Retirement / Savings / Carloan

[myrdale]

This past month was kind of expensive for truck repairs. $500 at the start of the month for a new radiator. $1,500 at the end of the month for plugs, wires, intake gaskets, MAF sensor, more hoses than you can shake a stick at! For the moment, the truck is running like new, with 279,000 miles on it.

I've about decided it is time to trade in. I have wanted a 4 door 4 wheel drive Tacoma for quite a while. Looking at the pricing I am probably looking at $32-35k for one new. My intention had been to save up and pay cash, but I am now strongly considering a car loan (I have loved the last 12 years with out a car loan and the last 4 years debt free).

The conflict is the fact that I have not put anything into the IRA this year. Last year I maxed out the $5,500 limit. Additionally the roof does NOT leak, but it could be argued I need a new roof $7k. Also the furnace / AC WORKS but is an old unit, $5k. I've got about $28k in the bank at the moment. Also I love my job, but at the point I crossed the $30k mark in savings, I consider that less of an emergency fund and more a go to hell fund (I am not the least bit interested in quitting or finding another line of employment, but cash does provide a nice sense of security).

So the ultimate question is what is the most reasonable path forward?

1) Max the IRA, get the new truck on loan, keep saving?
2) Max the IRA, keep driving the truck till the wheels fall off, keep saving?
3) Pass the IRA this year get the truck for cash middle of next year?
4) Put less than max in the IRA, get the new truck, keep saving?
5) Some other solution I have not considered yet?

There is a separate argument for want vs need vs utility for purchasing a new 4x4 truck. I could get a $15k car new for cash tomorrow if I wanted, but I don't. I could get a used truck, but I am in it for the long haul (as I stated 279,000 on my current truck) and everyone says "Toyota's hold their value" so I am not sure about how deep of a discount I can get for used. As for the 4x4 that would knock $5k off the price to go with out. I might only NEED once or twice a year, but it would be a nice utility, though something else to break too.

[Petunia 100]

How does the rest of your financial picture look? You say you are debt free...do you own a home with no mortgage or do you rent? Is your retirement savings on track for a comfortable retirement, or are you ahead/behind target?

[LivingAlmostLarge]

How much are the trucks you are considering? Have you even tried to shop a 1-2 year old used truck? Do you know the interest rate you would get? That is why we are buying our car instead of financing the balance. The interest rate offered was a ridiculous 5.75%.

[Jluke]

There is not enough info but here are some thoughts.

Debt free and you weren’t able to come up with $5500 for an IRA?

What is your current saving rate?

What amount will you be able to save if you also have a car payment?

did you max a 401k if available?

i would not deplete the cash to buy a car
unless the info you haven’t mentioned includes substantial savings elsewhere (taxable account, Ira, 401k or similar)

[disneysteve]

There's no way I'd be buying a $35,000 brand new truck if I couldn't afford to contribute to my retirement account, but as Jluke said, we don't have enough info here. How much are you saving for retirement elsewhere? What are your monthly expenses? You have 28K in savings but I don't know what that represents without any context. How much do you earn?

What would I do? I'd max the Roth and be shopping for a much cheaper truck. The fact that you're willing to drive it for 200-300K miles makes buying a used one an even better deal because it will still have plenty of life left in it for you.

[myrdale]

A few more details.

Income is around $75k before taxes.

For the 401K, the company matches 4% if you put 5% in. I am currently at 7%.

$90k in the 401K

$10k in the IRA

$28k in savings (cash in the bank)

I seem to average $10k+ in savings each year.

I typically save up and try to knock out the big expenses in cash. $17k for new siding last year. $5.5k to the IRA March of this year for 2017. $2k for garage doors earlier this year. Just call it $2k for truck repairs this past month.

"You say you're debt free, do you own your home...." Yes.

"How much are the trucks you're considering?" $32-34k as stated in the original post.

"Do you know the interest rate you would get?" No. I have not pulled a credit report in years, but bills are always paid on time. If I save up and pay cash interest rate is a none issue. If I pay a loan off within 2 years, again not a big issue.

"Have you even tried shopping for a 1-2 year old car" No. I could get a used truck but I am in it for the long haul as stated in the original post. The price listed in KBB is $28-32k for 2016 model.

"Debt free and you weren't able to come up with $5500 for an IRA" False. I could contribute the full amount at this very moment, I haven't contributed to it yet as I have been in savings mode for the past year.

The rule of thumb I've heard in the past is your vehicle should not be more that 50% of your annual pay. By that end, $34k is at the top end of affordable.

The trade in value for a 2002 Nissan Frontier with 279,000 miles on it I suspect is less than I spent on maintenance last month.

The ultimate concern is balancing negating risk by having enough cash on hand, maximizing retirement, minimizing debt, and having a dependable vehicle.

[Jluke]

One rule of thumb is 3x salary in retirement accounts by age 40. Not sure of your age. With no mortgage I imagine most of your potential savings in the last years went to paying off the house (been there done that too).

I am a natural saver so 7% to 401k ($5k out of allowed 18.5k seems low to me but I am different).

You have had some serious expenses for house and truck and managed that well.

28k in the bank. I would call this the emergency fund (move to online account for 2% interest) and now start saving for your next vehicle.

Im torn on whether the new truck is affordable for you. I would aim for a payment under $500/month and a loan of 5 years or less. Depending on interest rates.

