How to pay for large purchase

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jayboss
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How to pay for large purchase

Post by jayboss »

Hello,

I have a large purchase coming up in roughly a year. It will be roughly $100,000.

I currently have roughly $200,000 in cash and roughly $670,000 in a brokerage account.

I don't particularly want to use 50% of my cash and don't particularly want to liquidate my brokerage account and pay capital gains and lose the growth.

Would it be wise to consider a Portfolio Loan at Interactive Brokers? I would have to transfer my brokerage account holdings to them and would be borrowing only the $100,000. That is only roughly 15% LTV of the portfolio.

I am aware of the pitfalls of the market crashing but at only 15% LTV I believe it would be a risk worth taking. I can pay back the loan over time through salary, and if necessary could just pay it off ASAP with my cash if need be.

Any thoughts here? Thanks very much.
manuvns
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Re: How to pay for large purchase

Post by manuvns »

sign up for 3-4 card with sign up bonus and intro 0% apr split the payment with them
Thanks!
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anon_investor
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Re: How to pay for large purchase

Post by anon_investor »

If it is a year from now, why don't you start saving up for it each pay check, the just take from either your cash or equities to pay for any short fall?
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jayboss
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Re: How to pay for large purchase

Post by jayboss »

anon_investor wrote: Thu Jul 22, 2021 1:26 pm If it is a year from now, why don't you start saving up for it each pay check, the just take from either your cash or equities to pay for any short fall?
I'm already doing that. But it won't cover the whole purchase. For some reason psychologically, I have a difficult time separating from funds I've saved. I've worked so hard to grow it, it is painful to watch them go away. It is hard to shift from the saving mentality to the spending one. But then I ask myself, "why am I saving in the first place"?

The only reason I'm considering the Portfolio Loan is to not watch my accounts go lower.
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anon_investor
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Re: How to pay for large purchase

Post by anon_investor »

jayboss wrote: Thu Jul 22, 2021 1:30 pm
anon_investor wrote: Thu Jul 22, 2021 1:26 pm If it is a year from now, why don't you start saving up for it each pay check, the just take from either your cash or equities to pay for any short fall?
I'm already doing that. But it won't cover the whole purchase. For some reason psychologically, I have a difficult time separating from funds I've saved. I've worked so hard to grow it, it is painful to watch them go away. It is hard to shift from the saving mentality to the spending one. But then I ask myself, "why am I saving in the first place"?

The only reason I'm considering the Portfolio Loan is to not watch my accounts go lower.
If it is a mental hurdle, not sure anyone here can help you. But since you have enough cash on hand, it seems silly to pay interest to borrow money when you have the money.
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Toons
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Re: How to pay for large purchase

Post by Toons »

Please Ignore Me

Cash

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djpeteski
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Re: How to pay for large purchase

Post by djpeteski »

What is the reason you are holding all that cash? Is the purpose an emergency fund or is it for this exact large purchase?
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greg24
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Re: How to pay for large purchase

Post by greg24 »

You should pay for a large purchase with the cash on hand. Taking on debt for a purchase is backwards.
Jack FFR1846
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Re: How to pay for large purchase

Post by Jack FFR1846 »

I understand not wanting to let go of hard earned cash for a large purchase. Many times, I'd used my patented strategy that you can use too. Don't buy the big expensive thing.
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hi_there
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Re: How to pay for large purchase

Post by hi_there »

I don't understand why you are holding $200k in cash. It seems no brainer to spend $100k of that on your presumed mandatory expense.
Topic Author
jayboss
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Re: How to pay for large purchase

Post by jayboss »

djpeteski wrote: Thu Jul 22, 2021 1:41 pm What is the reason you are holding all that cash? Is the purpose an emergency fund or is it for this exact large purchase?
It’s for optionality. I don’t ever sweat small purchases, activities, trips, etc. Plus I’m in a career where it can take a while to get a new gig quickly.
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JoeRetire
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Re: How to pay for large purchase

Post by JoeRetire »

jayboss wrote: Thu Jul 22, 2021 1:24 pm I don't particularly want to use 50% of my cash and don't particularly want to liquidate my brokerage account and pay capital gains and lose the growth.
Delay the purchase or avoid it altogether.
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ResearchMed
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Re: How to pay for large purchase

Post by ResearchMed »

Open the margin account with IB.
Do NOT use it.

Save what you can between now and then.

Pay for your purchase with all cash.

Then, IF you need more cash for <whatever you are concerned about>, you've got that Margin loan available.
But you won't pay any interest (low interest is still interest, and is more than your cash is earning) until/unless you need it.

And you'll still be seeing your investments, plus having access to the margin cash IF needed - and that's what you would have done IF it had been needed "now", but it may not have been needed now.

RM
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Watty
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Re: How to pay for large purchase

Post by Watty »

jayboss wrote: Thu Jul 22, 2021 1:24 pm I don't particularly want to use 50% of my cash and don't particularly want to liquidate my brokerage account and pay capital gains and lose the growth.
If you do not want something enough to write a big check for it then you really do now want it bad enough to buy it.
jayboss wrote: Thu Jul 22, 2021 1:24 pm ....don't particularly want to liquidate my brokerage account and pay capital gains and lose the growth.
Can you figure out a way that might ever pay less in capital gains tax if you delay the sale of those investments for a few years?

If not then it is only a matter of when you pay the capital gains taxes, not if you will pay them sooner or later.

One other risk to consider is that you might delay paying the capital gains tax for 10+ years only to find that when you do eventually sell them that your capital gains tax rate is higher, possibly a lot higher. If you can get by with paying a 15% long term capital gains rate, plus your state taxes, then that is really a historically really good rate.
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jayboss
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Re: How to pay for large purchase

Post by jayboss »

ResearchMed wrote: Thu Jul 22, 2021 2:03 pm Open the margin account with IB.
Do NOT use it.

