000? If you can, do it.  Use the savings you have now, in conjunction with the proceeds from the sale, to pay off the loan. 

What city are you in?  Is transit an option for a while, until you have another $4-6,000 saved, for a good used car?  Why do you need a car? 

These are all better questions to be asking :)

jestered

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Re: Pay off car or save/invest?
« Reply #5 on: May 30, 2013, 02:26:12 PM »
Check out TD Canada Trust e-series. It's different from their TD Waterhouse brokerage accounts. I'm in Canada and looking into this at the moment. They have low MER index funds. They seem to have no annual fees. (I thought you needed to have an automatic  payment plan to waive the fee but I can't find that anywhere.) I'm starting to set mine up tomorrow so will have more info soon.

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp?tab=what-is-it

With only a 2% interest rate, I would invest the money instead. Since you have no mortgage or other debt, and 2% rocks. Treat it like you would a mortgage if it bugs you that it's for a car.

Yes, that is what I have intended to invest in but the last time I was at a TD branch and wanted to convert my mutual funds to the e-series the rep told me about the annual fee for having less than $25000 to invest.  Let me know if you hear any different as you're setting up your account!  Maybe she got it wrong.

icefr

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Re: Pay off car or save/invest?
« Reply #6 on: May 30, 2013, 02:29:58 PM »
Check out TD Canada Trust e-series. It's different from their TD Waterhouse brokerage accounts. I'm in Canada and looking into this at the moment. They have low MER index funds. They seem to have no annual fees. (I thought you needed to have an automatic  payment plan to waive the fee but I can't find that anywhere.) I'm starting to set mine up tomorrow so will have more info soon.

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp?tab=what-is-it

Yes, that is what I have intended to invest in but the last time I was at a TD branch and wanted to convert my mutual funds to the e-series the rep told me about the annual fee for having less than $25000 to invest.  Let me know if you hear any different as you're setting up your account!  Maybe she got it wrong.

From what I've read online, you can't convert your mutual funds to an e-series in a branch - you can only do it by mailing a form in: http://www.tdcanadatrust.com/products-services/investing/mutual-funds/investment-options/convert-acct.jsp

jestered

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Re: Pay off car or save/invest?
« Reply #7 on: May 30, 2013, 02:37:09 PM »
How much could you sell the car for, right now?

Could you sell it for somewhere near $15,000? If you can, do it.  Use the savings you have now, in conjunction with the proceeds from the sale, to pay off the loan. 

I have no idea.  The last time I checked the Gold Book for the MSRP was a year ago and for my location in Canada it was $15450 for Wholesale, $17950 for Retail.  So I would say less than that. ;)

But don't you need to have the title of a car before you can sell it?  The other problem I have is that it's a manual so it would be even tougher to sell it if I could convince the buyer to give me money if I couldn't produce a title right away.  The other problem (which I really didn't consider until now) is that it's (and I hate to use this word) a "girly" colour. That combined with being a manual combined with not being able to immediately produce a title may be a problem.  I don't know.  I don't have much experience selling cars.  :S  (Nor buying cars, obviously, or else I would not have purchased new!)  All these factors are making me lean in the direction of keeping it.  Plus the heated seats, moonroof, and bluetooth.  Oh, and the gas mileage/reliability.  That's kind of important too.

jestered

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Re: Pay off car or save/invest?
« Reply #8 on: May 30, 2013, 02:40:18 PM »
From what I've read online, you can't convert your mutual funds to an e-series in a branch - you can only do it by mailing a form in: http://www.tdcanadatrust.com/products-services/investing/mutual-funds/investment-options/convert-acct.jsp

Yes, I know, I was just asking advice at the time as I was there to invest in mutual funds.  (I wasn't quite ready to make the leap to indexing yet.)  But still, she said the minimum was $25000 to waive annual fees (not including trade fees).

Self-employed-swami

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Re: Pay off car or save/invest?
« Reply #9 on: May 30, 2013, 02:43:01 PM »
How much could you sell the car for, right now?

Could you sell it for somewhere near $15,000? If you can, do it.  Use the savings you have now, in conjunction with the proceeds from the sale, to pay off the loan. 

I have no idea.  The last time I checked the Gold Book for the MSRP was a year ago and for my location in Canada it was $15450 for Wholesale, $17950 for Retail.  So I would say less than that. ;)

But don't you need to have the title of a car before you can sell it?  The other problem I have is that it's a manual so it would be even tougher to sell it if I could convince the buyer to give me money if I couldn't produce a title right away.  The other problem (which I really didn't consider until now) is that it's (and I hate to use this word) a "girly" colour. That combined with being a manual combined with not being able to immediately produce a title may be a problem.  I don't know.  I don't have much experience selling cars.  :S  (Nor buying cars, obviously, or else I would not have purchased new!)  All these factors are making me lean in the direction of keeping it.  Plus the heated seats, moonroof, and bluetooth.  Oh, and the gas mileage/reliability.  That's kind of important too.

I am in Canada, and my car doesn't have a title, it just gets registered to me/whomever owns it.  What province are you in?

If you find a buyer, you just get them to make the cheque out to you, and the finance company.  Then you give the finance company the cheque (and whatever extra you need), sign over the registration, and bingo, car sold!

jestered

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Re: Pay off car or save/invest?
« Reply #10 on: May 30, 2013, 02:58:29 PM »
I am in Canada, and my car doesn't have a title, it just gets registered to me/whomever owns it.  What province are you in?

If you find a buyer, you just get them to make the cheque out to you, and the finance company.  Then you give the finance company the cheque (and whatever extra you need), sign over the registration, and bingo, car sold!

I see.  I must have been reading American advice about selling cars.  I am in Alberta.  Thanks!

Self-employed-swami

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Re: Pay off car or save/invest?
« Reply #11 on: May 30, 2013, 03:49:49 PM »
I'm in Alberta too.

MorningCoffee

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Re: Pay off car or save/invest?
« Reply #12 on: May 30, 2013, 03:53:50 PM »
Check out TD Canada Trust e-series. It's different from their TD Waterhouse brokerage accounts. I'm in Canada and looking into this at the moment. They have low MER index funds. They seem to have no annual fees. (I thought you needed to have an automatic  payment plan to waive the fee but I can't find that anywhere.) I'm starting to set mine up tomorrow so will have more info soon.

http://www.tdcanadatrust.com/products-services/investing/mutual-funds/td-eseries-funds.jsp?tab=what-is-it

With only a 2% interest rate, I would invest the money instead. Since you have no mortgage or other debt, and 2% rocks. Treat it like you would a mortgage if it bugs you that it's for a car.

Yes, that is what I have intended to invest in but the last time I was at a TD branch and wanted to convert my mutual funds to the e-series the rep told me about the annual fee for having less than $25000 to invest.  Let me know if you hear any different as you're setting up your account!  Maybe she got it wrong.

I think that's the TD Waterhouse only (they do have a $25 for RRSPs under 25k). I'll let you know once I've been through it. I'm not sure how long it will take for the account to be converted.
Icefr is right, it's a form to fill out and mail in. Many PF bloggers out there have commented it's a bit of a pain to go through the process. At least I'm expecting it.