Save savings, or spend?

[SmrtSpndr]

I recently got a $1800 insurance payment for a small fender bender in a parking lot (100% liability on the other person).

My car is a 2000, so it's kind of old, though relatively good condition and been very reliable. It does have several small things that should get repaired, but don't affect the reliability.

I'm in my late 20's, recently started a new job, and living alone in an apartment. I don't have a whole lot of extra expendable income, averaging about $100/mo in spare income per month in the past year (I could probably improve that with some significant belt tightening). I have close to $40,000 in cash saved up from when I was living with my parents. Most of it is currently in a high-yield savings (about .7-.9% apr).

So, do I repair my car and get another couple years out of it, or buy a new car?

If I buy a new car, how much should I put down? If I put down a lot, I can keep my monthly payments low and buy a nicer car. If I don't put so much down, I may not be able to buy as nice a car and/or I'd be eating into my savings to make the payments. What would be an appropriate down payment for me on a car in the $10,000-$15,000 range?

I really don't know what I should do here, and I've really been hanging onto my "nestegg" cash for awhile, not sure what to do with it.

Thanks so much for any suggestions.

[scfr]

If you do no repairs to your car, is it driveable and street legal? In other words, are the repairs necessary or optional?
If repairs are necessary, what is the estimated repair cost?

[SmrtSpndr]

The car is driveable, but a couple of the repairs are mandatory for state inspection, so I will have to get them fixed eventually; and I'd estimate them to be approximately $500. Additional amenity repairs might run another $500.

[scfr]

If it were me, I'd do the mandatory repairs, skip the amenity repairs, and keep driving the car for at least a few more years. (One of our cars is a '99 Camry and our aim is to drive it at least to 200K miles. We stopped doing cosmetic repairs on it many years ago. It looks like crap but runs great!)

You may enjoy this article: http://www.cnbc.com/id/100773367 The bottom line is that the more you can save when you are young, the much better off you'll be in the long run.

You're in a nice spot right now ... you have a head start on building a secure financial future. Give some thought to your long term goals, especially about retirement (as hard as it may be to imagine at your age). You may decide that you want to move some of your savings in to an IRA if you don't already have one.

[Wino]

I have close to $40,000 in cash saved up from when I was living with my parents. Most of it is currently in a high-yield savings (about .7-.9% apr).

If I buy a new car, how much should I put down? If I put down a lot, I can keep my monthly payments low and buy a nicer car. If I don't put so much down, I may not be able to buy as nice a car and/or I'd be eating into my savings to make the payments. What would be an appropriate down payment for me on a car in the $10,000-$15,000 range?

The two above things jump out at me. You should have that $40K somewhere it can be earning you money. I suggest you at least start a Roth IRA and put that money ($5500 for 2013) in it. You're losing that money penny-by-penny to inflation.

The second thing is that you are thinking in terms of "payments" and not in terms of "cost." You need to buy a car outright. You can get a lot of vehicle for $10K. If you avoid the "new car" purchase, and instead get a reliable used car, you can save the drive-off depreciation (at least $5K just to take possession of a new car), and still have a car that's reliable for years to come.

If you think in terms of "can I afford the payment?" You're going to end up making payments the rest of your life. I suggest you google the following terms, and read some of the links: debt free, debt snowball, debt tsunami, get out of debt. What you'll find is a lot of ways to get out of debt. As you're not currently in debt, you should do everything you can to stay out of debt.

You need to start investing your money, and not just saving it. Got to Vanguard.com or Fidelity.com and start doing some reading. There are long term, low risk investments that you could do, but as you have over 30 years to plan, I suggest you look into some higher-risk investments. Search for "index" on the mutual fund guides and you'd find it tough to pick a long-term loser. Note, though, that "low risk" does not mean "no risk," and your investments MIGHT lose money; however, if you put the money in an index mutual fund and ignore it, you are very likely to have a significant nest egg waiting for you when you retire.

If you leave the money in a savings account, you'll have very little spending money compared to its value today. $40K in 1980 would be worth about $140K today. In other words, your spending power would diminish by about 3.5 times if you just "stayed even" with your dollar amount over the last 30 years. That's what is happening to your $40K right now.

[SmrtSpndr]

I'm sorry. I didn't mean NEW, I meant new-used.

Anyway, you make some good points... I've always been scared to move my money though, afraid it'd be hard to get if I needed it in an emergency, which is part of the reason why it still just sits in a savings account.

Also I'm not technically debt-free; I have student loans, but not much can be done about that.

[Wino]

I have student loans, but not much can be done about that.

I can think of 40,000 things you can do about student loans.

And you're still thinking "payments," not "affordability."

[Jerry91]

In my opinion, it will be better if you put the money in your savings account and increase your bank balance. What I can understand from your post is that the car repairs are optional and you can drive the car without the repairs. In such a situation, you can use the car is the same situation for quite a few years and then think of buying a new car.

[kork13]

Definitely open up & fully fund a Roth IRA with $5500 as soon as you can do some research on what you want to invest in. You can do this at Vanguard, Fidelity, T. Rowe Price, Charles Schwab, or any other low-cost mutual fund investment house. Saving for retirement while you're still young is critical to preparing for a comfortable future.

Repair the necessary things on your car, probably skip (at least for now) the "extra" repairs, and keep driving your current car for as long as you reasonably & safely can.

You don't specifically state your average monthly expenses -- what are they? Reserve 6-9 months of those expenses (depending on what makes you comfortable at night) and keep it right where you have it as your emergency fund.

The rest of your savings (including the $1800 insurance payout, less the car repairs & $5,500 for your Roth IRA) should be directed toward strengthening your financial position. That might involve investing it in a taxable account (beyond your Roth IRA), or perhaps paying down a significant part of your student loans. How much do you have in student loan debt?

You clearly have a healthy attitude toward money, and are good at saving. Now all you have to do is direct your money to the right places so you can put yourself on solid financial footing moving into the future.

[SeanH]

"I'm in my late 20's, recently started a new job, and living alone in an apartment. I don't have a whole lot of extra expendable income, averaging about $100/mo in spare income per month in the past year (I could probably improve that with some significant belt tightening). I have close to $40,000 in cash saved up from when I was living with my parents."

I think there's some exploring to be done here. When you say you have $100 left at the end of the month does that mean after putting some money into savings and retirement or does that mean you are $100 above breakeven and the slightest additional "unexpected" expense would push you into having to draw money from your savings? I put "unexpected" in quotes because this forum will hammer you on the fact that most "unexpected" expenses were in fact simply unplanned or unconsidered, but should have been expected.

Perhaps all that money has been waiting to be put to good use in a car, but I sort of see you tapping your savings account like tapping a finite resource you can't get back.

[MonkeyMama]

As to the car, I think you have gotten sensible advice. I'd keep the car.

As to the rest, surely not enough information. Are you saving for retirement? What are your other financial goals? If you want to buy a home, you'd want to keep the $40k, probably. Having cash like that on hand can always buy opportunity as well (or significant freedom in case of a job loss). If you only have $100/month left over and aren't saving anything, then you have some work to do.

I am sensing that you have no plans for the cash, and so may need some further direction. BUT, I think given your age I think this could be sensible. I think the point is you have a lot of unknowns in your nearer future (I've been there, and a similar saved up nest egg was more valuable than anything else, at that time in our lives). BUT, hopefully you are also saving for retirement.

[SmrtSpndr]

Wow, more feedback than I expected so far; thanks for everyone wanting to help. Let me try to paint a clearer picture of my finances.

I have $13k of student loans to my name ranging from 2.35% to 6.8%, and an unknown number of loans in my fathers name. It's unknown at the moment because it all includes loans from my brothers so we'd have to sit down and sort through it all. I am NOT paying those loans at the moment.

I do have a 401k from my previous employer, with about $10k in it at the moment. My new job has a retirement plan/pension, but I really don't know all the details of it yet.

My "extra" $100 a month is after all expenditures, averaged over the last several months, so it includes vet bills, car repairs and maintenance, taking mom out for mothers day, etc... So some months I have more, some months I'm in the negative.

So yes, I guess it boils down to the $40k cash across all accounts. Why is $5500 the magic number for a Roth IRA? Should I dump the rest in investments? At what point does it become safe to spend that money? Do I save it all for retirement?

If I say a vast majority of it should be saved for retirement or perhaps a house, then I really have to restructure my budget, because this car obviously can't last forever. I've always thought of things in payments because I've always made my budgets on a per-month basis. Is this a poor way of thinking? Right now I live fairly comfortably; not afraid of if I can afford to put gas in the car or go out with friends for a couple of drinks.

I do have a new job, but it's with a school district; so it's 10-mo pay + per-diem summer pay. Counting summer pay, I am making more money than I was (base pay is about the same). But since it's 10-month pay, my paychecks will look bigger, so I have to be extra conscious about my budget now too.

[BMEPhDinCO]

Are you a teacher then? Make sure to take advantage of the 403b or TIAA-CERF or whatever your district offers (5% at least gross to that for retirement). The $5,500 "magic number" is the max you can put into a RothIRA per year. So put that in for 2013, then I'd hold onto another $5,500 for 2014, put that in come Jan.

For the other $29k, I'd put $10-15k in the savings account you have now, $5k in another savings account for the next car/maintenance/etc. Then put $2k into a "misc" account for going out special, new toys, whatever. The final $2k I'd put on the highest loans.

Then, make up a budget with your monthly expenses, include some fun money, the 50/30/20 budget (needs/wants/savings) is a good starting point. Anything NOT in that budget is savings for the summer and for other things (ie, paying loans faster, adding to the car fund, etc).

[SmrtSpndr]

No, not a teacher. I'm on the support staff.

[dczech09]

You have $40k in cash, a 401k, no Roth IRA, $13k in student loans, and a car situation. I am going to say something that nobody has said yet. YOU HAVE TOO MUCH MONEY TO BE IN DEBT!

Pay off the student loans, immediately. You have no excuse to hold onto them. You will have to pay them off anyway, so do it now. This eliminates payments and frees up some cash every month. So pay off the $13k in loans! That leaves you with $27k.

You need an emergency fund. Conventional wisdom says 3 to 6 months of expenses (not income) set aside for emergencies. So keep $10k in a savings account for emergencies (or 3 to 6 months of expenses, whatever that may be, I am using $10k as an example). I know you are worried about spending your $40k in case you need it for emergencies. But a $40k emergency fund is very redundant and is not necessary. Especially if you have all of your insurance needs met. This leaves you with $17k.

Open a Roth IRA. Check out T Rowe Price, Vanguard, and/or Fidelity and look into investing for the future. For 2013, you can invest $5,500 through a Roth IRA. Do this! This leaves you with $11,500.

Either pay the $1,000 to repair the car or buy a $10k used car that is reliable. Do some research. Figure out if the repairs will be suitable. If they are, then do the repairs and keep your current car. If you keep your current car, then put the rest of the money in your savings account as a "car fund." This way you have money for when you need to buy a car. Avoid loans and leases. Stop thinking in terms of payments. Even 0% loans are worse deals than simply paying cash for a car. Again, you have too much money to be in debt!

Get on a budget. A written one. Income minus expenses equals exactly zero. Every dollar has a name.

Invest 15% of your income for retirement through your 401k and/or Roth IRA. If you followed my recommendations, you will not be putting any additional money into your Roth IRA until 2014 since you will have maxed out your 2013 contribution.

Save for a house down-payment.