Car note ending, saving for next car

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JustThisGuy
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Car note ending, saving for next car

Post by JustThisGuy »

Happy Sunday, Bogleheads!

I will be paying off a car note later this year and want to immediately re-deploy this monthly payment into accumulating cash towards my next car. I anticipate needing the money 4-5 years after the note is paid off.

Financial snapshot:
1) This note is my only debt. Credit cards are paid off monthly.
2) I am maxing out Roth IRA/HSA as well as 401K employer match. Total 401k contribution is 15%.
3) Six month EF already saved.

I'm trying to figure out what the best path forward for the new car fund will be. I can see a few options:

1) HYSA: Pro/cons well understood.
2) CD: Same as #1, but not compatible with streams of payments.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.
4) State Muni Bond Fund: Higher investment risk than #3, but favorable tax treatment in my state.
5) Some TBM fund: Higher risk than #4.
6) Other?

If you were in my shoes, what would you choose and why?

Thank you, in advance, for your feedback!
Silverado
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Re: Car note ending, saving for next car

Post by Silverado »

For me, I’d extend the need to 12+ years and not worry about for eight years. Then save up in normal savings account.

Ok, maybe nine years and wait six....vehicles seem to be on a downward trend in life.
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Watty
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Re: Car note ending, saving for next car

Post by Watty »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm If you were in my shoes, what would you choose and why?
Be sure to look at the numbers before you spend too much time on this.

For example if you will need to save up $20K to buy your next car, in addition to what you can sell your old car for, then the average balance in your car fund will be $10,000.

If you can somehow get an extra 1% then that would be $100 so after taxes it might be something like $80 on average.

$80 is nontrivial but it is not a worth enough to be to really try stretching for the extra yield or locking the money up where it would be hard to get to it if you needed to replace the car earlier than expected.

I would just put into a high yield savings account.
LuckyGuy
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Re: Car note ending, saving for next car

Post by LuckyGuy »

We just put our car fund in a HYSA.
sailaway
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Re: Car note ending, saving for next car

Post by sailaway »

I would make the additional contribution to max my 401k, knowing that I had several years to rebuild the car fund and could use Roth contributions if worst came to worst.

Once I was taking full advantage of tax advantaged accounts, I would start buying vti in my taxable brokerage account.

When it comes time to buy a new car I would look at:
-can I extend the life of this car?
-are interest rates so low that it actually makes sense to finance a new car?
-Is my taxable account up or down? If down, is this a good time to tax loss harvest? Can I rebalance in my tax advantaged accounts?

Sinking funds, like you are suggesting for this car, are basically the training wheels of budgeting. It sounds to me like you are beyond that stage and ready to look at the big picture.
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Sandtrap
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Re: Car note ending, saving for next car

Post by Sandtrap »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm Happy Sunday, Bogleheads!

I will be paying off a car note later this year and want to immediately re-deploy this monthly payment into accumulating cash towards my next car. I anticipate needing the money 4-5 years after the note is paid off.

Financial snapshot:
1) This note is my only debt. Credit cards are paid off monthly.
2) I am maxing out Roth IRA/HSA as well as 401K employer match. Total 401k contribution is 15%.
3) Six month EF already saved.

I'm trying to figure out what the best path forward for the new car fund will be. I can see a few options:

1) HYSA: Pro/cons well understood.
2) CD: Same as #1, but not compatible with streams of payments.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.
4) State Muni Bond Fund: Higher investment risk than #3, but favorable tax treatment in my state.
5) Some TBM fund: Higher risk than #4.
6) Other?

If you were in my shoes, what would you choose and why?

Thank you, in advance, for your feedback!
Open a non tax advantaged brokerage account at Vanguard, Fidelity, or etc.
Create and regularly add to an low cost index fund portfolio that you've already structured concurrently in your retirement accounts, per this forum "wiki" investment strategy basics. (have you done that?)
Drive you car until it dies.
When your car dies, pay in cash for a dependable used low mileage used Toyota or Honda.
Rinse, repeat.

