Where to put excess money?

[Meadbh]

I think the student loan was good, no, great debt, because it launched her on a high paying career. The car may be a requirement if she is on call, so it’s a purchase that needed to be made, probably before she had much spare cash. These were good and necessary investments. But now that she has surplus cash (and is LBYM) I think she should pay those debts off as soon as possible. Depending on how much spare cash she has available, I might vary the mix. For example, if she has $15K available, my preference would be to pay off the car loan immediately. That will be a psychological load off her back. The next tranche of savings can be put against the student loan. I do think she should invest in her retirement savings within the next year, to get maximum time in the market.

[brewer12345]

Quote:

Originally Posted by flyingaway Yes, you can use the loan to buy a jet and enjoy your elevated life. But how could you pay it back?

Who said I would buy a jet? I could use the money to buy high grade bonds and clip coupons. I could buy a portfolio of CDs and zeros to pay 50 years of debt service and then spend the rest on hookers and blow (have fun collecting the second hundred years of payments). I could pay off other debt. I could do lots of things, but it is a debt that offers me a very positive value over time with minimal risk. Why wouldn't I take it?

[pb4uski]

Quote:

Originally Posted by OldShooter ....."Bad" loans are used to buy depreciating assets or to buy things like vacation trips that are not assets at all.[INDENT] A car loan is the poster child for a "bad" loan. For most, it involves buying a new car and taking a huge depreciation hit. Where a "bargain" rate is offered, the real cost is simply priced into the vehicle. TANSTAAFL. In some cases a new car loan may look attractive from an interest rate arbitrage standpoint, but IMO this is what Richard Thaler calls "framing" where the full scope of the decision is not considered. The scope not considered includes the first year depreciation hit, higher insurance costs, temptation to buy more car than is needed ("only $10/month more), etc. The interest rate arbitrage usually involves risk arbitrage as well, with the apparently better investment interest rate usually involving higher risk.

WADR, I think you are wrong on a couple counts. I understand the whole framing idea... but that is more about discipline in selecting a car and negotiating a good deal than it has to do with whether a car is paid for in cash or is financed.

The real cost of a loan is not always priced into the vehicle as you state. On the car I drove today that we ordered from the manufacturer, I squeezed the dealer for his best out-the-door price in competition with 3 other dealers within 100 miles. My local dealer ultimately got within $200 of the lowest dealer and I decided that I would prefer to buy local and not drive a couple hours to get the car. No trade either. The deal was a cash deal... I was going to write them a check. Between when we ordered and delivery, I became aware of the manufacturer 1.9% financing and asked if I could do that and was told yes... so there is no way it was built into the price.

For many people, particularly those who live outside urban areas, a reliable transportation is necessary to get and keep a job.... so when it becomes a choice between steady employment income but with car payments or unreliable employment but no car payments.... it is an easy choice. DS is a great example... he has fairly modest car payments to have reliable transportation (and not continually put money into repairs on the POS he was previously driving) but as a result of reliable transportation he has a steady job that grosses over 8 times his car payment.

So while I concede that many people get up-sold and buy more car than they need because it is "only" $10/month more, that doesn't make financing a car bad.. it makes lacking discipline in negotiating bad.

[pb4uski]

Quote:

Originally Posted by brewer12345 Who said I would buy a jet? I could use the money to buy high grade bonds and clip coupons. I could buy a portfolio of CDs and zeros to pay 50 years of debt service and then spend the rest on hookers and blow (have fun collecting the second hundred years of payments). I could pay off other debt. I could do lots of things, but it is a debt that offers me a very positive value over time with minimal risk. Why wouldn't I take it?

+1.... some people just don't get it and view all debt as "bad".

[pb4uski]

Quote:

Originally Posted by flyingaway Too many loans can get a person to enjoy living above the means. I think for a person just started professional life, optimizing investment to the point of maximizing returns by loans, margins, or choosing hot stocks, should not be recommended. The person should have a good habit of LBYM and put more efforts on career.

What you say about loans allowing people to live above their means can happen for those who lack discipline.

I don't know where maximizing returns by loans, margins or hot stocks came from.... are you reading a different thread? or just dreaming stuff up?

The OP's DD isn't taking out a loan to invest the proceeds... but rather trying to decide the best use of excess cash to invest tax-deferred or to pay down loans.

I think most people here would recommend that people that age invest principally in equities. If so, it is silly to at the same time recommend paying down or off low interest loans since in a sense that is investing in fixed income.

[OldShooter]

Quote:

Originally Posted by pb4uski ... I was going to write them a check. Between when we ordered and delivery, I became aware of the manufacturer 1.9% financing and asked if I could do that and was told yes... so there is no way it was built into the price. ...

Of course it was. It was built into the manufacturer's price. The mfg. could just as easily have offered the discount as a rebate but chose not to do so. Ideally, you would have been offered the choice between a rebate and the discounted loan. I have seen that and I like that approach. Since the only option was the low rate loan and you were willing to take the risk in the arbitrage deal then that decision is probaly fine for you. (Especially if the market doesn't tank, as @ponyboy points out.)

Certainly it is also true that there are scenarios where car loans make sense, but in general they do not (and leases are worse), especially for a 30YO trying to gain her financial footing and learn to handle money. Hence my original post.

Re @brewer1234's credit debt kiting/interest arbitrage scheme I would put that into the category of "good" borrowing to invest. I have known people who played that game and there's nothing wrong with it IMO but it's waaay too much work for me.

[Done at 49]

Quote:

Originally Posted by pb4uski More marlarkey. I guess then that my 1.9% loan on my car is foolish? I have earned much more than that in the two years that I have had the loan expect to consistently beat 1.9%.... if not then a car loan will be the least of my worries. DS and DD both have car loans of about the same as OP's DD and similar rates... in one case on a slightly used (1 year old) car and in the other case on a new car.... they are both enjoying having reliable, safe transportation with a manufacturer's warranty and I expect they will both keep their wheels for 5-10 years.

Disagree about the car loan. Having a loan on a depreciating asset is never a good idea.....

[pb4uski]

Quote:

Originally Posted by Done at 49 Disagree about the car loan. Having a loan on a depreciating asset is never a good idea.....

It is if you need that depreciating asset to have a steady job and steady income.

The alternative would be to not have the car loan and not have the income. In the rural areas that I'm talking about there is no practical public transportation available.

[pb4uski]

Quote:

Originally Posted by OldShooter Of course it was. It was built into the manufacturer's price. The mfg. could just as easily have offered the discount as a rebate but chose not to do so. Ideally, you would have been offered the choice between a rebate and the discounted loan. I have seen that and I like that approach. Since the only option was the low rate loan and you were willing to take the risk in the arbitrage deal then that decision is probaly fine for you. (Especially if the market doesn't tank, as @ponyboy points out.) ....

In this case it was not a choice of taking a rebate or 1.9% financing.... no rebate available... just 1.9% financing inducement... or pay cash or get your own financing... so as I said before... it was clearly not built into the price.

Now if I had negotiated the price of the car and financing simultaneously, then you would have a valid point... but that is not what happened.

It's actually been a brilliant decision in hindsight.. in the two years since we bought the car our portfolio return has averaged 10%..... things would have to go very bad for it to ever be a poor decision.

[Dan32]

Thanks for all the input. A little more info. She lives ~an hour from us and a highly reliable car is required for her job (she is on call often). She bought this car when it was ~1.5 years old to replace a 2002 high mileage Nissan that had numerous mechanical problems. She also has an acceptable emergency fund. My summary of all the input.:

1. Acceptable answers are increase 401K, pay off either or both of the loans, or contribute to a Roth 401K.
2. Mathematically, increasing the 401K is probably best.
3. Psychologically, paying off one or both of the loans is always good.
4. Setting up a Roth would be good over the long term.

[RunningBum]

Quote:

Originally Posted by Done at 49 Disagree about the car loan. Having a loan on a depreciating asset is never a good idea.....

Why is that, exactly? I hear that being thrown around, but I haven't heard any math behind why that is important, and what the difference is whether it's a depreciating asset or an appreciating one.

