Car Loan and Emergency Fund

[PMMM]

I thought I would get feedback from the experts.

I am buying a new car and using my old car as trade bait. The net of the transaction will be roughly 25K. I have the cash in my emergency fund/rainy day fund to pay the car off. But in order to conserve the cash I was thinking of financing 10K to 15K at my local credit union. I was contemplating a 5 year loan at 2.99% rate. If I paid the loan off my emergency fund would still allow about 1.5 years of living should one of us suffer a job loss. The bad thing is that it would take me about 3 years to replace that money at the current allowable savings rate.

Here is my question. I have always been told and subscribe to the fact that cash is king. In order to pay the car off I will have to take money from my rainy day fund or long term emergency fund. This would reduce the fund but would still leave me with enough to live on for about 1.5 years should either of us suffer a job loss or get hurt etc. But will take me about 18 months to replace the 25K if I were to use it.

With rates as low as they are does it make sense to use the cheap money and save mine?

We have no other debts except for our mortgage and utilities.

[disneysteve]

Can you clarify what you are calling your EF? An EF is not a new car fund. It is an EF. But it sounds like you are lumping together your EF with other savings since even after paying 25K for the car, you'd still have enough to live for 1.5 years.

So look at it this way. You should have an EF of 6-8 months of living expenses. Anything beyond that isn't your EF. It is other savings. If you have enough in other savings to pay cash for the car, and no other pressing need for that money, I'd consider paying cash for the car.

That said, I totally understand cash flow concerns. What if I dump this money into the car and then something happens and I need that money? So for peace of mind reasons, taking a low-interest loan can be worth considering. I'd go with no more than 3 years though, not 5. Even at 2.99%, that is probably 3 times what your savings account is paying so it is going to cost you money to finance the vehicle. Make sure the loan has no prepayment penalty so that you can always pay it off early if you choose to.

On a separate issue, why a 25K new car? Why not a good used car?

[MonkeyMama]

Originally Posted by PMMM

I thought I would get feedback from the experts.


Here is my question. I have always been told and subscribe to the fact that cash is king. In order to pay the car off I will have to take money from my rainy day fund or long term emergency fund. This would reduce the fund but would still leave me with enough to live on for about 1.5 years should either of us suffer a job loss or get hurt etc. But will take me about 18 months to replace the 25K if I were to use it.

With rates as low as they are does it make sense to use the cheap money and save mine?

The cash mindset is:

A - Why would you spend $25,000 on a car? Why not pay cash for a car that doesn't drain your savings?

OR

B - So wait 18 months to save up for the car (to pay cash). You said it would take 18 months to replenish savings, if you paid cash?

Both are perfectly valid options.

I think the real point is that when you save the cash up first, you think twice about spending so much in the first place. I think that is the part that is hard to get across about the cash mindset. I think most cash car buyers probably spend far less on their cars in the first place. (Which frees up money for other things - and prevents these kinds of conundrums). Regardless, if you save up the cash first, no matter how much you spend, you are going to think about it a lot more thoroughly and probably make a much soudner decision. Plus, you aren't stuck with a car payment if things go sour. You can always sell your car if things go sour. & under this scenario you still have your emergency fund, too (should not be for car purchases). So, win-win-win.

[PMMM]

Originally Posted by disneysteve

Can you clarify what you are calling your EF? An EF is not a new car fund. It is an EF. But it sounds like you are lumping together your EF with other savings since even after paying 25K for the car, you'd still have enough to live for 1.5 years.

I'd go with no more than 3 years though, not 5. Even at 2.99%, that is probably 3 times what your savings account is paying so it is going to cost you money to finance the vehicle. Make sure the loan has no prepayment penalty so that you can always pay it off early if you choose to.

On a separate issue, why a 25K new car? Why not a good used car?

You are correct on your first point Steve. It really is more than just my emergency savings. It is my general savings as well. It gives me a "secure feeling" seeing that I could, if necessary, live that long should a job loss be suffered.

3 years does sound better and your right the loan will cost me money. Current savings rate is only .99% in an online account. The loan does not have a prepayment penalty which is a good thing. I don't think it would be a consideration if there was a penalty.

Your last point I have no excuse for. It's a new car model, a Coupe, for a particular car company who's cars I really like and it's an out and out WANT not need. Of this I am guilty of and I wish my wife would have said no. I have to blame her cause she said YES.

The good news is that as I think about it and get other input my head is clearing a bit. It's not too late to back out of the deal but I REALLY WANT that car. I am sane enough that if I had other obligations (debts) besides my mortgage it would not even be a consideration. (But I don't want to be viewed as spending 38K on a wedding either! Re:another post.)

Thanks for the advice Steve. You are a wise and clear thinker!

[disneysteve]

Originally Posted by PMMM

It's a new car model

If this means it is a brand new model in its first year, turn and run the other way.