Resist financing depreciating objects and things.
j :D
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H-Town
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Re: Car note ending, saving for next car

Post by H-Town »

OP,

Just put everything you got into one bucket, let's call it "JustThisGuy's stash". Your mission, should you accept it, is to preserve and maximize your stash. When you need to buy a car, just take some out of your stash. It's simple as that.

- Micromanaging multiple spending buckets will help you achieve your goal, which is having the buckets ready, and then spend it.

- Maximizing your stash will help you maximizing your wealth.

You probably will be able to pay for your future car, regardless of which method you choose. But one method will help you accumulating more wealth than the other. :sharebeer
SR II
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Re: Car note ending, saving for next car

Post by SR II »

I wouldn't overthink about saving for your next car. All your planning could easily go out the window. We've had a few experiences with cars we planned to keep until the wheel fell off, only to have everything go sideways.

Our examples:
1) Car was stolen when it was a few years old, but low mileage. Insurance didn't give us enough to replace it.
2) Car was totaled when it was six months old.
3) Timing belt broken prematurely and messed up the engine beyond what the vehicle was worth.
4) Had a two-seater. Then, had a baby.
5) Old Volvo we used as station and dog car with only 70K had electrical issue that dealer couldn't even figure out.
6) When the Volvo died this past summer, I bought a used car and the dealer was offering five-year 0% financing. So, I did that!

So, my thinking is: If your heart is set on saving for that next new car, I'd put it in something liquid!
surfstar
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Re: Car note ending, saving for next car

Post by surfstar »

sailaway wrote: Sun Jan 17, 2021 8:43 pm I would make the additional contribution to max my 401k, knowing that I had several years to rebuild the car fund and could use Roth contributions if worst came to worst.
I second this. Max 401k first. Cash-flow future car payment when/if needed. Boost your retirement accounts early and let compounding help.
hudson
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Re: Car note ending, saving for next car

Post by hudson »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm Happy Sunday, Bogleheads!

I will be paying off a car note later this year and want to immediately re-deploy this monthly payment into accumulating cash towards my next car. I anticipate needing the money 4-5 years after the note is paid off.

Financial snapshot:
1) This note is my only debt. Credit cards are paid off monthly.
2) I am maxing out Roth IRA/HSA as well as 401K employer match. Total 401k contribution is 15%.
3) Six month EF already saved.

I'm trying to figure out what the best path forward for the new car fund will be. I can see a few options:

1) HYSA: Pro/cons well understood.
2) CD: Same as #1, but not compatible with streams of payments.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.
4) State Muni Bond Fund: Higher investment risk than #3, but favorable tax treatment in my state.
5) Some TBM fund: Higher risk than #4.
6) Other?

If you were in my shoes, what would you choose and why?

Thank you, in advance, for your feedback!
If you need the money in 4-5 years, munis would be fine....in taxable. Most, if not all of the state muni funds have high expense ratios. If you're in a state that has a Vanguard in state muni fund, I'd go there. If not, maybe VWIUX, MUB, or BMBIX....all nationwide intermediate munis. You are probably already there, but if not, learn the ins and outs of munis, before buying.

HYSA...that works.

You aren't maxing out your 401K?
I bonds are worth a look.
Last edited by hudson on Mon Jan 18, 2021 8:50 am, edited 1 time in total.
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SmileyFace
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Re: Car note ending, saving for next car

Post by SmileyFace »

I simply combine large-purchase savings with my Emergency Fund. I allow my Emergency Fund to bloat a bit and then when it is time to buy a new car I simply draw from it (and then replenish). So wherever your emergency savings are - add this to it.
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Re: Car note ending, saving for next car

Post by Jack FFR1846 »

Suze Orman says to have 8-12 months in an emergency fund. If you want to overlap, buy some US Savings bonds. It's the closest thing to "investing" your emergency fund.
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bltn
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Re: Car note ending, saving for next car

Post by bltn »

Sandtrap wrote: Mon Jan 18, 2021 12:20 am
JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm Happy Sunday, Bogleheads!