[pb4uski]

+1 the car/depreciating asset is in the picture either way unless one can go without a car.... it is a matter of financing it or not. And in this OP case the financing is already done so whether the collateral is a depreciating asset, appreciating asset or pile of cow dung doesn't really matter.

What is important to the decision are the expected cash flows and those clearly favor NOT paying the loans off early... albeit with some modest risk... but the risk/reward favors the investing.

In DS's case, he probably could have paid cash but his emergency fund would have been gone so he didn't like the idea of not having an emergency fund... especially because he is typically laid off for a few weeks each winter.

[iloveyoga]

Quote:

Originally Posted by gayl I'm in the some other order camp. 1/3 to each

You can't go wrong focusing on any of the three!

[Doc0]

1 Fund a Roth
2 Fund the IRA
3 If you have money left payoff the highest interest loan
I don't give a crap what Dave Ramsey says

$1 you put in the Roth today will be $6 in 30 years but the money can be used tax free and no RMD

$1 you put in the 401K will be $8 in 30 years but you will
owe tax when you take it out and the govt will force you to annuitant it at age 70.

$1 you put in either Roth or 401K ten years from retirement will only grow to $2 so the most you can get in early is best for your future wealth.

The loans will be long forgotten

[43210]

Max 401k
Max IRA
(Carefully do Trad vs Roth analysis.)
Has HSA? Then max that too.
This should leave plenty left over to knock off those modest principle, modest interest loans quickly.

[pb4uski]

Quote:

Originally Posted by Doc0 1 Fund a Roth 2 Fund the IRA 3 If you have money left payoff the highest interest loan I don't give a crap what Dave Ramsey says $1 you put in the Roth today will be $6 in 30 years but the money can be used tax free and no RMD $1 you put in the 401K will be $8 in 30 years but you will owe tax when you take it out and the govt will force you to annuitant it at age 70. $1 you put in either Roth or 401K ten years from retirement will only grow to $2 so the most you can get in early is best for your future wealth. The loans will be long forgotten

For once Doc, we agree on something! Though think on #2 you mean 401k rather than IRA?

One odd thing in your post though... why would $1 put in a 401k today be $8 in 30 years but $1 put in a Roth be only $6 in 30 years.... presumably they would be invested in the same thing... and assuming that the Roth would have access to investments with lower ERs then it should come out slightly ahead.

[Doc0]

The Roth is post tax so you only compound 75-80 cents of Roth dollar the IRA is pretax so you compound the whole dollar but you still owe tax. I respect your chops pb

[pb4uski]

So I think you really meant:

75c $1 you put in the Roth today will be $6 in 30 years but the money can be used tax free and no RMD

$1 you put in the 401K will be $8 in 30 years but you will owe tax when you take it out and the govt will force you to annuitant it at age 70.

[Koolau]

Dan32,

Congrats on your daughter's excellent financial situation. I don't know if your daughter asked for advice, but here is what advice I would offer my own daughter if she were in a similar situation. Go over with her the arguments you've seen here about good and bad debt, paying off loans vs investing, etc. Let her decide what makes most sense for her. It probably doesn't matter a lot in the long run as long as she remains a high earner. IF her goal is to ER, then I would advise her not to buy new cars any more. Avoid luxury items. Don't take on consumer debt. Read all of the ER library (Random Walk Down Wall Street, etc. etc.). Stay single or find a partner as interested in ER as she is.

Not suggesting her situation is trivial, but that you might be focusing on the urgent instead of the important, so to speak. Just my thoughts - a bit off the subject.

What a great set of "problems" to be addressing at her young age. I'm sure you are very proud of her. As always, YMMV.

[RobLJ]

What a great "problem" to have at her age.

It's difficult to go wrong with any of the options but, were it me (which it isn't),
1) Fund 401k to full match and any additional income taxed above the 25% rate,
2) pay off the car loan with excess cash
3) then fund Roth
4) then work on student loan--or save money to buy house if she doesn't have one, assuming she intends to stay in the same area