The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: snowedin on March 27, 2017, 09:42:42 PM
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I'm 27 making 51k/yr with $59k in retirement. I'm currently contributing 6% into my 401k with the full 50% match and contributing $350/month into my Roth IRA. I want to pay cash for my next car but I only have $4k saved and adding $100/month. Should I drag out the car purchase or stop contributing to my Roth and use that to add to my car fund?
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Can you get a $4k car?
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Cars aren't something you should really be planning for. When your current car dies, you buy another one, just like you would pay any sudden unexpected expense.
If it takes more than a couple months (let's say 3-6) of normal savings to buy it, you're probably buying too much car for your means.
Many fine automobiles can be purchased in the USA for 4k.
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Also, at your income level, you should consider contributing to a traditional IRA instead of Roth.
http://www.madfientist.com/traditional-ira-vs-roth-ira/
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I really don't want a super cheap car. Maybe $15k. I've had my 08 Malibu now since 2011 and the repairs are starting to get annoying. My BF can do the repairs but they're getting costly and taking lots of time. If I go with a cheap car it will be about what I have now. I live where we get a lot of snow and I need a safe reliable vehicle. Most of the $4K cars here are rust buckets due to salt.
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Great job at the savings at your age. I agree with the suggestion that you should be capturing the extra 15% gain through tax avoidance by putting everything into a traditional 401k and nothing into a Roth 401k. Once that's maxed, then contribute as much as you can, up to the $5,500 max to a Roth IRA.
Overpaying for housing and cars are two things that will for sure extend the time it takes for you to get to FI. MMM preaches this endlessly. $15K is WAY too much to pay for a car on your salary. I know, shocking statement that is counter to conventional thinking. But, you are in a forum titled "Ask a Mustachian" and conventional thinking causes most Americans to be broke on a median salary (close to yours).
I agree, $4K may be too low for the conditions of cars in your area, but you should be able to shop around carefully and pick up a fine, clean, safe, and reliable vehicle for no more than $8K (see article below, and shop around). I personally would focus on highly reliable brands (i.e. Japanese and Korean, rather than European or American). Save up for it and pay cash. Don't stop or slow the automatic pilot savings that you have established. That will mitigate the amount you spend. Don't even think about pulling money from your Roth to pay for it. The $8K 'asset' will be worth less next year, while the $7K that you 'saved' from averting the overspending may be worth 6-12% more in a S&P500 index fund. Think about that $7K savings making you $50/month ($7,000 * 8.6% = $600 / 12 = $50/month). Get all of those green monetary soldiers working for you!
http://www.mrmoneymustache.com/2016/01/28/the-man-who-gets-his-cars-for-free/
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I was looking at Honda Accords a couple years old. Even $8k doesn't seem enough for an Accord... considering I want to keep it for 5+ years. I would never actually pull the money from my Roth, just pause the contributions while still contributors my 401k at work. FWIW, I did just take a whole year off work and didn't contribute to retirement at that time. I also spent down my savings, but I do have around $20k liquid. My mortgage (including escrow) is only $675.
I'll have to look more into Roth vs traditional IRA. The calculators I used at the time had me pretty convinced that I was setting myself up to pay less total tax by using the Roth given current and predicted future income.
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I like Financial Samurai's 1/10th rule when it comes to car, which boils down to not spending more than 1/10th of your gross income on a car. It's not perfect, but it's a good guideline for most people.
Want a nicer car? Earn more! :)
Can you buy a more reasonable car in a southern climate and bring it back up to avoid rust?