I will be paying off a car note later this year and want to immediately re-deploy this monthly payment into accumulating cash towards my next car. I anticipate needing the money 4-5 years after the note is paid off.

Financial snapshot:
1) This note is my only debt. Credit cards are paid off monthly.
2) I am maxing out Roth IRA/HSA as well as 401K employer match. Total 401k contribution is 15%.
3) Six month EF already saved.

I'm trying to figure out what the best path forward for the new car fund will be. I can see a few options:

1) HYSA: Pro/cons well understood.
2) CD: Same as #1, but not compatible with streams of payments.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.
4) State Muni Bond Fund: Higher investment risk than #3, but favorable tax treatment in my state.
5) Some TBM fund: Higher risk than #4.
6) Other?

If you were in my shoes, what would you choose and why?

Thank you, in advance, for your feedback!
Open a non tax advantaged brokerage account at Vanguard, Fidelity, or etc.
Create and regularly add to an low cost index fund portfolio that you've already structured concurrently in your retirement accounts, per this forum "wiki" investment strategy basics. (have you done that?)
Drive you car until it dies.
When your car dies, pay in cash for a dependable used low mileage used Toyota or Honda.
Rinse, repeat.

Resist financing depreciating objects and things.
j :D
I totally agree with avoiding financing depreciating objects.

Making payments to yourself in advance of buying a car for cash will be a great feeling.
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JupiterJones
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Re: Car note ending, saving for next car

Post by JupiterJones »

LuckyGuy wrote: Sun Jan 17, 2021 8:42 pm We just put our car fund in a HYSA.
Same here, basically.

Technically, our non-retirement savings are spread among several things. Mostly high-yield savings accounts, but also couple of other vehicles too.

Still, we consider it to be one single pool of fungible money that is only "bucketized" in a spreadsheet we keep. We know that X dollars is my car sinking fund and Y dollars is my DW car's sinking fund, but where in the pool the money actually lives is not necessary to specify.
Stay on target...
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JupiterJones
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Re: Car note ending, saving for next car

Post by JupiterJones »

bltn wrote: Mon Jan 18, 2021 9:50 am I totally agree with avoiding financing depreciating objects.

Making payments to yourself in advance of buying a car for cash will be a great feeling.
I've mentioned the concept of "pre-paying" car payments to friends before. I often get the excuse that they can't afford to set aside the savings.

But when I ask them what they'll do when their current (paid off) car falls apart, they'll usually say, "oh, just get another car loan I guess".

So they're admitting that they're perfectly fine with having a new car payment each month, but for some reason saving that exact amount each month while they have their paid-off current car is unaffordable???

:oops:
Stay on target...
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vineviz
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Re: Car note ending, saving for next car

Post by vineviz »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.

If you were in my shoes, what would you choose and why?
If personally suggest #3 using something like Invesco BulletShares 2025 HY Corp Bd ETF (BSJP).

You’ll be averaging into it over 4 years, and the risk will decline the closer you get to your goal which makes it perfectly suited for this kind of application.

There is some credit risk, obviously but not much. And the goal is largely discretionary: if returns are catastrophically bad, presumably you’ll have options (delay purchase, buy a cheaper car, partially finance it, etc).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
zie
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Re: Car note ending, saving for next car

Post by zie »

vineviz wrote: Mon Jan 18, 2021 11:01 am
JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm.
3) A product like BulletShares: This would be "held to maturity". Return of investment highly likely.

If you were in my shoes, what would you choose and why?
If personally suggest #3 using something like Invesco BulletShares 2025 HY Corp Bd ETF (BSJP).

You’ll be averaging into it over 4 years, and the risk will decline the closer you get to your goal which makes it perfectly suited for this kind of application.

