Another "what would you do" financial situation

[starnsey]

So let's say you owned two cars - one worth about $5000 and one worth about $15000. You had the intention to sell both of them in order to put $20000 towards a new vehicle between $20k and $30k. Doing this would lead to between a $0 and $150 per month payment for 60 months.

Now, you're also $15000 away from having your emergency savings full. You put $1200/month towards this savings already.

So my question, would you take the $15000 you potentially make from selling one car and put it in your emergency savings so that's full and accept a substantially larger monthly payment for a new car due to the lower down payment of $5k or maybe a little more? Doing this would allow you to put a little less money towards emergency savings per month. Or do you use all of the entire $20k towards a new car for the lower monthly payment (or possibly no payment) while still putting away $1200/month knowing that it'll still be about a year before you reach your emergency savings account goal?

No need for responses about not buying a new car, I'm only interested in the scenario mentioned above.

Bonus: You start contributing to your 401k in less than three months if you fill your emergency savings immediately (company doesn't match till after one year of employment - substantial 401k value already exists but is not currently being contributed to). Otherwise, it's possible you don't contribute to your 401k until after your emergency savings is full in about a year.

Thoughts?

 

[DHG1078]

Always contribute to your 401k. That is the only appreciating asset you listed. Not contributing to it is only losing you money. Assuming the savings account doesn't accrue interest since it isn't specified.

 

[thomas91169]

Do half and half. Problem solved.

$10k to new car, $10k to savings.

What do you mean though when you say your "emergency savings" is full? Are you going to make it a certain amount and then not touch it unless necessary? Pretty good idea.

$10k down on a new car with 60mo financing and getting little to no interest rate and taking advantage of other incentives is still way awesome.

The real question is what car are you looking at in that range......

 

[starnsey]

Always contribute to your 401k. That is the only appreciating asset you listed. Not contributing to it is only losing you money. Assuming the savings account doesn't accrue interest since it isn't specified.

Wife and I bought a house this past year which reduced our savings account hugely. First priority was getting emergency savings reloaded before 401k, especially since my company doesn't contribute for the first year, so I'm not losing out on the free money yet.

Do half and half. Problem solved.

$10k to new car, $10k to savings.

What do you mean though when you say your "emergency savings" is full? Are you going to make it a certain amount and then not touch it unless necessary? Pretty good idea.

$10k down on a new car with 60mo financing and getting little to no interest rate and taking advantage of other incentives is still way awesome.

The real question is what car are you looking at in that range......

Hmm, simple solution that I didn't think of! Good idea.

My definition of emergency savings is just a minimum balance in a savings account that could cover my wife and my basic financial needs should us both get laid off from our jobs at exactly the same time (not likely but obviously it's a slim possibility). Once that balanced is reach, we still contribute to keep it growing but can contribute less and utilize is for "less desperate" emergencies without much worry.

New vehicle would be a pickup truck of some sort most likely.

 

[MovingZen]

Sell the $15k car and fix your emergency fund. Use the $5k car as a down payment for your new car. The payment on your new car can come from the $1200 a month you wont be putting in your emergency fund. Find out how much you can put in your 401k/matching and all that and reduce that from the $1200 a month leaving you with how much car you can afford. This is assuming the two older cars are paid off.

 

[starnsey]

Sell the $15k car and fix your emergency fund. Use the $5k car as a down payment for your new car. The payment on your new car can come from the $1200 a month you wont be putting in your emergency fund. Find out how much you can put in your 401k/matching and all that and reduce that from the $1200 a month leaving you with how much car you can afford. This is assuming the two older cars are paid off.

Correct, both cars paid off.

And that pretty much answers the question - deduct monthly payment from savings contribution once emergency fund is met, deduct 401k contribution and then add back in whatever raises or any other finances come our way from there to the monthly contribution.

Pretty simple, guess my brain's just beat from working a ton this past week.

Genius, Zen! Thanks.

 

[lobra97]

$20k is a lot on a car cash. Granted its paid off but damn. I threw all my deployment money in my savings , prolly shouldve paid off Cobra but i like having emergency money.

 

[10splaya22]

If you can get an interest free loan for a new car. Take the money from the sale of both cars and fill up emergency fund then stick the rest in your 401k. That way you are building interest for free while taking the biggest advantage of the interest free car loan.

 

[starnsey]

If you can get an interest free loan for a new car. Take the money from the sale of both cars and fill up emergency fund then stick the rest in your 401k. That way you are building interest for free while taking the biggest advantage of the interest free car loan.

Yeah, that would completely depend on timing of vehicle purchase and type of vehicle if they come with 0%. Won't know until the time comes. Unfortunately, that's at least a ways out. But my interest rate will be somewhere between 1.5% and 2.5% regardless on just a normal auto loan through the CU so I'm not too concerned.

 

[VenomousDSG]

I like the half and half idea.

 

[starnsey]

I like the half and half idea.

As do I. Really, this is still hypothetical and I'm counting on my estimation of car values. But at least I have some good ideas on what needs to be done when the time does come that I'm certain have steered me in a much better direction that my initial plan.

 

[LS2GTO]

I'd put all the money that I need into this savings account, the rest as a downpayment towards the car.

You will end up with a higher payment each month, but given that you now have $1200 a month freed up you can use that to pay off your loan faster.

especially since my company doesn't contribute for the first year, so I'm not losing out on the free money yet.