I would NEVER buy a brand new model or a model that has undergone a major redesign in the first year. Far too much risk of kinks that haven't yet been worked out. If you really, really want this car, hang on to yours for another year and then buy it - either used if no major issues turned up or new in the next model year if you insist.

[PMMM]

Originally Posted by MonkeyMama

The cash mindset is:

A - Why would you spend $25,000 on a car? Why not pay cash for a car that doesn't drain your savings?

OR

B - So wait 18 months to save up for the car (to pay cash). You said it would take 18 months to replenish savings, if you paid cash?

Both are perfectly valid options.

I think the real point is that when you save the cash up first, you think twice about spending so much in the first place. I think that is the part that is hard to get across about the cash mindset. I think most cash car buyers probably spend far less on their cars in the first place. (Which frees up money for other things - and prevents these kinds of conundrums). Regardless, if you save up the cash first, no matter how much you spend, you are going to think about it a lot more thoroughly and probably make a much soudner decision. Plus, you aren't stuck with a car payment if things go sour. You can always sell your car if things go sour. & under this scenario you still have your emergency fund, too (should not be for car purchases). So, win-win-win.

I hear what you are saying. It's back to a want. The trade is in a good spot right now. The miles are low and the used car market is very attractive now as far as worth goes. In fact on some models it's makes more sense to buy new than used. (Very model specific of course. There is a real shortage of good used autos and those on the market are commanding more than usual.) This particular dealer has very few of these cars and the car is in near perfect condition so he is willing to pay more. 18 months from now the situation may be much different in that the trade will be worth much less (miles and age of the car.) and the car market will have changed again and probably to a point where used cars are worth less than today's car park. But it still all boils down to NEED.

You may think this is nuts but I have not even driven the vehicle yet. There were none in the states until just a few days ago. (New model and it's an import.) But I have an appointment to drive it Saturday so that will be the telling point. If I drive it and it's not EVERYTHING I think it should be then the decision will be made much easier.

I appreciate your sage advice and common sense approach. (I have tried to gain common sense over the years but I'm a car guy and cars are my weak point.)

Thank you!

[PMMM]

Originally Posted by disneysteve

If this means it is a brand new model in its first year, turn and run the other way.

I would NEVER buy a brand new model or a model that has undergone a major redesign in the first year. Far too much risk of kinks that haven't yet been worked out. If you really, really want this car, hang on to yours for another year and then buy it - either used if no major issues turned up or new in the next model year if you insist.

I hear you Steve and it certainly is a risk. But I think it's minimal just because the complete drive train, front to back, is an existing design that has been well received and has good history over the past 4 years. Basically the car is transforming from a 4 seat hatch to a 2 seat coupe. Very little new drive train technology versus a true newly engineered model with new engineered drive train.

This MFG intends to release a new Roadster next year as well. That will be the car to stay away from in my estimation. Too much of it will be new and it could suffer from new car syndrome.

I thank you for the advice. You have given me much to think about. I will update later when the final decision has been made.

[disneysteve]

Originally Posted by PMMM

I'm a car guy and cars are my weak point

There's really nothing wrong with that. All of us tend to have one area where we aren't so frugal. For us, it's probably travel. For you, it is cars. For others, it might be dining out. As we often say, it is all about priorities. I'm willing to eat generic Cheerios every morning and pack my lunch every day and drive a 13-year-old car an shop at the thrift shop so that we can afford to spend 2 weeks in Disney World every summer and take a few other trips each year.

[bjl584]

Originally Posted by PMMM

I thought I would get feedback from the experts.

I am buying a new car and using my old car as trade bait. The net of the transaction will be roughly 25K. I have the cash in my emergency fund/rainy day fund to pay the car off. But in order to conserve the cash I was thinking of financing 10K to 15K at my local credit union. I was contemplating a 5 year loan at 2.99% rate. If I paid the loan off my emergency fund would still allow about 1.5 years of living should one of us suffer a job loss. The bad thing is that it would take me about 3 years to replace that money at the current allowable savings rate.

Here is my question. I have always been told and subscribe to the fact that cash is king. In order to pay the car off I will have to take money from my rainy day fund or long term emergency fund. This would reduce the fund but would still leave me with enough to live on for about 1.5 years should either of us suffer a job loss or get hurt etc. But will take me about 18 months to replace the 25K if I were to use it.

With rates as low as they are does it make sense to use the cheap money and save mine?

We have no other debts except for our mortgage and utilities.

Someone called Suze Orman with this exact question a few weeks ago. Her answer was, "What makes you feel more powerful and gives you better peace of mind? Paying off the car completely, or having the money in the bank?"

If you have 6 to 8 months living expenses saved beyond the 25K, then I'd pay cash for the car. If you are running things tight, then I would probably finance and sit on the money.