[msomnipotent]

From what I have read, the Tacoma is due for a redesign in 2020. Usually but not always, the model year prior to the redesign is sold at a discount once the redesign comes out so you might want to wait for the 2019's. With all the work you had done, your truck should make it another year without a huge repair. You might also get a great deal now on a 2018 with it being the end of the year. Because the Tacoma is popular and the used models are selling only at a slight discount to the new ones, I would buy new with a healthy down payment. I would get a car loan considering the upcoming expenses you listed and just pay it off in 1-2 years. Keep the emergency savings for the house repairs and start a new account for the Go To Hell money.

Why don't you just put some money in the IRA now, like half, instead of maxing out? I'm pretty sure we have until April of 2019 to add to the 2018 year, so add more before April once you figure the truck thing out. Personally, I would start increasing the 401k contribution 1% every few months. I have been raising ours 1% every 4-6 months and we don't notice it. Well, now we are starting to notice since it is now several hundred dollars a pay check more than before but we get used to the smaller checks by the time I raise the contribution again.

[bjl584]

Maybe meet somewhere in the middle. You can buy a used truck with 50K miles or less for half of a new Tacoma. This will leave you some cash for eventual home repairs.
It's not the end of the world if you miss this year's IRA contribution, just don't let the reason be a brand new truck in the driveway.

[myrdale]

Thank you all for the feed back by the way. I actually answered part of the question myself about 15 minutes ago. A coworker had asked if I wanted to join a football pool they were putting together for $20. I declined and when pressed why, I explained that $20 spent on a gamble per year would be $5 or $6k if invested in annual for the next 30 years. They laughed and went on their way. Then it occurred to me the $5500 for the IRA is potentially $165,000 in 30 years just by itself.

To be completely honest, my intention has been to fully fund the IRA for 2018, probably in January or February of this coming year.

Not going for the 4 wheel drive will knock a nice chunk off. It is more a want than a need.

I do have mixed feelings about the used truck option. Its one I'd have to study. While I am not pressed to make a decision, I do feel like the current truck has passed the point on the curve where future upkeep outweighs the overall value of the vehicle. But then again it could last till 350 or 400k easily.

[msomnipotent]

Thank you all for the feed back by the way. I actually answered part of the question myself about 15 minutes ago. A coworker had asked if I wanted to join a football pool they were putting together for $20. I declined and when pressed why, I explained that $20 spent on a gamble per year would be $5 or $6k if invested in annual for the next 30 years. They laughed and went on their way. Then it occurred to me the $5500 for the IRA is potentially $165,000 in 30 years just by itself.

I'm getting $1,749.10 for $20 a year and $481,200.63 for $5500 yearly at 6%. How are you calculating this? Not that I am trying to prove you wrong. I'm really bad at math and have always wondered if I am calculating wrong or not. Even when I use the online calculators (as I did now), I think to myself that the numbers do not sound correct.

[james.hendrickson]

Myrdale: This is a problem. Financial education in the USA varies a great deal => A coworker had asked if I wanted to join a football pool they were putting together for $20. I declined and when pressed why, I explained that $20 spent on a gamble per year would be $5 or $6k if invested in annual for the next 30 years. They laughed and went on their way. People just don't understand how compound interest works and how to realize it.

[LivingAlmostLarge]

I'd fund the Roth IRA because you can take out contributions so that can be your EF. What is 6 months EF? I agree that your car is past the point of investing more money. Not sure i would have spent $2k, but that's in the past. That being said Toyotas keep their value really, really well. Really well. It's hard to buy a used toyota and know that you aren't really getting a deal.

Last December we bought a used 2015 (2 year old) toyota minivan. We paid $28k for it. I was stopping at 30k. I wanted the AWD limited package with tv. Brand new that thing was $50k. Now had I been willing to get a LE with 2wd, new I would have paid around $32k and 2 year old used 20k miles was running close to 26k so i mean why buy used? i bought with 45k miles on it and I've put on another 15k miles this year. Anyway the only way to get a deal on toyota is to compromise.

So I can see the point of saving $6k for 2 years and 20 miles? That seems a way to me. But I didn't want to spend $50k to get my leather, awd, tv and I managed to find one. It took a few months to boot to find a less than 3 year old minivan loaded that was under $30k. The other thing is that Toyotas newer tend to be less frequent because people hang on to them. Our friends bought a 2014 toyota highlander loaded this year so 4 years old for $26k. They really hold value well.

I'd probably just put $5500 into Roth, then save like crazy and buy your new toyota tacoma when your car needs another repair. At that time, put down what you feel comfortable with and then take out a loan.

[disneysteve]

I have a question. Why aren't you funding your IRA on an ongoing basis during the year? You're not anywhere close to the income limit so no risk of betting closed out of eligibility. And there's absolutely no benefit to waiting until February or March to put in the prior year's contribution. In fact, there's actually a downside financially speaking. It's to your benefit to fund it as early as you can. Rather than saving up in a bank account and putting in a lump sum, just make a monthly contribution throughout the year. That way the money gets into the tax shelter sooner and can start growing (hopefully) sooner and it won't be in your hands anymore to tempt you to spend it on something else like a 32K truck.

[Jluke]

Adding to Disney Steve:
in 2019 monthly contributions of $500 (nice round $$ for a change) will max out the Roth.

Catch up contributions are Not factored in.