There is some credit risk, obviously but not much. And the goal is largely discretionary: if returns are catastrophically bad, presumably you’ll have options (delay purchase, buy a cheaper car, partially finance it, etc).
Oh! This is interesting. I've been using FIKFX(a 20/80 AA TSM/bond fund) for this use case(and other savings).

Looking at PV, it seems FIKFX has done better(6% vs 4.5%) since BSJP has been around.

FIKFX is a static AA, and historically, the worst drop would be about 15%, Since 1987 the largest drop has been 8.49%. What's the worst case for BSJP and friends? I'm going to guess since it seems to be holding high yielding corporate bonds(but not to the level of "junk"), that if things go really bad(like 15% drop in FIKFX bad) that BSJP would basically default and go to 0?

The other comparison is of course ER, .42% for BSJP and .12% for FIKFX. I know there is a vanguard equivalent, but I'm to lazy to look it up, but I'm not aware of any ETF equivalent to a 20/80 AA.

So unless I'm missing something, I think I'll keep with my 20/80 AA FIKFX. Though I like the idea of something that is termed to my particular savings goal.
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KneePartsPro
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Re: Car note ending, saving for next car

Post by KneePartsPro »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm Happy Sunday, Bogleheads!

If you were in my shoes, what would you choose...

Thank you, in advance, for your feedback!
If I already had an emergency fund I would be inclined to just invest the money according to my allocation then drive and maintain the paid off car for as long as it made sense to before starting to worry about how to pay for the next one.
I can tell you almost anything about artificial knees used in knee replacement, and almost nothing about investing.
DVMResident
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Re: Car note ending, saving for next car

Post by DVMResident »

I would continue to invest per my plan.

When I need a new car, I would get a loan. If the interest rate is high, I would pay the loan off quickly or less likely sell my portfolio if the cash discount was high enough (depends on taxes on sale; cash flowing a loan is likely a better choice, but we’ll see in 4-5 years).

Dollars are fungible. Keeping separate pots of money is just mental accounting.
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Re: Car note ending, saving for next car

Post by Scott S »

KneePartsPro wrote: Mon Jan 18, 2021 12:33 pmIf I already had an emergency fund I would be inclined to just invest the money according to my allocation then drive and maintain the paid off car for as long as it made sense to before starting to worry about how to pay for the next one.
+1. 6 months' worth of expenses would already be much more than we plan to spend on our next car. Might as well put any additional money to work in the meantime. :beer
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dratkinson
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Re: Car note ending, saving for next car

Post by dratkinson »

JustThisGuy wrote: Sun Jan 17, 2021 8:23 pm...
4) State Muni Bond Fund: Higher investment risk than #3, but favorable tax treatment in my state.
...
Bonds prices have been higher since mid-2019. I expect they will be same or lower in 4-5yrs, after pandemic forgotten. Meaning there would be little capital gains to sell then... might even get a tax deduction on a small loss. So you'd get...
--Tax exempt dividends until then.
--Owe little in capital gains to sell muni fund to buy your car for cash.


Disclosure. Several years ago, I got tired of chasing teaser rate, and low-yields on savings/CDs and savings bonds. I now keep 1yr in cash (offset by "ABP by 2% CC technique" to pay my bills; search forum), and the rest in higher risk/reward muni funds (not HY munis) as the last tier of my EFs. This includes Vanguard's LT national muni fund, and an IT single-state muni from a small mutual fund company.

So far, so good. But I could be wrong.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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vineviz
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Re: Car note ending, saving for next car

Post by vineviz »

zie wrote: Mon Jan 18, 2021 12:23 pm

Oh! This is interesting. I've been using FIKFX(a 20/80 AA TSM/bond fund) for this use case(and other savings).
FIKFX is certainly a reasonable fund to use for something like this.

Somewhat lower overall risk and expected return overall than BSJP, but a credible choice.
I’m going to guess since it seems to be holding high yielding corporate bonds(but not to the level of "junk"), that if things go really bad(like 15% drop in FIKFX bad) that BSJP would basically default and go to 0?
No, the only scenarios in which BSJP would go to zero are ones where FIKFX would also go to zero.

