Author Topic: Zero-Interest Debt (And a newbie who appreciates advice)  (Read 2552 times)

lt_smith

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Zero-Interest Debt (And a newbie who appreciates advice)
« on: May 30, 2013, 07:47:04 PM »
Hello all, I just registered after totally falling in love with the blog a few days ago.  I'm now working my way through the posts from the beginning, and naturally have started thinking about my own situation from a mustache perspective. (Still not getting the mustache thing, but they're awesome, so all right.)

My most pressing question about my own situation ($45k steady and reliable salary (and lots of room to grow), a few thousand in regular (ie low-interest) savings, a few (fewer) thousand in a five-year RSP and a 2-year GIC (Canadian), 24 years old, single, daily bike commuter, and renting) is this: is my zero-interest debt an equally hair-on-fire emergency compared to deep credit card debt with interest?

I (foolishly, I now realize) bought a brand-new 2013 Ford Focus hatchback last year at about $22,000, broken into $324 monthly payments for six years, with guaranteed no interest.  I felt I could do this at the time because I could afford it easily (provided I keep my job, which is basically a sure-thing).  And I still can afford these monthly expenses easily.  It would be nice to not have them, of course, but still very manageable.  Still, overall a foolish move, considering I don't even drive that much anyway.

I also have no other debt of any kind. I regularly clear my CC balance, and never let it go past a month with so much as a penny on it.  I recently totally paid off my student loans as well (which was a big hit to the savings account at the time but I'm so glad I did it - especially after reading this blog).

I really feel like I want to get mustachian on my finances, and retire (or at least become a full-fledged SWAMI in the industry I love -- urban planning and design) at like 35-40.  I'm not through reading the blog yet though, and my FI plan will need to be flushed out in greater detail soon.  (I don't know anything about investing!!)  For now: do I need to be gravely concerned about paying off my car even though it's building no interest and never will?  Should I be throwing my few thousands in hard-earned savings at it already?

Thanks for any input everyone! I'm looking forward to becoming part of this little community. Now back to the blog! (Can you tell I love parenthesis?)

DougStache

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Re: Zero-Interest Debt (And a newbie who appreciates advice)
« Reply #1 on: May 30, 2013, 07:58:50 PM »
Hey ltorviksmith, I'm new around here as well.

There's no advantage to paying off your 0% interest loan early.  In fact, paying it early would work against you since you could at a bare minimum keep the money in a 1% savings account and come out ahead. 

The question I'd ask myself is:  Do I want to sell it and buy used, banking the difference?  I'm currently asking myself the same question, as I have a fully paid off (but way too expensive) car.  I could sell it (optimistically) for ~$25,000 according to KBB and we could get by on just my fiance's car.  I'd save money on insurance and registration on a regular basis as well.  The mustachian side of me knows it's best to sell it, but it's still a difficult decision to act on without sleeping on it for a while.

swick

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Re: Zero-Interest Debt (And a newbie who appreciates advice)
« Reply #2 on: May 30, 2013, 08:26:34 PM »
Welcome to you both!

It is a great community here. I'm in a similar situation in that I am still just starting to learn about investing and questioning how best to go about it. We just (as in take possession tomorrow) bought a new house so I'm trying to balance my mad desire to pay off our mortgage as soon as possible with the nagging suspicion that it MIGHT be better to invest the money -  if I had any sort of idea the best way to do it. The Investor section is a GREAT resource  to get started.

I don't know how others would view the debt, but I would second DougStache's questions. Especially since you said you don't really use the car all that much. Not having those payments would free up quite a bit of cash.


lt_smith

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Re: Zero-Interest Debt (And a newbie who appreciates advice)
« Reply #3 on: May 30, 2013, 08:58:37 PM »
Hey guys, thanks for the replies.

It's nice to know I don't necessarily have to fret about my debt.  But you're right, Doug, that it's probably too expensive.  I love the car, though, and even on the day I purchased it I had at least a LITTLE bit of mustache spirit in me when I told myself that this will very likely be, barring a major accident or theft, the last car I ever own (especially since I'm a cycling and sustainable transportation geek - though I live in a heavily car-dominated environment).  Even if it does crap out on me in 20 or so years, by that point I'm hoping to live in a much more cycling-friendly city that it won't matter and I'll never need another one.

Still, I have the option of selling it, right? It's still in mint condition and everything, but what I'm worried about with that scenario is the hit I'll take on value.  I hear cars lose almost half their value the minute you drive it off the lot.  I don't know if the savings I'll see from having a cheaper car (or even no car -- but that's not feasible in the short-term) will exceed or even balance out with the hit I'll take on selling the car for 20, 30, or 40 percent less than what I paid (or am paying).

Plus I've got a road trip with the boys planned for August and my new wheels are playing host.  It's really hard to beat the media and technology capabilities of new cars. And it's great on gas (except, unfortunately enough, at speeds exceeding 100 kmh -- it's a 5-speed manual, and the engine revs at about 3,000 RPM at 115 kmh; not ideal for highway travel...woops...should've got the 6-speed automatic).

I'm rambling now! Anyway, I'd like to see if anyone else supports selling the car (even though I love it so much), or if it might be worth it in the long run to just keep it, with the notion that it will probably (hopefully) be my last car ever? MMM would probably punch me in the stupid face just for buying brand-new to begin with, but I made that choice before I saw the blog! Can't rewind that tape.

DougStache

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Re: Zero-Interest Debt (And a newbie who appreciates advice)
« Reply #4 on: May 30, 2013, 09:42:17 PM »
I'm in a similar situation.  I love the car, even though it's very non-mustachian (2011 dodge charger v8).  I decided it was going to be my guilty pleasure, and aggressively paid it off in a year.  I've put 23,000 miles on it in the past two years, but since I'm no longer driving to work that's going to be cut WAY back.  This car could seriously last me for 20+ years at the current rate.  I comfortably get ~30 mpg highway, and if I lay off the gas I get around 20 mpg city if I avoid rush hour traffic.

However, if I actually run the numbers (which I haven't done formally, but lets break out some napkin math):

Optimistically sell it for $25,000
Insurance is $500 every 6 months
Registration is... $340/year (and decreasing with the cars value)

So over 5 years (the time period I know we can get by with one car, i.e. before we have kids):
$25,000 + 5*($1000 + $340) = $31,700

Invested at 7% per year would be (this is slightly high since the yearly gain wouldn't be realized all at once):
$31,700 * (1.07)^5 = $44,500

Not exactly chump change.  When five year's are up, I could drop $15,000 on a 5 year old 2013 and still be $30,000 ahead, or almost a year and a half's living expenses.  By the numbers, it's a straight forward decision; but it's a big enough decision I still feel the need to sit on it for a while.  At least until our wedding is over in a few weeks.

(editted for bad math)
« Last Edit: May 30, 2013, 09:44:51 PM by DougStache »