Where To Stick The Car Fund?

[RetiredGypsy]

My new to me car fund is sitting in a savings account earning a whopping 0.95%. It's going to be a year or two until I buy one, but CD rates don't seem to be much higher than 1% unless it gets close to 60 months.

I'd love to hear any recommendations. Keep it where it is, and just keep adding to it every month until it's time to buy, or are there better options?

The most exciting part is, this is the first big ticket item I'll be purchasing with cash only. I'm really looking forward to seeing how true those statements are about better deals with using cash for leverage on a car.

 

[DailyGrind]

RetiredGypsy,

I think where you have it is probably the best and safest place for your money that you'll need in a year or two. You may be able to get a slightly better rate by signing up for a Christmas savings account or something similar where you keep depositing money monthly until either Christmas or a one year anniversary when you can take all the money with interest out.

I think "Cash is King" used to be true for car purchases. The reason I say that is now, the profit from the sale of the car is a smaller part than what it used to be. Now the dealer can make additional profits by selling accessories, paint coatings, rust proofing, extended warranties, trade-ins, and most applicable to cash, financing. So it may not be in your best interest to let them know you'll be paying cash. Therefore, they'll be unable to make additional profits through financing.

When I bought my car about a year ago, I was given a choice of $2,000 cash rebate and 5.9%, or forgo the $2,000 cash rebate and get 0% for 2 years. I kinda just let them know that I'd be interested in financing if the rates were good while taking the $2,000 cash. So they (miraculously) found me a rate of 3.88% for 48 months. Not a bad rate, but not a great one either. I just declined and wrote them a check. If I could have earned 7% in a CD, I would've taken the loan, but such was not the case.
When they ask if I'll be trading in my vehicle, I also tell them I may have a trade-in but I want to negotiate the purchase price of the car first. This way maybe they'll give me a little better price thinking they can make it up on the trade-in.
I think saving the money is the easy part. Deciding what to buy and options is the difficult one. At least for me it was.

Good luck with the journey.

 

[JBmadera]

I agree with DailyGrind, when my investment horizon is that short I use CD's as a safe place to park the money.

good job on going the all cash route for an asset purchase like that!!

 

[heikejohn]

When I purchased my car, there was a $5000.00 cash rebate with financing. The interest rate was terrible, but I took it anyway. We paid it off in full as soon as the first payment was due.
We planned to pay in cash, but with the financing deal it came out to be cheaper that way.

 

[73ss454]

DailyGrind, 2 things about your post.

Many times the dealer will want you to finance with them. The dealer will get a kick back from the bank for finance reserve or a flat reserve if they give you the buy rate. This also allows the dealer to put in other items without telling you the price, just the payment.

Some times the program will make you finance with the lending arm of the manufacturer you will be buying from. Many folks get mad at this but that's the deal from the factory. You can pay it off when your first payment is due.

Many times the manufacturer of the vehicle will offer a finance rate or a rebate. This is usually taken out of the dealers hands and in many cases they don't care which one you pick. Good dealers will try and get you a good rate and also get you the rebate.

As far as the trade in is concerned. Once you tell them you have a trade the game is over as far as the trade is concerned. They don't need to know what you have, just that there will be one entering into the deal at some point.

 

[W2R]

I think that keeping the "new car fund" in the bank is probably the best you can do, given that you will be wanting to use it before long.

I bought my last two cars in cash, too, with trade-ins. If you believe Edmunds.com, then I got reasonably good deals despite not financing. But then I might have done better with financing, who knows? I don't know or even care because I got the best deal I could, and besides - - for me, the best part of buying in cash is driving home and knowing you never, ever have to make a car payment for this car.

It's a great way to lift your spirits on a cloudy day....

 

[Alan]

We've always had a car fund and have bought every car we've ever owned with cash, it is a great feeling. Until recent years I had always saved in a savings account or money market fund, but the last 3 years I have used a short term bond fund from Vanguard VBISX Not risk free, but pretty good.

1, 3, 5 and 10 year returns are

3.92% 4.54% 4.98% 4.61%

 

[BigNick]

About 15 years ago I was going to buy a car with cash, but the salesdude pointed out a deal whereby if I took financing - even for the minimum amount of the equivalelent $5000 - then by paying something ridiculous like $10/mo I could have a warranty on pretty much all of the car, certainly all the expensive bits, for the length of the loan. (In Europe, especially 15 years ago, we don't expect the long powertrain warranties that Americans are used to.)

So I had an automatic transmission car - rare in France - with a 6.5 year warranty. After 3.5 years the gearbox needed a complete strip down and rebuild. I was very glad that I took the salesdude's advice. Presumably, he was incentivised to "sell finance", regardless of whether that particular upsell actually did anything for the corporate bottom line (there is no way that the financing of $5000 made Renault any money, even without the warranty issue). Good news for me, good news for him, bad news for the shareholders, about whom I don't care.

 

[slingshot]

Paid cash for our last three cars also. Saved the money in CD's and MM accounts, like most here agree is a good idea. However, I assume I'm going to need another pickup in five years and I'm going to look into Alan's suggestion of the Vanguard bond fund. Right now, I have my new auto fund sub-categorized within my ING savings. Hope my old truck will have some Craig's list value as I just check and I only have $250 in my new truck fund!

 

[RetiredGypsy]

I think "Cash is King" used to be true for car purchases. The reason I say that is now, the profit from the sale of the car is a smaller part than what it used to be. Now the dealer can make additional profits by selling accessories, paint coatings, rust proofing, extended warranties, trade-ins, and most applicable to cash, financing. So it may not be in your best interest to let them know you'll be paying cash. Therefore, they'll be unable to make additional profits through financing.

I still remember the first time I bought a car. I was shuffled through a couple different offices with people trying to get me into extended warranties, their own financing. When I found out later by an odd set of circumstances how much they were earning from making these kinds of deals, it was a very impressive sum.

When I purchased my car, there was a $5000.00 cash rebate with financing. The interest rate was terrible, but I took it anyway. We paid it off in full as soon as the first payment was due.
We planned to pay in cash, but with the financing deal it came out to be cheaper that way.

I've signed up for newsletters from just about every manufacturer that has a car in the price range I want. I'm going to see if some of the local dealers have something similar. It seems like the popular choice is either very low financing, or cash back. I was planning on using holiday or year end sales to get a good offer, but who knows what kind of nifty combination I might find.

We've always had a car fund and have bought every car we've ever owned with cash, it is a great feeling. Until recent years I had always saved in a savings account or money market fund, but the last 3 years I have used a short term bond fund from Vanguard VBISX Not risk free, but pretty good.

1, 3, 5 and 10 year returns are

3.92% 4.54% 4.98% 4.61%

I really like this idea. I think during the next saving up period, I'll do something like this.

Right now, I have my new auto fund sub-categorized within my ING savings.

I don't know if it's as easy with other online banks, but this is one of my favorite features of ING. Make a new savings account in a minute, then get to name it for whatever you're saving for.

 

[rayvt]

We debated this last year when we bought our last new car. Both PenFed and my ex-employer's credit union had new car loans for 2.99% interest. We still have a 7-year CD at Penfed paying 5.25%, and a bunch of preferred stocks paying dividends between 6% and 8%.

Finally decided that it made more sense to get the 2.99% loan. BTW, when you finanace with Penfed you can get a very good extended warantee for cheap. It cost less than half what the dealer wanted and the coverage was better (like no deductible).
If we ever decide we don't like making payments, we'll just do a "deferred pay cash" by withdrawing the cash from a CD or savings or portfolio and pay it off.

But back to the OP: Alliant CU is paying 1.15%, Discoverbank 1.35%, SFGIdirect is 1.31%. All are savings account, not CDs. Problem with a CD for car fund is that you can't do a monthly deposit to accumulate funds.

 

[FIREd]

I stick the car fund in a CD ladder.