Default rates on short term high yield bonds is pretty low, and bonds that do default almost never go to zero because the companies have assets that act as collateral. Stockholders get wiped out long before bond holders do.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
zie
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Re: Car note ending, saving for next car

Post by zie »

vineviz wrote: Mon Jan 18, 2021 2:26 pm
zie wrote: Mon Jan 18, 2021 12:23 pm

Oh! This is interesting. I've been using FIKFX(a 20/80 AA TSM/bond fund) for this use case(and other savings).
FIKFX is certainly a reasonable fund to use for something like this.

Somewhat lower overall risk and expected return overall than BSJP, but a credible choice.

I'm not sure I follow on expected overall return on FIKFX being lower than BSJP. I guess it all depends on the overall market and interest rates.

Certainly in the recent past, FIKFX has definitely won out over BSJP, though perhaps that trend won't continue. I'm just not sure why you think that?
I’m going to guess since it seems to be holding high yielding corporate bonds(but not to the level of "junk"), that if things go really bad(like 15% drop in FIKFX bad) that BSJP would basically default and go to 0?
No, the only scenarios in which BSJP would go to zero are ones where FIKFX would also go to zero.

Default rates on short term high yield bonds is pretty low, and bonds that do default almost never go to zero because the companies have assets that act as collateral. Stockholders get wiped out long before bond holders do.
[/quote]

DUH. I knew this, but didn't get it in my brain. Thanks for the correction! I need to think a bit more before I post I guess :) You are absolutely correct. Stocks go to 0 before bonds do.

My understanding, if Company Y borrows short-term at 5% and gets put into the BSJP and then decides they can't pay next month, they typically go bankrupt, go through a very lengthy court drama and the poor holder of BSJP gets say 10% or 50% of the value of the bond, or gets stock in the newly restructured company, etc. The details are up to the court and how the restructuring works(assuming there is a restructuring). Without a restructuring, everything gets sold off, and whatever is earned is then used to pay everyone back, in order of bonds and then stocks, where stock holders generally get 0% back and bond holders get some % back, but rarely get full payment or even their principal back.

Glad the default risk is pretty low!

Also, thanks for the teaching!
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vineviz
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Re: Car note ending, saving for next car

Post by vineviz »

zie wrote: Mon Jan 18, 2021 5:01 pm I'm not sure I follow on expected overall return on FIKFX being lower than BSJP. I guess it all depends on the overall market and interest rates.

Certainly in the recent past, FIKFX has definitely won out over BSJP, though perhaps that trend won't continue. I'm just not sure why you think that?
The good news about bonds held to maturity is that you know with accuracy what the return will be: basically the current SEC yield minus any expected losses due to defaults. The yield of BSJP is about 3.78%, which maybe ends up being 3.3% to 3.4% total return by the time you're done assuming a typical rate of defaults and asset recovery.

FIKFX is 80% invested in bonds yielding 0.8%, on the other hand. The remaining 20% in stocks have, optimistically, an expected return of 7% or 8%. That creates an expected return of 2.2%, give or take.

Historically, high yield bonds have performed roughly like a mix of 35% stocks and 65% investment grade bonds. That works out to a return that is about 100 bps higher than a 20/80 mix like FIKFX, or roughly what I estimated above more directly.

My understanding, if Company Y borrows short-term at 5% and gets put into the BSJP and then decides they can't pay next month, they typically go bankrupt, go through a very lengthy court drama and the poor holder of BSJP gets say 10% or 50% of the value of the bond, or gets stock in the newly restructured company, etc. The details are up to the court and how the restructuring works(assuming there is a restructuring). Without a restructuring, everything gets sold off, and whatever is earned is then used to pay everyone back, in order of bonds and then stocks, where stock holders generally get 0% back and bond holders get some % back, but rarely get full payment or even their principal back.
That''s mostly accurate. Most defaults are technical defaults, so they definitely don't always force the company into bankruptcy, and most bonds will still trade at 40% to 70% of par value while the default is being worked out.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Car note ending, saving for next car

Post by LittleMaggieMae »

You don't say how you are handling car expenses - like routine maintenance or new tires etc.
I'd make the "car payment" to a HYSA. After a year, I'd do a review.

