Got another one for you guys

[Broken Arrow]

Let's say there's a guy named Brok...er... Bob!

Bob currently drives a reliable but aging car with 150,000 miles on it. Bob knows that that car won't last forever.

What Bob doesn't have is a car fund. What Bob does have is 10k in emergency fund. Ok, so I don't think I *cough* er Bob is going to have a problem replacing his car.

That problem is, afterwards, he will have to re-fill his emergency fund again.

Now, the question at hand!

Bob's current budget won't be able to allow it! So, he's going to have to "cut back" on something. Well, the only two items on his budget that he can do that with is either his 401k or his student loan payments.

The student loan is fixed at 5%, and there's 27k outstanding. The minimum monthly payment is $165, but he currently pays $400 per month.

The 401k has employer matching of $0.28 per dollar. His current monthly contribution is $650 per month, before matching.

So, what should he do to pay for his next car? Reduce the 401k? Reduce the student loans? Or something else?

[disneysteve]

I would tell "Bob" to cut back on the student loan payments to replenish the EF. A car loan would probably carry a higher rate than the 5% you - I mean "he" - is paying on the student loan, so it makes more sense to keep paying the student loan rather than borrowing to buy the car. Of course, if Bob can find car financing for less than 5%, then it might make more sense to take a loan for the car and leave everything else the same.

I would not cut back on the 401K contributions because that money should be considered sacred, to be touched only in a dire emergency.

The only other thing I'd say is that I wouldn't totally deplete the EF to get the new car. If that were the case, I'd rather borrow for the car and keep the EF because you never know when you will need it, especially when you are getting a "new" used car.

[Ima saver]

I would cut back on the student loan payment and not touch the 401K contributions. I agree with disneysteve.

[tinapbeana]

BA, i would still have to question whether the money in your 401k is actually a case of compounding interest or not. my 401k is invested in mutual funds and while i do get a good return, it is still not quite the same as 'compounding interest'.... well, i suppose one could argue it's compounded annually or quarterly when my dividends are reinvested, but you know what i mean.

also, for me at least, i try and look at retirement the same way i look at my net worth. not only do i want to go into retirement with as much liquid money as possible, i also want to enter it with as little debt as possible (thereby making it easier for my liquid money to stretch longer into my golden years). for me, this means balancing paying my house and student loan with saving for retirement.

[TBH]

I'm confused, do you need to replace your car now, or are you just anticipating that you'll need to replace it relatively soon?

If you need to replace it now, I'd buy it with the E fund and reduce student loan payments to the minimum level until you've built your E fund back up.

If you don't need to replace it yet, why not just cut your loan payments by, say, $50 per month. Put the rest toward the loan, and start funding a small car fund. You still want to put most of your resources toward the loan, but that way if you need a new car before your student loans are paid off, you'll have at least a small car fund so you won't have to hit up your E fund quite so badly.

I agree with everyone else that you shouldn't lower your 401k contributions. $650/month is great! Keep it up.

I struggle with this too. My car has 130K on it and runs great. But it's almost 13 years old and I know I won't want to pay for any really big repairs. I have a healthy E fund and no debt except my mortgage, but I'm not really adding to my E fund. I need to start a car fund, or at least start adding to my E fund again, but it's hard to think about where to cut back.

[vishenda]

Reduce the student loan to minimum, and cut the 401k in half untill he has to get a new car. However if he takes good care of his car and does the recommended maintenance, it will last longer than you think!!!!

[disneysteve]

Originally Posted by tinapbeana

BA, i would still have to question whether the money in your 401k is actually a case of compounding interest or not.

A mutual fund definitely experiences the joy of compounding. Unless you pull out the earnings that the fund generates (which you couldn't do in a 401K account), those earnings do compound. If you want to really be technical, it may not be "interest" but rather dividends and capital gains that are compounding.

[Broken Arrow]

Originally Posted by claire

I'm confused, do you need to replace your car now, or are you just anticipating that you'll need to replace it relatively soon?

Er, Bob says his car is working fine right now. He's just thinking about the near future because he knows it's just a matter of time before he has to replace it. So... he's just thinking about what kind of preparations he should make to anticipate that day and soften the blow to my *cough* his finances.

[bjl584]

Student loan payment. Low interest rates, tax deductible interest, relatively easy to negotiate extensions and refinancing options. Sounds like a winner to me. Def. wouldn't mess with the E fund or the 401.

[Snoopy2645]

I would buy a car for about 5k or less when it comes time to replace & then to bring the EF up again pay $150 to $175 a month less on student loans!!!

[zabbkoff]

Since "Bob" has a student loan payment, I assume that he is young(-ish). The money put into a 401K at a young age will mean much, much more than paying off those pesky student loans a bit longer.