Save what you can between now and then.

Pay for your purchase with all cash.

Then, IF you need more cash for <whatever you are concerned about>, you've got that Margin loan available.
But you won't pay any interest (low interest is still interest, and is more than your cash is earning) until/unless you need it.

And you'll still be seeing your investments, plus having access to the margin cash IF needed - and that's what you would have done IF it had been needed "now", but it may not have been needed now.

RM
This is a really good idea. I like this and may do exactly this.
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Aslan18
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Re: How to pay for large purchase

Post by Aslan18 »

Jack FFR1846 wrote: Thu Jul 22, 2021 1:44 pm I understand not wanting to let go of hard earned cash for a large purchase. Many times, I'd used my patented strategy that you can use too. Don't buy the big expensive thing.
+1
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fyre4ce
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Re: How to pay for large purchase

Post by fyre4ce »

Are you willing to share what this planned large purchase is? Could be relevant to advice, with regard to how essential it is, consequence of delaying, whether a cheaper substitute exists, etc.
Afty
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Re: How to pay for large purchase

Post by Afty »

jayboss wrote: Thu Jul 22, 2021 1:30 pm
anon_investor wrote: Thu Jul 22, 2021 1:26 pm If it is a year from now, why don't you start saving up for it each pay check, the just take from either your cash or equities to pay for any short fall?
I'm already doing that. But it won't cover the whole purchase. For some reason psychologically, I have a difficult time separating from funds I've saved. I've worked so hard to grow it, it is painful to watch them go away. It is hard to shift from the saving mentality to the spending one. But then I ask myself, "why am I saving in the first place"?

The only reason I'm considering the Portfolio Loan is to not watch my accounts go lower.
I hear you on this. One thing that helps me is to focus on net worth rather than account values. Whether you spend that $100k from cash or by taking a loan, your net worth is the same. In addition, presumably whatever you buy with that $100k has some value, which should be reflected in your net worth — i.e., it’s not $100k evaporating, but $100k moving from cash into some other asset. Maybe framing it this way will help.
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RickBoglehead
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Re: How to pay for large purchase

Post by RickBoglehead »

jayboss wrote: Thu Jul 22, 2021 1:51 pm
djpeteski wrote: Thu Jul 22, 2021 1:41 pm What is the reason you are holding all that cash? Is the purpose an emergency fund or is it for this exact large purchase?
It’s for optionality. I don’t ever sweat small purchases, activities, trips, etc. Plus I’m in a career where it can take a while to get a new gig quickly.
Had to look that up. I did not see in the definition "saving more than 6 months of expenses so as to get an overall lower total return on investments".

Having $200k in cash is crazy IMO if it isn't 6 months of expenses. Then, not using it to buy something but considering taking a loan is way, way, out there.

Do NOT open up a line of credit.
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RickBoglehead
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Re: How to pay for large purchase

Post by RickBoglehead »

fyre4ce wrote: Sun Aug 01, 2021 1:35 pm Are you willing to share what this planned large purchase is? Could be relevant to advice, with regard to how essential it is, consequence of delaying, whether a cheaper substitute exists, etc.
More likely it will result in the "I drive a 20 year old car people" from raining on OP's parade. What others think of one's wants and desires should be of no interest.
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
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Re: How to pay for large purchase

Post by Dottie57 »

greg24 wrote: Thu Jul 22, 2021 1:43 pm You should pay for a large purchase with the cash on hand. Taking on debt for a purchase is backwards.
+1
ROIGuy
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Re: How to pay for large purchase

Post by ROIGuy »

Dottie57 wrote: Sun Aug 01, 2021 3:04 pm
greg24 wrote: Thu Jul 22, 2021 1:43 pm You should pay for a large purchase with the cash on hand. Taking on debt for a purchase is backwards.
+1
+1
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Devil's Advocate
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Re: How to pay for large purchase

Post by Devil's Advocate »

I gotta ask, what is the big purchase??

DA
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Re: How to pay for large purchase

Post by Doctor Rhythm »

Are you buying an ocelot? That what it is, right?

In any case, you’ve kept a large cash reserve beyond your emergency fund needs. This kind of large purchase is what the cash reserve is for. There’s no opportunity cost to using cash that’s otherwise just sitting around — unlike liquidating any investments, which I agree would be a bad move. I also wouldn’t take out a loan both because of the unnecessary interest payments, and also from my belief that you shouldn’t borrow money to buy something that doesn’t maintain or grow in value.
fyre4ce
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Re: How to pay for large purchase

Post by fyre4ce »

RickBoglehead wrote: Sun Aug 01, 2021 3:03 pm
fyre4ce wrote: Sun Aug 01, 2021 1:35 pm Are you willing to share what this planned large purchase is? Could be relevant to advice, with regard to how essential it is, consequence of delaying, whether a cheaper substitute exists, etc.
More likely it will result in the "I drive a 20 year old car people" from raining on OP's parade. What others think of one's wants and desires should be of no interest.
Hah, I am often one of those people. But only directed at those folks who are actually over-spending on cars. If OP says he wants to buy his life-long dream Porsche for $100k, I'd tell him to go ahead. I just noticed a seeming incongruity between what seems like a discretionary purchase, and a lack of willingness to actually spend the money.

For the record, I agree with most others here who say you should spend the cash. It's doing almost nothing, maybe earning 0.5% of you're lucky. If you need more cash later, and the $100k plus whatever you save over the next year isn't enough, then you can borrow money then.
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Re: How to pay for large purchase

Post by basspond »

By getting the loan you are trying to avoid the “hurt” of sacrificing savings for something you want not need. Use $50k from each account and just consider it balancing your portfolio.
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