There are intangible benefits to having money sit not working so hard for you (not invested). It gives you flexibility, options, may let you take advantage of a future opportunity. You can always change your mind about how you will use your "future car fund" funds.

There isn't any rule or law or moral obligation that says after saving up $$ in a HYSA for a year or two for a car - you can't redirect the "payment" to some other account (investment) or that you can't skim money off your HYSA and invest it (while continuing to make the "payment" to the HSYA).
TheDDC
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Re: Car note ending, saving for next car

Post by TheDDC »

You should be building wealth in a way that you are not worried about a blip in the market for your "big ticket item" savings. When you get to six figures in a taxable account invested in good mutual funds after filling up your tax advantaged options you are then at the point where a market blip won't matter here and there for "stuff" with motors along the way. I would invest new car fund money in a taxable account at that point. Until then you could invest in a HYSA or "hustle" returns using new account bonuses. Also, borrowing money for a depreciating asset is generally what we call stupid. That option should be off the table.

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zie
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Re: Car note ending, saving for next car

Post by zie »

vineviz wrote: Mon Jan 18, 2021 5:53 pm
zie wrote: Mon Jan 18, 2021 5:01 pm I'm not sure I follow on expected overall return on FIKFX being lower than BSJP. I guess it all depends on the overall market and interest rates.

Certainly in the recent past, FIKFX has definitely won out over BSJP, though perhaps that trend won't continue. I'm just not sure why you think that?
The good news about bonds held to maturity is that you know with accuracy what the return will be: basically the current SEC yield minus any expected losses due to defaults. The yield of BSJP is about 3.78%, which maybe ends up being 3.3% to 3.4% total return by the time you're done assuming a typical rate of defaults and asset recovery.

FIKFX is 80% invested in bonds yielding 0.8%, on the other hand. The remaining 20% in stocks have, optimistically, an expected return of 7% or 8%. That creates an expected return of 2.2%, give or take.

Historically, high yield bonds have performed roughly like a mix of 35% stocks and 65% investment grade bonds. That works out to a return that is about 100 bps higher than a 20/80 mix like FIKFX, or roughly what I estimated above more directly.

My understanding, if Company Y borrows short-term at 5% and gets put into the BSJP and then decides they can't pay next month, they typically go bankrupt, go through a very lengthy court drama and the poor holder of BSJP gets say 10% or 50% of the value of the bond, or gets stock in the newly restructured company, etc. The details are up to the court and how the restructuring works(assuming there is a restructuring). Without a restructuring, everything gets sold off, and whatever is earned is then used to pay everyone back, in order of bonds and then stocks, where stock holders generally get 0% back and bond holders get some % back, but rarely get full payment or even their principal back.
That''s mostly accurate. Most defaults are technical defaults, so they definitely don't always force the company into bankruptcy, and most bonds will still trade at 40% to 70% of par value while the default is being worked out.
YAY! Thanks for the learning! and I agree with you. Also, I got to go look up "technical defaults" which was an interesting side adventure! Technical defaults for those reading and not interested in a side adventure, is basically when some term of the loan isn't quite met, but is considered temporary in nature, i.e. a temp. cash flow problem leading to say a week delay on the bond payment, or a term might stipulate that a debt to income ratio be set at a certain %, which might not get met temporarily. They are either excused(probably with a fee), if they really are temporary or the loan is re-negotiated. Why go through the hassle of bankruptcy court if one doesn't have to, which makes perfect sense.
novemberrain
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Re: Car note ending, saving for next car

Post by novemberrain »

General boglehead wisdom is to pay for car with cash. The rationale is that it will force you to buy a reasonable car.

But I personally just finance car purchases. Loans are cheap and I am reasonably sure I won’t overspend.
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JustThisGuy
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Re: Car note ending, saving for next car

Post by JustThisGuy »

This thread is a perfect example of why this forum of such a wonderful resource. I appreciate the time each of you took to post your thoughtful responses. I'll try to respond to everyone below. Please know that I am and will continue to consider all of the great feedback everyone provided. I am, as always, open to any additional thoughts as well.

A few of you brought up a great point: Why not just ride the car into the ground and replace it then? The answer is that I held on to my previous car entirely too long for irrelevant reasons and spent way too much money keeping it running. I'm not going down that path again if it can at all be avoided. My intention is to replace the car when I'm ready, not when the car's ready. As long as it's running well, I intend to keep it. Repairs are cash-flowed.
Watty wrote: Sun Jan 17, 2021 8:40 pmBe sure to look at the numbers before you spend too much time on this.
I absolutely agree. There's no point in spending much time trying to make an extra $100 in the course of 4-5 years (or longer).
sailaway wrote: Sun Jan 17, 2021 8:43 pm Sinking funds, like you are suggesting for this car, are basically the training wheels of budgeting. It sounds to me like you are beyond that stage and ready to look at the big picture.
That's a fair point. To give you an idea of where I am in my journey, my 401K was a single TDF at this point last year. I had no Roth IRA and wasn't taking advantage of my company's HSA beyond their annual contribution. Since the middle of last year, I discovered this forum, moved to a Three-Fund Portfolio, opened and fully funded a Roth IRA, and started contributing to my HSA. I also opened an HSA at Fidelity to be able to transfer and invest the HSA funds at low cost. I feel like I've made much progress, but there's still so much more to learn. I still have a good few months until the note is over. I definitely have time to consider my approach.
H-Town wrote: Mon Jan 18, 2021 12:35 amJust put everything you got into one bucket, let's call it "JustThisGuy's stash". Your mission, should you accept it, is to preserve and maximize your stash. When you need to buy a car, just take some out of your stash. It's simple as that.
This, too, is a fair point. As with sailaway's response, I'll have to spend some time thinking about this. It's a big change of mindset.
SR II wrote: Mon Jan 18, 2021 1:10 am So, my thinking is: If your heart is set on saving for that next new car, I'd put it in something liquid!
Absolutely agreed. As other posters have mentioned, there's something quite comforting about knowing the money is there ready to be used. If I can avoid financing the next car, I would dearly love to do so. I've never been in a position to purchase a car outright. I'd consider financing for the right deal (0%? Sure, pay me to have the loan!), but No One Knows Nothing about what the future will hold.
hudson wrote: Mon Jan 18, 2021 8:47 am If you need the money in 4-5 years, munis would be fine....in taxable. Most, if not all of the state muni funds have high expense ratios.
I'm in the Fidelity world, and there is a muni bond fund for my state. The ER, as you indicated, is high (about half a percent). You also recommended I-Bonds. I want to keep these funds reasonably liquid without penalty. I don't believe I-Bonds fit the bill for that. Am I wrong?
SmileyFace wrote: Mon Jan 18, 2021 8:49 am So wherever your emergency savings are - add this to it.
Another fair point. Of course, if the excrement hits the rotating blade and extra funds are needed beyond my 6 month EF, this can be tapped as a stopgap. I'd hate to do it, but an emergency is an emergency.
JupiterJones wrote: Mon Jan 18, 2021 10:44 am Still, we consider it to be one single pool of fungible money that is only "bucketized" in a spreadsheet we keep.
It's funny you should say this. I'm trying to avoid the extra bookkeeping of knowing X dollars total is Y dollars for item #1 and Z dollars for item #2. Seeing a hard number for a specific purpose is helpful for me. However, given some of the feedback that H-Town and sailaway provided, I have some things to think about.
vineviz wrote: Mon Jan 18, 2021 11:01 am If personally suggest #3 using something like Invesco BulletShares 2025 HY Corp Bd ETF (BSJP). (...)And the goal is largely discretionary: if returns are catastrophically bad, presumably you’ll have options
You raised a good point as well -- this is, definitely a (mostly) discretionary purchase. I was considering the muni bond fund for the tax benefits, but I'll take a look at the HY as well.
KneePartsPro wrote: Mon Jan 18, 2021 12:33 pm If I already had an emergency fund I would be inclined to just invest the money according to my allocation then drive and maintain the paid off car for as long as it made sense to before starting to worry about how to pay for the next one.
Fair point. I'm thinking of this more as a "laying the foundation for future success" tactic than any genuine concern about the future eventuality. One of the great lessons I've taken away from my time here is thinking about financial matters in a different light. I'll add this to the great feedback from H-Town and sailaway as more of that "different light".
DVMResident wrote: Mon Jan 18, 2021 12:43 pm (depends on taxes on sale; cash flowing a loan is likely a better choice, but we’ll see in 4-5 years).
Are you taking this from the perspective of "5% loan in a 7-8% returns world is still a win"?
LittleMaggieMae wrote: Mon Jan 18, 2021 6:18 pm You don't say how you are handling car expenses - like routine maintenance or new tires etc.
I'd make the "car payment" to a HYSA. (...)You can always change your mind about how you will use your "future car fund" funds.
Car expenses are cash-flowed. I absolutely agree about having the flexibility to change direction. That's part of the calculus here -- how to maximize the benefits without tying my hands. HYSA may just be the right answer. Your approach is something to consider.
TheDDC wrote: Mon Jan 18, 2021 7:01 pm Until then you could invest in a HYSA or "hustle" returns using new account bonuses. Also, borrowing money for a depreciating asset is generally what we call stupid. That option should be off the table.
I appreciate your candor! I'm certainly trying to avoid a note down the road. I generally don't get into the New Account Bonus game. It can certainly be profitable, but it requires more time/effort than I'm willing to spend, too many tax forms to keep track of, etc.