[PMMM]

Originally Posted by bjl584

Someone called Suze Orman with this exact question a few weeks ago. Her answer was, "What makes you feel more powerful and gives you better peace of mind? Paying off the car completely, or having the money in the bank?"

If you have 6 to 8 months living expenses saved beyond the 25K, then I'd pay cash for the car. If you are running things tight, then I would probably finance and sit on the money.

Well stated.

More fodder for the decision making process.

Thank you.

[disneysteve]

Originally Posted by bjl584

Someone called Suze Orman with this exact question a few weeks ago. Her answer was, "What makes you feel more powerful and gives you better peace of mind? Paying off the car completely, or having the money in the bank?"

That's an interesting point of view. Personally, I'd rather have the money in the bank. I don't mind owing money as long as I know I've got a good plan for repaying it. When it comes time to replace our cars, it is very likely that we will put down large down payments and take moderate loans which we then pay ahead of schedule. I don't mind paying a little in interest to maximize cash flow. I like the flexibility that provides.

What I won't do is borrow for something that I can't afford. Taking out a 10K car loan when I've got that 10K sitting in the bank is fine in my mind. Taking out a 10K car loan if I didn't already have the money in the bank would be a problem.

[feh]

Originally Posted by PMMM

Your last point I have no excuse for. It's a new car model, a Coupe, for a particular car company who's cars I really like and it's an out and out WANT not need. Of this I am guilty of and I wish my wife would have said no. I have to blame her cause she said YES.

I agree with the other posters - find a less expensive car.

That aside, if you have the cash on hand to pay for a car, and it doesn't deplete your EF, just buy it w/ cash. We also combine our EF w/ long term savings. We bought a new car 3 months ago and just paid cash from that account.

[PMMM]

Originally Posted by feh

I agree with the other posters - find a less expensive car.

We bought a new car 3 months ago and just paid cash from that account.

Just curious, but how much did you pay for your new car?

[feh]

Originally Posted by PMMM

Just curious, but how much did you pay for your new car?

Including TT&L, it was right around $19K. We got $5500 from the insurance company for our smashed car (the reason we needed a replacement), so net was $13500.

We had a bit of a surplus in our checking account at the time. so we ended up taking about $10K from our EF/long-term savings.

[PMMM]

Not bad.
Yes I am spending more than I probably should. (If I pull the trigger.) But it's back to the WANT thing versus the need.

It is such a sweet car. If you were in my shoes and had the same love of automobiles that I do you would understand.
I think my wife's next car is going to be a good used Toyota Corolla. We sold hers TC to buy the car she is driving now. While she likes it and it gets good fuel economy she is not the car person I am and truthfully I think she liked the Toyota better but won't admit it.

So the next go around we'll put her back in a good low mileage TC. She'll be happier and those things run forever. Maybe even the last car we buy for her.

Now me, we'll that's a different story. LOL

[feh]

Originally Posted by PMMM

But it's back to the WANT thing versus the need.

It is such a sweet car. If you were in my shoes and had the same love of automobiles that I do you would understand.

Oh, I understand. I dig cars. But I'm not willing to spend $10K+ more than necessary for a sweet and/or fast car.

You obviously know what the prudent choice is. It's just a matter of whether you'll listen to the devil on one shoulder or the accountant on the other...

[artwest]

If I am reading your post correctly, you could take 25k out of your EF and still have enough for 1.5 years of expenses. If that is the case, take out the money and buy the car. I would also take out some money and throw it at your mortgage.

A 1 year EF should be ore than adequate. The experts suggest 3-6 months so 12 months would be fine.

[PMMM]

You read it right. But it's also my general savings fund so that time could be changeable.

But I'm not sure I agree with your suggestion to pay down the mortgage and here is why.

I am not upside down in my house but in my market the house is worth less (according to Zillow) than I paid for it 8 years ago. Though I still have equity in the house and a good interest rate (4.3%) I do not intend to retire in this area. I want to move to Boise, Idaho and buy a much smaller house. The house I am in now is far too large for just my wife and I. Boise has a median housing price of about $130K (now) and a much lower cost of living than the Seattle metro area. (now) It's darned expensive around here and I want to slow down my lifestyle when I retire. I'm assuming that Boise will still be affordable when I retire and if not I will find the area that is.

I have about 15 years to go before I retire, (retiring at 70) and my wife about 19 years. My reason to retire at 70 is to get the full SS benefit. I may not work full time once I reach an earlier retirement age but I do want to max the SS benefit.

So I think I would rather keep putting money into 401K and other investments rather than pay down the house. I am assuming that I will be able to sell my home for a decent profit when retirement comes and then I will just pay cash for our end of life home. At least this is how I envision it all coming together.

I'm not sure if that makes sense to you but it does to me.

[Frugal]

I don't know, five years' worth of living expenses in an EF seems pretty reasonable. Was just thinking the other day that this kind of savings might be ideal for most people (if only most of us could afford to have so much in savings! Not likely!).