Sadly, you are most likely losing out on free money regardless. Employer matching isn't the only way to fatten up your 401k with free money. But seems like you've set your mind between savings (that most likely earns you 0.05% and a car payment).

 

[starnsey]

Sadly, you are most likely losing out on free money regardless. Employer matching isn't the only way to fatten up your 401k with free money. But seems like you've set your mind between savings (that most likely earns you 0.05% and a car payment).

Oh no, I'm not set on savings and a car payment. I contributed fully to my 401k for three years at my first job. My wife has been contributing to 401k and Roth IRA the whole time as well. Moving to Houston, we bought our first house which more or less depleted our savings so it's critical that we get that built back up first before contributing back to retirement (better to be prepared for lay-offs in this environment than retirement short-term).

But yes, you're correct, I'm losing out on compounding interest and in essence, free money, for one year. I believe that's acceptable while trying to get the emergency fund set up (especially with as young as we are). Once that's back to our desired value, I'll be again fully contributing to my 401k as well as savings - so only savings and a car payment are not my focus.

 

[Repth]

I'd put all the money that I need into this savings account, the rest as a downpayment towards the car.

You will end up with a higher payment each month, but given that you now have $1200 a month freed up you can use that to pay off your loan faster.

Sadly, you are most likely losing out on free money regardless. Employer matching isn't the only way to fatten up your 401k with free money. But seems like you've set your mind between savings (that most likely earns you 0.05% and a car payment).

Keep "emergency money" in a 401K is stupid. This guy is not insisting that he should sit there and rack up his life's savings in a bank account, he just (responsibly) wants some liquid cash in case he needs it in a pinch. For the record, though, I'd advise him to do the same amongst the given options.

 

[DHG1078]

Oh no, I'm not set on savings and a car payment. I contributed fully to my 401k for three years at my first job. My wife has been contributing to 401k and Roth IRA the whole time as well. Moving to Houston, we bought our first house which more or less depleted our savings so it's critical that we get that built back up first before contributing back to retirement (better to be prepared for lay-offs in this environment than retirement short-term).

But yes, you're correct, I'm losing out on compounding interest and in essence, free money, for one year. I believe that's acceptable while trying to get the emergency fund set up (especially with as young as we are). Once that's back to our desired value, I'll be again fully contributing to my 401k as well as savings - so only savings and a car payment are not my focus.

You are also losing out on the tax break you get from contributing to your 401k because that is pre-tax money.

 

[starnsey]

You are also losing out on the tax break you get from contributing to your 401k because that is pre-tax money.

Alright, that too. But again, I think I'm okay. Started contributing on day one of my first job out of college, which is likely long before most people in this country start. Taking one year off of retirement contribution to ensure that I don't have to live on the streets if my wife and I lose our jobs is probably justifiable.

 

[LS2GTO]

I believe that's acceptable while trying to get the emergency fund set up

Not to go off on a completely different subject, but that is also something that I personally don't put as much importance on as it seems others do (and may just be my particular situation).

For example, I know both my wife and I have good careers with year and years of experience in our fields + good education. The likelyhood that both of us will get fired at the same time (and be out of a job for months on end) is very very unlikely, but like you said still there. Plus there is always unemployment to keep us afloat for 6 months..and we can always end up working at Walmart for a few months just to get by while looking for a real job. So for us, we keep enough money in our liquid savings account to take care of house bills for a few months just so we know we have a roof over our head. The rest of the stuff we may need can easily be put on a low/no interest credit card, or worst case scenario we take a loan out on a 401k which comes with no penalties and the interest that we do pay goes right back into our own accounts as apposed to a bank.

This way we have alot of money freed up to go into 401k, which like you mentioned gets matched to a certain degree and also compounds interest. It's a much better place to keep money than a savings account earning you 1/10th of a percentage point. I'd rather dump everything I can now into my 401k to earn interest rather than stash that money away unecessarily into a savings account that gains nothing and then later I can always take out this money penalty free. Yes a 401k loan means you lose interest gains, but those are made up by excessively putting in more money there all these years rather than in savings.

Not saying that you should change your mind about how much you feel comfortable with in pure savings, but there are other ways around it and better ways to save your money than in a regular savings account.

 

[HandBanana]

I never put a ton of cash on a vehicle. If I get in a bind, I can always dip into my savings fund. I don't think it's wise to put more than a couple payments worth down on a vehicle. Always better to have the cash than have it wrapped up in something that could get totaled on your commute tmrw.

 

[LS2GTO]

I never put a ton of cash on a vehicle. If I get in a bind, I can always dip into my savings fund. I don't think it's wise to put more than a couple payments worth down on a vehicle. Always better to have the cash than have it wrapped up in something that could get totaled on your commute tmrw.

That depends greatly on the value of the vehicle and how much interest rate you have on the loan.

If it's 5% interest then you're much better off paying that thing down quickly than stashing away money pointlessly in an account earning you 0.1% interest. If you have a 0% loan then what you said is true. And that's why you have auto insurance and/or gap insurance. Having a car being totaled on your commute everyday should not be a worry of you losing tens of thousands of dollars on the spot. If it is, then you have the wrong coverages.

 

[ViciousJay]

OP why not open the savings and buy the new car, sell the other 2 and put the money back :shrug: