Invest or Pay Off Vehicles???

[flyfishnevada]

In July when I ESR I can access my deferred comp account. I want to take my money out, pay the taxes and move on with my life. I am see some tax increases on the horizon and don't want to end up paying more then than now. That's not my question though.

I owe about $5,000 on my car and $13,000 on my truck. My car is a Hyundai with 70,000 miles, so 30,000 miles of warranty left on it. I was going to sell it and buy a used car with the proceeds, but I'd rather have a lower mileage car with the warranty. My truck is a Dodge Cummins diesel. It has about 100,000 miles, in other words just now broken in. I can expect another 200,000 miles if I take care of it, which I do.

So, should i pay these off saving me about $800 a month in payments and the interest left to pay or invest the money? I think the car is a no brainer. The truck, however is not as simple. I see a positive side, like not having to make the $500 payment the same month I need a major repair. I think it is probably better to pay off debt than to invest, especially in this climate. So am I missing something?

 

[heyduke]

your interest on each of your car payments is what? can you earn more than that investing it if a doesn't equal b then make the payments...

 

[W2R]

Whenever I see threads like this, I want to post

If you buckle down and pay off all of your debt just once and never incur any more, you will never ever have to agonize over these decisions ever again for the rest of your entire life.

. But I know I shouldn't post that....

 

[LARS]

I don't care if you "think" you can earn a higher return than your car payment. Pay off your car or don't if you need a rainy day fund. But it is NUTS to leverage your car (a basic necessity) to arbitrage a return.

 

[Spanky]

I think it is probably better to pay off debt than to invest, especially in this climate. So am I missing something?

In general, it's always better to pay down debt until the interest rate of the loan is very low.

 

[ziggy29]

In general, it's always better to pay down debt until the interest rate of the loan is very low.

I think so in most cases. Frankly, investing instead of paying down debt requires a considerable expected advantage to be attractive, considering the "risk premium" required of investing as opposed to the "sure thing" of paying down debt.

I personally see a loan at about 5-6% or higher as a no-brainer to pay down in this environment. That would be like saying: Would you invest money in the market (with all the risks) or would you put it somewhere that yields 5-6% with no risk of loss to principal?

Another way to look at it: If your vehicles were paid off, would you take out a loan on them in order to invest? Same outcomes, but approached in the opposite direction. Either way, your choices are the same: a paid off car and no investments, or investments and an outstanding car loan.

As mentioned earlier, unless the interest rate on the loan is really low (like under 3-4%) I'd certainly pay off the loans before investing it (with the exception of getting a 401K employer match -- I'd get all that, then use the rest to pay down debt).

 

[laurence]

I vote pay off the cars as well. The only payment we've had for years is a mortgage and it's been great to not have to agonize over decisions like that, just like W2R said. The market isn't exactly at new lows right now (dirty market timer alert!) so I can't imagine you'll be kicking yourself for the decision.

 

[MasterBlaster]

I personally see a loan at about 5-6% or higher as a no-brainer to pay down in this environment. That would be like saying: Would you invest money in the market (with all the risks) or would you put it somewhere that yields 5-6% with no risk of loss to principal?

As you know that 5-6 % loan must be paid for with after-tax money. So in reality (depending on your maqginal fed-state tax bracket) you'll need to earn more than 6-8 % on your investments to pay the cars.

 

[ziggy29]

As you know that 5-6 % loan must be paid for with after-tax money. So in reality (depending on your maqginal fed-state tax bracket) you'll need to earn more than 6-8 % on your investments to pay the cars.

True. I should have said it's the equivalent of a sure-thing *tax-free* 5-6%, making the debt payoff even more compelling.

 

[conpewter]

I agree on paying off the car, it was such a great feeling when we finally paid off my wife's car, now we have a car fund for when we need to replace hers or mine someday. I wonder though if the same principles can be used when talking about a mortgage.

 

[MasterBlaster]

Pay the mortgage down or invest is one of the favorite topics on just about any financial forum. You'll get a diverse set of opinions on this one.

The principals are the same as a car loan except that mortgage interest is deductible. Posters on this topic though often compare highly volatile investments versus a low risk mortgage pay down. One should risk-normalize returns before a direct comparison is made. It just may be possible though to come out ahead by investing rather than paying off the mortgage (over the long haul). Over the short(er) haul either approach can come out ahead.

There is no correct answer on this one.

 

[laurence]

MasterBlaster, you did a great job summing up months and thousands of posts on the pay off mortgage debate. Having lived through much of it, I had to laugh reading your deadpan post on the matter, considering the heated exchanges we've had here!

 

[MasterBlaster]

laurence: well thank you very much for your appreciative response. I usually get quite the opposite reactions to my posts.

 

[flyfishnevada]

Wow! Seems like the consensus is pay off the vehicles. Our loans are at about 6.99 or 5.99, I can't remember off the top of my head. The reason we are picking the cars instead of the house or our HELOC is the monthly outlay. We could pay off our $19,000 HELOC and only see a benefit of $100 a month and lose the tax deduction. The vehicles will net us about $800 a month. We don't plan on buying new vehicles until absolutely necessary and will likely pay cash for used then and get off the new car every three years train. In fact, we are selling some of our stuff like our boat we hardly use to free up more cash that will go towards the HELOC.

In a short three months, I have gone from a mindset of continuing to work after I take my pension to buy more stuff to getting rid of stuff to avoid work. Losing the car payments will put me in a position to not work if I don't want to and If I do it will be gravy. I still have materialistic pangs, but I tend to ignore them.

 

[ziggy29]

In a short three months, I have gone from a mindset of continuing to work after I take my pension to buy more stuff to getting rid of stuff to avoid work. Losing the car payments will put me in a position to not work if I don't want to and If I do it will be gravy. I still have materialistic pangs, but I tend to ignore them.

True, but one caveat: unless you think your cars will last forever, you will have to replace them (or at least one; being retired you may find you don't need more than one), so even if you pay them off it still might be a good idea to set some cash aside each month earmarked toward repairing and replacing big ticket items such as the cars. If you don't do that and the car gives up the ghost, you're back to needing a loan. Or alternatively, just build it into a (somewhat larger) cash reserve that you periodically tap a few thousand at a time...

 

[flyfishnevada]

True, but one caveat: unless you think your cars will last forever, you will have to replace them (or at least one; being retired you may find you don't need more than one), so even if you pay them off it still might be a good idea to set some cash aside each month earmarked toward repairing and replacing big ticket items such as the cars. If you don't do that and the car gives up the ghost, you're back to needing a loan. Or alternatively, just build it into a (somewhat larger) cash reserve that you periodically tap a few thousand at a time...

Yep, I agree. I want to avoid loans. In fact, my ER will allow me the time to finish restoring my Jeep which will give me a basically new vehicle. I will also set aside some cash for cars, travel, rainy days and invest some too. Sure I could just invest this money, but for me paying off the vehicles is a better choice right now.

 

[Ronstar]

Yes - pay off the vehicles, but above all finish the jeep - sounds like fun! I envy you - DW made me get rid of mine

 

[flyfishnevada]

Yes - pay off the vehicles, but above all finish the jeep - sounds like fun! I envy you - DW made me get rid of mine

I bought it and drove it for one day, then started tearing it down to the frame. It was a fun day.

 

[haha]

Pay the mortgage down or invest is one of the favorite topics on just about any financial forum. You'll get a diverse set of opinions on this one.

The principals are the same as a car loan except that mortgage interest is deductible.

I thnk there is at least one other difference- the length of the loan. We can probably safely assume that we will not see 10%+ interest rates over the course of a 4 or 5 year car loan.

Not so with a 30 year mortgage. For as long as you own the house and that mortgage is still in place, you will have that 5 or 5 1/4% money to do whatever with.

Ha

 

[hedgebet]

I'm new here. But I would offer a counter position. Debt Free is Fantastic. My wife and I have used a NDD strategy for years. NO DEBT..then DITCH..job, geography..whatever. It's freedom.

Since you are going to ESR I think using your deferred comp might be a mistake. If this Deferred comp is in a retirement account I would say leave the money pretax and invested make the payments as long as they are not punitive interest. (I doubt that is the case considering you are ESRing). Worst case, use the Semi part of your retirement to fund the cars. If the funds are in a Rabbi trust (You defer income this year you want to be paid at set later date 5 years etc....) I would still resist drawing it out. Chances are you will pay less tax in Semi-Retirement then you do now.

 

[jIMOh]

How tight is the cash flow making the $800/mo payments
how much longer do you need to sustain making the payments?

How tight would cash flow be if you paid off the debts now?
Does paying down the debts change the SWR?

I agree with W2R... at some point you want to never finance again... and because you are about to retire, I would think that day is coming real soon.

Whatever decision you make, try to organize finances so you don't have to borrow again.

 

[flyfishnevada]

How tight is the cash flow making the $800/mo payments
how much longer do you need to sustain making the payments?

How tight would cash flow be if you paid off the debts now?
Does paying down the debts change the SWR?

I agree with W2R... at some point you want to never finance again... and because you are about to retire, I would think that day is coming real soon.

Whatever decision you make, try to organize finances so you don't have to borrow again.

Thank you! There are a lot of considerations and neither of my choices is a bad one. Just what works best for us right now. We are paying off both vehicles. We had another consideration I hadn't taken into account that made it more attractive (too complicated to explain). We plan on not financing again. We are going to set up a fund for our next vehicles to pay the difference between what we can sell our existing vehicles for in the future, if anything, and what the next vehicles (likely used) would cost.

I am also going to finish restoring my Jeep which will give us a essentially new vehicle in the next couple of years for about $10,000 in parts and such. We intend to do some full-time RVing once the kids are out of the house in about six years and our plan is to use the Jeep as our tow vehicle. That's our plan this month anyway.

 

[CRABBY JERRY]

Jeep

Thank you! There are a lot of considerations and neither of my choices is a bad one. Just what works best for us right now. We are paying off both vehicles. We had another consideration I hadn't taken into account that made it more attractive (too complicated to explain). We plan on not financing again. We are going to set up a fund for our next vehicles to pay the difference between what we can sell our existing vehicles for in the future, if anything, and what the next vehicles (likely used) would cost.

I am also going to finish restoring my Jeep which will give us a essentially new vehicle in the next couple of years for about $10,000 in parts and such. We intend to do some full-time RVing once the kids are out of the house in about six years and our plan is to use the Jeep as our tow vehicle. That's our plan this month anyway.

What year is the jeep you are restoring?

 

[meierlde]

Re #20 consider also that retirement money is protected if somehow you get into a bankruptcy situation while non retirement money is not. For the home mortgage issue then this factor also applies depending on the state in TX you can keep a home with any equity in BK.
Not that its very likley but bad things can happen, so its best to know your rights.