Again, I very much appreciate everyone's feedback and thoughts on this. Not only will this help me today, some of the suggested changes of mindset will also help lay the foundation for future success!
DVMResident
Posts: 1523
Joined: Mon Aug 01, 2011 8:15 pm

Re: Car note ending, saving for next car

Post by DVMResident »

JustThisGuy wrote: Mon Jan 18, 2021 9:01 pm
DVMResident wrote: Mon Jan 18, 2021 12:43 pm (depends on taxes on sale; cash flowing a loan is likely a better choice, but we’ll see in 4-5 years).
Are you taking this from the perspective of "5% loan in a 7-8% returns world is still a win"?

Not quite. My point is slightly different. You don't need a specific car and you have lots of options when you decide to purchase the car in the future.


Let's imagine a couple of senarios:


(1) You take a car loan. The loan is cheap. You decide to keep that loan and pay it on schedule. Meanwhile, your assets continue to stay invested and provide additional liquidity (i.e. less liquidity risk to you). FWIW, my current one is $0 down at 0% for 5 years; I'm keeping this one.


(2) You take a car loan. The loan is expensive compared to the current fixed interest rate. You decide to redirect cash-flow from investments towards the loan and you pay it off at an accelerated pace, e.g. 6 months instead of 5 years.


(3) The loan is more expensive compared to current fixed interest rates. You decide to sell assets to pay for the car. You need to consider taxes (LTCG plus state) and potentially "cash-discounts" the dealer/manufacture is offering.


The part you quoted is option 3. LTCG plus state taxes are likely more expensive than the interest costs than option 2, making option 3 the least likely to optimal. But only time will tell. My recommendation is to stay invested and not have a separate car fund for 4-5 years in the future. You can adapt to reality of interest rates in 2025.
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