[ren]

As much as you, I mean, Bob wants those student loans off his back, those seem like the better place to get the money for the car. He's 'making' 28% on every dollar he contributes to his 401k with that match, and I'm sure he wants a comfortable retirement, so I think he should probably leave that where it's at. He can't get back missed matching funds and would lose the tax benefits of contributing as well.

[MonkeyMama]

150k is nothing to me...

If it were me I Wouldn't necessarily consider a car loan because interest rates for those things are high. BUT I would consider financing it with a 0% credit card. Nothing more than your e-fund though so you could pay it off if the credit cards change terms and stuff like that.

I agree though, sacrifice the student loans and build up more e-fund over getting a high-interest car loan.

Frankly I could find a pretty decent car for $1k or so and that is what I would buy, worst case, if the old car became defunct. I have bought a toyota and a saturn for less than $1k that with over 100k miles that ran forever with little repairs. I bought an old Ford with no miles for $5k and the thing had issues though it was pretty much brand new/never driven. I ran one of the $1k cars into the ground over 7 years and the other I just upgraded because it was more of an interim car until we were ready for the minivan. Sounds like you should plan for a nice, frugal interim car. But if you go for an older model you can find some pretty nice cars that have depreciated from age but are like new - in the $5k variety.

But mostly I hope your current car lasts until you have the cash to buy the car you want - good luck!

[rduell]

I would agree with leavng the 401K money at the level it is unless it becomes absolutely necessary to reduce it. I would use the Emergency Fund to finance a different car when it is needed and then use some of the money currnetly going toward the student loan to bring the EF back up to full capacity.

[sakigt]

I think Bob is underestimating his corolla and how long it will last.

Id save $100 a month for the car, funded from the student loan payments. I think you can easily squeeze another 2 or 3 years on the car without any major issues. If you can do that youll have at least $2400 for a downpayment. THEN you can decide how to allocate payments. Who knows. A car loan may be cheaper than 5% at that time...

[tinapbeana]

one other question for "Bob": what kind of work has "his" corolla had over the years? not just routine maintenance, but things like shocks, struts, water pump, AC compressor & clutch, regular clutch/transmission work, brakes, CV joints, rotors, alternator, etc? if none of this has been done, at 150k it's likely some of it will become an issue in the near future before the car itself is on it's last leg.

[creditcardfree]

"Bob" might you consider working an extra job to make a car payment should the need arise, or work one now to save for that car? At the rate you are paying on the student loan it will take you more than 6 years to pay it off, so I see why you are thinking about your car.

If it were me, I'd look for a job to make me an extra $600 a month, start sending $1000 to the student loan and be done with it 29 months. You car is likely to last this long, right? Then you quit and have enough for a $400 car payment or continue the job and pay for a car and build up your house fund.

[Broken Arrow]

Originally Posted by tinapbeana

one other question for "Bob": what kind of work has "his" corolla had over the years? not just routine maintenance, but things like shocks, struts, water pump, AC compressor & clutch, regular clutch/transmission work, brakes, CV joints, rotors, alternator, etc? if none of this has been done, at 150k it's likely some of it will become an issue in the near future before the car itself is on it's last leg.

That's a good thought, and he hasn't had any major work done on it yet, except for an alternator. I just got a new one.

"Bob" might you consider working an extra job to make a car payment should the need arise, or work one now to save for that car? At the rate you are paying on the student loan it will take you more than 6 years to pay it off, so I see why you are thinking about your car.

A second job is most definitely on er Bob's mind for quite some time now, and that's without the car being an issue. The biggest thing is that Bob has a somewhat irregular work schedule, so the challenge is to find a job that is not only financially worthwhile, but more importantly, one that can fit around his primary work schedule.

[tinapbeana]

Originally Posted by Broken Arrow

A second job is most definitely on er Bob's mind for quite some time now, and that's without the car being an issue. The biggest thing is that Bob has a somewhat irregular work schedule, so the challenge is to find a job that is not only financially worthwhile, but more importantly, one that can fit around his primary work schedule.

i think bob has a lot of options. knitting, professional karaoke singer, crock-pot tester all come to mind...

perhaps rather than taking another job, bob could consider working overtime and making all OT funds his car fund. or get a part-time night/weekend gig at a store he shops at or restaurant he eats at alot and can get a discount at. then the wages and the money saved from the discount could both go to the fund...

[Broken Arrow]

Originally Posted by tinapbeana

i think bob has a lot of options. knitting, professional karaoke singer, crock-pot tester all come to mind...

Creative... kinda crazy, but... creative nontheless.

perhaps rather than taking another job, bob could consider working overtime and making all OT funds his car fund.

Oh yeah, Bob volunteers for all the overtime he can get, and a lot of it is during the weekends as well. Hence the irregular hours.

or get a part-time night/weekend gig at a store he shops at or restaurant he eats at alot and can get a discount at.

Mmmm. Sounds tasty!