Author Topic: Reader Case Study - pay off car or hoard cash for eventual house puchase?  (Read 2833 times)

ysette9

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Hello and thank you in advance from a noobie to the forums. I really enjoy the blog and and now hoping to become a little more interactive. I have searched through the old postings and didn't find my question exactly, so I apologize in advance if the veterans around here find this question tedious.

Income: $246K/year gross (DINKs) + $20-30$K/year in stock/cash grants, at least for the next 2 years
Expenses: Since I am just starting on my mustachian journey, I am not ready to have the details scrutinized yet. I know what your responses are going to be anyway based on reading so many case studies! :)
Average spending from 2013 is ~$4870/month. We save $6700/month (cash + retirement), not including 401(k) matching.

Assets:
Townhouse value ~ $500K
2 cars value ~ $26K(is it even fair to count them since they depreciate?)
Retirement accounts (for 2 people) ~ $465K
Emergency fund ~ $33K
Cash (down payment) ~$202K

Liabilities

Mortgage $330K, 5/1 ARM, currently 3.375%, will reset in 2 years but we most likely will have sold by then.
Car loan $10K, 2.49%

Detailed Question
We have a car loan that could clearly be wiped out 5 minutes from now if I chose to do it. Why have we not? Mainly because our main goal for the last few years has been to hoard as much cash as possible so we can buy our "forever home" when the perfect place comes on the market. We are in no rush to buy, but are thinking in the next 0.5-2 years we will. Since we are in no rush, we are waiting patiently but want to move immediately should we find that perfect place. What we are looking for is extremely specific so not many properties come on the market meeting our desirements.

Since we really like sitting on cash and seeing that savings balance grow, we are having a hard time coming up with reasons to pay off the car early. If I paid it off today, I would save a little under $1000 over the life of the loan. The plan for the next house is to (likely) sell the condo which is rented out anyway, and buy some sort of multi-unit place that will allow us to continue our current savings rate. That will put us at financial independence in 9-11 years, depending on average market return. I am comfortable with this timeline.

So my main question: what are compelling reasons to get rid of the car loan early?

**
Update: I went back through my spending 2013 spreadsheet and realized that I was essentially double-counting housing with line items for both mortgage (covered by renting the townhouse out) and rent on the place we actually live in. That makes a big difference! Monthly spending reduced from $6400 to $4870. That said, what I also didn't include in income was ~$30K/year in rental income. However you calculate it, our monthly housing expense is $2400 and our townhouse is pretty much cash flow neutral.
« Last Edit: February 11, 2014, 08:27:11 PM by ysette9 »

AccidentalMiser

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Re: Reader Case Study - pay off car or hoard cash for eventual house puchase?
« Reply #1 on: February 11, 2014, 07:07:46 PM »
Welcome to the forums!  May your journey be long and profitable!

If I had two cars valued at 26k with a loan value of 10k, I would sell them both and buy two 5k cars and bank the other 6k.

With income of 246k and a 2.5% 10k loan, I don't have a strong opinion one way or the other. 

When you say "Cash ~ 202k", do you mean cash in the bank at 0.0000001% interest? 

Why do you want to sink all your cash into an expensive house? 

« Last Edit: February 11, 2014, 07:11:30 PM by Accidental Miser »


soccerluvof4

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Re: Reader Case Study - pay off car or hoard cash for eventual house puchase?
« Reply #3 on: February 12, 2014, 04:15:51 AM »
if you have 202k in the bank cash get rid of the car payments. Get the money in some index funds for earned income or at least part of it and the rest in a mm account paying 1%.  Cars are debt until payed off period imho. And at that point i really don't ever look at them as an asset as you said they just depreciate.

ysette9

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Re: Reader Case Study - pay off car or hoard cash for eventual house puchase?
« Reply #4 on: February 12, 2014, 09:51:23 AM »
I appreciate your responses. As for the $202K, we are keeping it in savings for now because it is slated for a near-term goal, so I don't want to risk it in any sort of market investment.

I realize that the car note is obviously debt and debt is something to be avoided. In the case of debt resulting from poor financial choices, debt leading to a negative net worth, or long-term debt like a mortgage that eventually sucks up a significant portion of your money in interest payments, I am completely for getting rid of it as quickly as possible.

In this more nuanced case though I feel I am making a choice between two competing goals, in which neither choice is inherently bad or risky. Perhaps it does end up being a philosophical decision based on what allows up to sleep more soundly at night. I am interested in your opinions and the reasons for them.

Shor

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Re: Reader Case Study - pay off car or hoard cash for eventual house puchase?
« Reply #5 on: February 12, 2014, 10:29:49 AM »
Mainly because our main goal for the last few years has been to hoard as much cash as possible so we can buy our "forever home" when the perfect place comes on the market. We are in no rush to buy, but are thinking in the next 0.5-2 years we will.
You say this, but..... argh those expenses! I can't take it, it makes me a little ill seeing such a large expense number without even knowing where it's ending up, or maybe because I don't know where it's ending up....

For your specific goal and situation, the car loans are a deficit, and the monthly payments detract each month as well. The $10k owed on the cars is really a blip in your lump sum down payment available. My opinion is that you just pay it off. Dodging the additional interest and the monthly car payments will make up for the upfront cost. With that expense off the table, you can then save that much more as you continue looking for your dream house. Based on your income and your cash available, unless you are planning to get a super (duper) McMansion + ski resort, this should not negatively impact your capacity to buy up your future home.

All of this is well and dandy.. but those expenses... they make my mustache whiskers tingle..