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Old 11-08-2017, 11:50 PM   #41
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My DD is a 30 year old, financially responsible, single, medical professional at the top of the 25% tax bracket (or just barely in the 28% tax bracket). She is currently contributing 6% to a 401K and has a $28,000 student loan at 3.25% interest and a $15,000 car loan at 3% interest.

In what order should she be applying excess cash?

1. Increasing 401K?
2. Paying off a student loan (highest interest rate)?
3. Paying off her car loan (smallest balance)?

or

1. Paying off her car loan (smallest balance)
2. Pay off a student loan - eliminate all debt
3. Increase 401K

( I think the above is what Dave Ramsey would recommend?)

or

Some other order?

Looking for recommendations on what makes the most financial sense as well as what makes the most psychological sense.
The most important thing to do is to ignore Dave Ramsey. He is a disgruntled millionaire fool. Dave Ramsey just got lucky. Good for Dave and Sharon Ramsey!

A car is a depreciating asset(NO kidding duh!) but its a necessity for most people . 3% on a car loan is not bad. But your DD should pay as scheduled and next time she finances a car it should be at 0% or at highest 1.9%.

The most IMPORTANT part of this whole car loan thing is how long you drive the car after you pay it off! You have to keep the car for a minimum of 10 years to make it totally worth it to finance a vehicle.
The Dave Ramsey buy a beater idea in 2017 is a damn joke because you can buy a Corolla or a Civic or a Sentra brand new well under $20k and drive it trouble free for a decade easily if you do the basic required maintenance on the vehicle. With great fuel economy and reliability.
If you have good credit or a family member loan cosigner that loan money is free or almost free.

The student loan should be paid as scheduled also.

Your DD should pay herself first and max out all retirement accounts. The 401k and a Roth IRA. 6% going to the 401k is just not getting it done.

I guess throwing some excess cash at the student loan after maxing out all retirement would not hurt.

But saving a downpayment for a house should be right there at the top of her personal finance list.

If your DD pays herself first she will win. But she needs to be way above 6% on 401k contributions.
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Old 11-09-2017, 01:20 AM   #42
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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.

I thought that was what I said more or less. You said it more eloquently

Dave Ramsey deals with people who are addicted to irresponsible spending. This woman is not addicted to spending. I bought beaters in my youth but I had a job that required reliable transportation and had no interest in dealing with "oh crap the power steering went out". It's her money, and her safety. I bought my daughter a 2 year old Nissan with a 4 year warranty exactly for this reason. I don't want her broken down somewhere in an old beater.

It sounds like she makes about $95K per year and has about $40K of rational debt with some equity in the car. That's not LBYM. She works in the medical field which has extremely low unemployment even in a crash. If she gets laid off she basically walks down the street and says hire me. Her retirement if not aggressively funded is at far more life long risk than her credit statement. If the market goes down she should put MORE in the market not less. That's what dollar cost averaging is all about. Loans are a drag, literally, but the point is to make money over the long term. Paying off the loans might "feel good" but in this scenario you are paying a lot to feel good.. If I maxed out the Roth and 401 I would move on to post tax stocks if there were excess cash.
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Old 11-09-2017, 07:56 AM   #43
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The most IMPORTANT part of this whole car loan thing is how long you drive the car after you pay it off! You have to keep the car for a minimum of 10 years to make it totally worth it to finance a vehicle.
Why is this specifically important if you have a car loan? You seem to be implying that if you pay cash, it's ok to buy cars more often.

I'm still trying to figure out the math on what it is with cars that make people apply special rules about money.
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Old 11-09-2017, 09:50 AM   #44
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... I'm still trying to figure out the math on what it is with cars that make people apply special rules about money.
Yes. Well said. A wasting asset is a wasting asset.

The other thing that makes me smile is that if these folks who are so afraid of used car reliability were to look in their driveway or garage I'm pretty sure they will see (gasp!) a used car.
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Old 11-09-2017, 12:45 PM   #45
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If you look at a car as an investment, then yes, it is depreciating. However, we purchase many things that are worth less a short time after purchase when used. Consider furniture for one example. One could purchase many different styles from different manufacturers. We can pay big bucks or buy more economical versions. It serves a purpose and certainly, a used bedroom set will be worth less than when it was new. That doesn't mean that we should buy used. or even consider it on our net worth calculations.

A car, in many areas of our country are necessary items to get along with our everyday life just like owning a bed is pretty much a given in our society. Think of purchasing a car the same as very expensive bedroom set.

Every purchase does not have to be analyzed as if it were an investment even if we have ( or want) to take a loan our for the purchase. Would you consider a 30-day cruise as an investment and expect it to increase our net worth over time?
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Old 11-09-2017, 01:22 PM   #46
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If you look at a car as an investment, then yes, it is depreciating. However, we purchase many things that are worth less a short time after purchase when used. Consider furniture for one example. One could purchase many different styles from different manufacturers. We can pay big bucks or buy more economical versions. It serves a purpose and certainly, a used bedroom set will be worth less than when it was new. That doesn't mean that we should buy used. or even consider it on our net worth calculations.

A car, in many areas of our country are necessary items to get along with our everyday life just like owning a bed is pretty much a given in our society. Think of purchasing a car the same as very expensive bedroom set.

Every purchase does not have to be analyzed as if it were an investment even if we have ( or want) to take a loan our for the purchase. Would you consider a 30-day cruise as an investment and expect it to increase our net worth over time?
Actually, I think you are agreeing with many of us here: Borrowing for an investment is a good loan. Borrowing to buy a wasting asset (an instantly wasting asset in the case of a vacation) is a bad loan. These are rule of thumb suggested for the OP to transmit to his daughter as she learns financial navigation.

Part of the confusion may be @pb4uski's 1.9% car loan. After a little thought, I believe that the right way to look at that one is that he was investing in a risk arbitrage deal with the borrowed money, not buying a car. The 1.9% loan was available in connection with buying a car, but if he had not had the arbitrage opportunity he probably would not have taken the loan. So ... really not a "car loan."
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Old 11-09-2017, 01:56 PM   #47
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That is a fair way to think about it. I was buying a car either way. But the OP's DD decision to use excess cash to invest or paydown the car loan is a similar decision.

I had planned to pay cash for the car and then 1.9% money popped up unexpectedly.... I was confident that I could beat 1.9% over the 5 years of the car loan so I decided to bet that I would by financing the car instead of paying cash.

Our portfolio has returned ~20% over since we bought the car so the bet worked out so far. Our $30k loan is now $20k so the average balance has been ~$25k... so far I'm $4k ahead....having earned ~20% on $25k and paid ~4% on $25k... a good result for virtually no effort but that could change anytime.

The question now is should I cash in my chips and my $4k gain or keep playing the game? Something to think about.
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Old 11-09-2017, 02:07 PM   #48
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Old 11-09-2017, 02:33 PM   #49
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Since you didn't mention kids or mortgage, I assume she rents and has no kids. If that's the case then she should be able to Max her 401K and ROTH IRA and have enough left over to pay off the car in one year and the student loans a year or two later.
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Old 11-09-2017, 02:38 PM   #50
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If you look at a car as an investment, then yes, it is depreciating. However, we purchase many things that are worth less a short time after purchase when used. Consider furniture for one example. One could purchase many different styles from different manufacturers. We can pay big bucks or buy more economical versions. It serves a purpose and certainly, a used bedroom set will be worth less than when it was new. That doesn't mean that we should buy used. or even consider it on our net worth calculations.

A car, in many areas of our country are necessary items to get along with our everyday life just like owning a bed is pretty much a given in our society. Think of purchasing a car the same as very expensive bedroom set.

Every purchase does not have to be analyzed as if it were an investment even if we have ( or want) to take a loan our for the purchase. Would you consider a 30-day cruise as an investment and expect it to increase our net worth over time?
Bingo!

It is fine for those of us with the free cash to say never take out a car loan. That is frankly not an option for a young person, who MUST have a car to stay employed, in many (most?) cases. I would be more concerned about the cost of the vehicle. Did it meet the need for reliable transportation? Or was it a high end indulgence? And with a $15,000 balance, it appears it was the former. Ditto with the college loan. $28k is a very reasonable and manageable amount to pay-off for a 30 year old.

So, to the original question "What to with extra cash?". At 30yo it is a no-brainer to say invest it. t401k or Roth or after tax brokerage account really depends on the potential tax benefits, but definitely contribute enough to the 401k to get all available matching.
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Old 11-09-2017, 02:41 PM   #51
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Actually, I think you are agreeing with many of us here: Borrowing for an investment is a good loan. Borrowing to buy a wasting asset (an instantly wasting asset in the case of a vacation) is a bad loan. These are rule of thumb suggested for the OP to transmit to his daughter as she learns financial navigation.
Why? People keep saying that, but I can't figure out why. What is the math behind this?
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Old 11-09-2017, 02:47 PM   #52
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Bingo!

It is fine for those of us with the free cash to say never take out a car loan. That is frankly not an option for a young person, who MUST have a car to stay employed, in many (most?) cases. I would be more concerned about the cost of the vehicle. Did it meet the need for reliable transportation? Or was it a high end indulgence? And with a $15,000 balance, it appears it was the former. Ditto with the college loan. $28k is a very reasonable and manageable amount to pay-off for a 30 year old.

So, to the original question "What to with extra cash?". At 30yo it is a no-brainer to say invest it. t401k or Roth or after tax brokerage account really depends on the potential tax benefits, but definitely contribute enough to the 401k to get all available matching.
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Old 11-09-2017, 03:50 PM   #53
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Why is this specifically important if you have a car loan? You seem to be implying that if you pay cash, it's ok to buy cars more often.

I'm still trying to figure out the math on what it is with cars that make people apply special rules about money.
No its the same math to deal with the fast depreciating value of a car once driven off the dealer lot.

Most 30 year olds just don't have 20k cash sitting around to buy a new car.

Many people get bored with their cars and get new car fever and trade in for a new car and roll the upside down value into the next loan.

You have to keep the car for about 10 years to help build wealth in other areas like saving for retirement and buying a house.

For the person who can pay cash for a car they might have more choices obviously.

I paid cash for a 2017 TRD Pro 4runner in July with the full intention of keeping this vehicle for 10 years.

I probably should have kept that 43k in the market but oh well.
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Old 11-09-2017, 04:12 PM   #54
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Yes. Well said. A wasting asset is a wasting asset.

The other thing that makes me smile is that if these folks who are so afraid of used car reliability were to look in their driveway or garage I'm pretty sure they will see (gasp!) a used car.
I have driven all my vehicles that I purchased new for 10 years or more.
So yes people did gasp at my cars at about year 8 of ownership.

So what if you buy used. I like new because you get the full factory warranty and the price difference on a new 4runner vs used 4runner was not that big.

If you drive the car for 10 years or more it becomes much less of a wasting asset.
The cost of ownership goes way down.
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Old 11-09-2017, 04:13 PM   #55
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No its the same math to deal with the fast depreciating value of a car once driven off the dealer lot.

Most 30 year olds just don't have 20k cash sitting around to buy a new car.

Many people get bored with their cars and get new car fever and trade in for a new car and roll the upside down value into the next loan.

You have to keep the car for about 10 years to help build wealth in other areas like saving for retirement and buying a house.

For the person who can pay cash for a car they might have more choices obviously.

I paid cash for a 2017 TRD Pro 4runner in July with the full intention of keeping this vehicle for 10 years.

I probably should have kept that 43k in the market but oh well.
You're comparing two people in different situations. The person who can pay cash obviously has more choices than someone just out of college who needs the loan. Not a fair comparison.

Take two people in the same financial situation. One pays cash, and the other takes out a loan (investing the cash, not spending it on something else). There's no difference in when either sells the car. The longer both hold onto it, the better, obviously, but if both sell early they are in the same situation. Even if the loan taker is upside down, the invested cash will make up the difference.

The asset depreciated the same whether there was a loan or not. How to pay for the car (cash or loan) is a separate issue from the nature of the asset. You pay cash if you can't make better use of that money (that is, invest it elsewhere and get a better return), not because the asset is depreciating.
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Old 11-09-2017, 04:43 PM   #56
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I have driven all my vehicles that I purchased new for 10 years or more.
So yes people did gasp at my cars at about year 8 of ownership.

So what if you buy used. I like new because you get the full factory warranty and the price difference on a new 4runner vs used 4runner was not that big.

If you drive the car for 10 years or more it becomes much less of a wasting asset.
The cost of ownership goes way down.
The car I owned from 1992-2007 I bought used but it was one of those "program cars" which the carmakers buy back from the rental agencies, recondition, and sell back as high quality used cars with the balance of the factory as added security.

I bought a 1991 Geo Prizm in early 1992. Essentially a Corolla, it had about 10k rental miles, a pretty low amount for these types of rental cars. It had been on the road for only 6 months, so I got nearly 2 1/2 years of the 3-year factory warranty. And not by coincidence, I had rented a 1991 Prizm about a year earlier when I was in California for vacation, so I was familiar with how it drove and its various features.

I was essentially saving the first year of depreciation on the car by buying it used versus a 1992 Prizm, as the 1991 Prizm cost about 30% less. The car lasted me 15 years and had few problems until its final year when I ran up some repair bills. It was a very good car.
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Old 11-09-2017, 04:49 PM   #57
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You're comparing two people in different situations. The person who can pay cash obviously has more choices than someone just out of college who needs the loan. Not a fair comparison.

Take two people in the same financial situation. One pays cash, and the other takes out a loan (investing the cash, not spending it on something else). There's no difference in when either sells the car. The longer both hold onto it, the better, obviously, but if both sell early they are in the same situation. Even if the loan taker is upside down, the invested cash will make up the difference.

The asset depreciated the same whether there was a loan or not. How to pay for the car (cash or loan) is a separate issue from the nature of the asset. You pay cash if you can't make better use of that money (that is, invest it elsewhere and get a better return), not because the asset is depreciating.
The real issue is a car is a necessity for most people. Its a tool needed to make money. To get from point A to point B. Its not really an asset.

People like Dave Ramsey constantly talk about cars being a terrible depreciating asset and a terrible investment. No kidding Dave! Thanks Dave for pointing out the obvious.

My point was for the DD to drive her car for many years and make use of her income to build wealth after the loan is paid off.

In your comparison of 2 people who can either pay cash or invest and take out a loan I agree for the most part especially in a record bull market and super low interest rates.

BUT if 1 of these people drive their car for 10 years their costs will go down.

If we go into a 10 year Bear stock market with higher interest rates paying cash will definitely be the easy choice.
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Old 11-09-2017, 05:09 PM   #58
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The car I owned from 1992-2007 I bought used but it was one of those "program cars" which the carmakers buy back from the rental agencies, recondition, and sell back as high quality used cars with the balance of the factory as added security.

I bought a 1991 Geo Prizm in early 1992. Essentially a Corolla, it had about 10k rental miles, a pretty low amount for these types of rental cars. It had been on the road for only 6 months, so I got nearly 2 1/2 years of the 3-year factory warranty. And not by coincidence, I had rented a 1991 Prizm about a year earlier when I was in California for vacation, so I was familiar with how it drove and its various features.

I was essentially saving the first year of depreciation on the car by buying it used versus a 1992 Prizm, as the 1991 Prizm cost about 30% less. The car lasted me 15 years and had few problems until its final year when I ran up some repair bills. It was a very good car.
The last 2 cars I recently purchased I factory ordered. A 2016 Hard rock Rubicon Wrangler and a 2017 TRD Pro 4runner.

My other kind of recent vehicle was a Turbo Subaru.

I just like to be the person that breaks these vehicles in. Maybe I am paranoid but I want to be the first person that takes my Jeep off road.

I recently drove a Nissan Rogue Thrifty rental car from San Diego to Napa(before the fires) and thats definitely a vehicle I would buy used if I were in the market for one.

The cars I usually buy are just not that much less expensive new vs. used.

Must be the new car smell.
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Old 11-09-2017, 05:17 PM   #59
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Sure, if people say "don't overspend on a depreciating asset" I'll totally agree with that. But people are saying not to take out a loan on them, and I still contend the financing is a separate issue. The loan rate is certainly a factor. OP's daughter had a pretty good loan rate.


If we look at everything strictly from an investment perspective, it makes no sense at all to go on a vacation, or eat anything but the most basic meal, among other things.
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Old 11-09-2017, 05:43 PM   #60
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Wow. This car purchase discussion is really mixing up some unrelated concepts.

1) That the OP's daughter cannot afford a car without borrowing. This is poppycock. After a foolish car loan to buy a used Porsche right out of graduate school I never borrowed to buy a car again. We had a Volvo sedan and a Volvo wagon, both the old style "122" series, all paid for with cash. Zero prestige, but as reliable as a block of granite. Somewhere along the line my wife bought a Rabbit convert with cash. I don't remember exact dates, but roughly that gaggle of cars carried us well into the 1980s. As our incomes grew (and as the OP's daughter's income grows) we could buy nicer cars. For a while we were buying 2-5 YO Merkur Scorpio sporty sedans, which were great cars but at the time were stunning bargains because they were a market failure for Mercury. The only actually new car we've ever bought was a 1994 K1500 Chev Pickup, bought because ordering a new one (for cash) was cheaper than buying one of the year-old used ones that every lot seemed to have. Lately we have been buying "new" cars that are one model year old. So as we have prospered, we have been able to buy better rides. But we have prospered IMO to some degree because we avoided car loans and avoided expensive depreciation.

2) That used cars are unreliable. We're not talking about beaters here. In my experience, even 100,000 miles isn't a breaking point for cars any more. Typically I have driven my cars close to 10 years with excellent reliability then end up selling them because our northern-clime road salt has finally made them look unacceptably tatty. I can't remember a time, except once 35 years ago, when a car stranded me.

3) That used cars require an uneconomic level of maintenance. There are many studies that rebut this. Except in very unusual circumstances, it is always going to be cheaper to maintain a car than to replace it with one that involves big depreciation costs.
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