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4 year free car financing
Old 02-20-2017, 09:03 PM   #1
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4 year free car financing

Buy back approaching for my VW TDI, so I bought a new car with 4 years free financing. I would like some recommendations on where to stash the $35k until needed with recurring monthly payments.
Current plan
Year 1 payments will sit in Ally earning 1%. The car payments, through Chase, will auto-draw from Ally each month. The better of Ally or Vanguard CD’s will hold the other years.
Question
On the Vanguard CDs and Bonds page there are a variety of bonds that yield better than CDs. Are these worth considering? Having never purchased Municipal or Corporate bonds can you please let me know the risk relative to a CD and whether or not these are tax free and if their stated yield compounds daily like the Ally CD clearly states (Vanguard CDs only says “yield”)

Municipal and Corporate A, AA, AAA
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Old 02-20-2017, 10:33 PM   #2
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Originally Posted by krldrummerboy View Post
Buy back approaching for my VW TDI, so I bought a new car with 4 years free financing. I would like some recommendations on where to stash the $35k until needed with recurring monthly payments.
Current plan
Year 1 payments will sit in Ally earning 1%. The car payments, through Chase, will auto-draw from Ally each month. The better of Ally or Vanguard CD’s will hold the other years.
Question
On the Vanguard CDs and Bonds page there are a variety of bonds that yield better than CDs. Are these worth considering? Having never purchased Municipal or Corporate bonds can you please let me know the risk relative to a CD and whether or not these are tax free and if their stated yield compounds daily like the Ally CD clearly states (Vanguard CDs only says “yield”)

Municipal and Corporate A, AA, AAA
Be aware that the Vanguard CDs are "brokered" CDs, they aren't issued by Vanguard. The impact to you is that they cannot be cashed out early simply by paying an early withdrawal penalty. Instead, if you want to get the money early (say, because you have a 2.5% CD and rates have gone to 5%), you'll sell them to somebody else, and the loss might be quite a bit more than the interest penalty you'd suffer from a CD bought directly from a bank, etc. Also, if you are a member of a credit union, check their CD rates. I was surprised that my local CU had a better 3 year CD rate than Ally.
I can't answer your bond question, except in generalities: No municipal bond will be as safe as an FDIC/NCUA insured CD, and some municipal bonds (issued by entities with shaky finances) could carry more risk than you'd want, especially if they have a local hit to their economy. You'd expect the riskiest munis to have the highest interest rates.
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Old 02-21-2017, 06:40 AM   #3
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I would avoid the bonds. Credit risk is certainly an issue- if the issuer has financial problems you may not get 100% of your money back. But even if you pick a good investment grade bond, interest rate risk is real. As interest rates change, bond prices change. If you buy a bond and hold it to maturity you get your principal back (ignoring credit risk) but if you need it back earlier the value could be lower than your initial purchase if interest rates have increased. That's what happened to most bond portfolios last year. Personally I'd stick with your Ally plan if these are the only funds earmarked for the car payment.
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Old 02-21-2017, 07:02 AM   #4
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If you're buying bonds for a known term to pay an obligation at a known future date, the risks associated with cashing it in early should be mostly moot if you're willing to forego any possible "better rate" you could get somewhere else during that time period, right? So if you're just putting money away today to pay the car payments 2 years from now, you should be anticipating holding a 2 year bond or CD to maturity and plan accordingly for that scenario, right? Am I missing something there?
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Old 02-21-2017, 07:40 AM   #5
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Figure the "hassle factor" as you look at options. Rates are so low now that, in dollar terms, it may not be worth your time and neural overhead to do anything complicated. First, any "long term" investment is now for less than 3 years because you'll need to close it out and dump the dough into your checking account to cover the last 12 payments. Also, if you miss any CD end window (10 days?), you'll be forfeiting months of interest to get the money out. So, something else to remember/do in the future, maybe at an inconvenient time. Bonds -- to avoid interest rate risk you'll need to calculate a schedule to assure you buy ones that will refill your checking account in time to make the car payment. Any broker fees to buy those bonds?All of this costs you time to figure out, set up, monitor on specific dates, etc. Or, you could just put the whole wad in an Ally Bank savings account (earning a respectable 1% in today's market) and have the autopay for the loan come directly from it. One step and you are done thinking about it for 4 years. Run the numbers on what you'll actually earn on this shrinking pot of dough and you may find wer'e not talking about very much money in interest anyway. As a bonus, the money in the savings account can serve as an emergency fund and may save you from having to sell other securities (tax implications) to cover unanticipated expenses.

Another thought-- I wonder if the car company will pay you to pay off early? I'm sure there's no language like that in the contract, but somebody benefits if you pay off early, and it they may be willing to pay a higher rate to get that money now than you'd get on a CD or bond.
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Old 02-21-2017, 07:58 AM   #6
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I really don't see the need to compartmentalize funds in this way.

We all have expenses coming up in the next year, 2 years from now, 3, 5, 10, 15, etc. Does that mean we need to take out a CD ladder to match each future year to ensure those funds are there at that time? No. I say just keep everything in an AA you are comfortable with, plus some reasonable amount of cash in your checking account to handle your cash flow needs.

The only reason I can see for keeping money in a dollar certain account for some future expense is if we needed every single one of those dollars to cover that expense. In that case, the expense should probably be reconsidered.

-ERD50
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Old 02-21-2017, 03:01 PM   #7
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Thanks everybody. Agree that I should keep it simple and put it in Ally at 1%. Might still split 1/2 into their 2 year CD at 1.3% which has a feature to increase to a better rate (only once) if one becomes available.
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