Post by: Green Lantern on June 04, 2008, 04:20:28 AM
Interest on 401K loan = I guesstimate about 10% (more on that below) - Paid to MYSELF...
Interest on Credit Card = about 20%
Loan would be used to either pay off my credit card or my car. I owe just shy of $5k on my card, and a little less than that on my car. BTW, I plan on keeping that car for as LONG as I can!!!
Now, er, I've already taken out two smaller loan on it - one is paid off in a few weeks, the other should be paid off in about 2 years...
This is why I don't know for SURE what the interest rate would be.I know, I KNOW...I promise I'll be good this time if I can get (relatively) debt-free!
But now - assuming I DO NOT take the loan:
The car will be paid off next September.
The card, SHOULD be paid off by this time next year at the VERY LATEST. Well, barring any 'troubles.'
That's pretty close...but still, I wonder if it'd be worth it to save on interest charges...?
Post by: Ben on June 04, 2008, 04:27:40 AM
If you're in debt, you gotta do what you gotta do, but definitely consider the long term when looking at using your retirement money.
Post by: wmenorr67 on June 04, 2008, 04:28:55 AM
Best advice is to talk to a financial advisor.
Post by: ilbob on June 04, 2008, 04:55:12 AM
Whatever gains you would have on the funds in the plan will be lost for the amount borrowed, and if you are forced to not pay it back later on, it becomes a taxable event, with penalties.
OTOH, you pay no interest.
$5000 is not a huge amount of money. Most people can pay off such a debt in a year or two if they really want to.
I would also suggest that it is possible you can get a much better unsecured loan than 20%. You might be able to get the rate reduced just by calling the CC company and asking.
Post by: grampster on June 04, 2008, 04:58:08 AM
As the great Walter Hagen said about tactics to recover from a bad golf shot:
"It did not take a good shot to get you into that trouble...what makes you believe you can make a good shot to get it out?"
The same thing applies to debt. It will be a better exercise for you to condition yourself to be more responsible with your money by focusing ALL of your efforts on paying off the car and the card early and not make another bad decision regarding your 401k. Cut up all of your credit cards. Keep your car in good running order by paying attention to maintenance. Get a part time job and put all the take home pay against your debt. Live frugally while you are doing this. It will be good not only for your self confidence but your spirit as well.
Good luck.
Post by: K Frame on June 04, 2008, 05:45:03 AM
Post by: Leatherneck on June 04, 2008, 05:52:11 AM
TC
Post by: Northwoods on June 04, 2008, 06:42:47 AM
1.) It doesn't change the habits you're in that got you into consumer debt.
2.) If you don't pay back according to the rules you get hit with your full tax rate on the outstanding amount plus a 10% penalty. Total hit is 30-50% depending on your tax bracket.
3.) When you leave the company the balance of the outstanding loan amount is due in full within 60 days. And you will leave the company at some point. Death counts as leaving and do you really want your spouse to have to face the payback requirement right after burying your butt? Layoffs count as leaving too. Do you really want to have to face that kind of financial stress when you are out of work?
4.) It's still debt. You're just rearainging the deck chairs.
5.) You've unplugged yourself from the stock market to the tune of whatever the loan amount was. Yeah, the market's not doing great right now, but that can change and then you're missing out on all the gains.
6.) You can only pay it off early by one single lump sum for the whole amount.
What you need as much as anything else is a better game plan going forward. This mean doing a written new budget before each month begins allocating that month's income on paper, on purpose and sticking to that plan. If you're married both you and your spouse need to do said budget together and come to an agreement on how to prioritize your spending, savings and giving. Make sure your both have an equal vote in the process. Then once it is agreeded upon, neither of you gets to spend money that's not on the budget without first renegotiating the budget.
My wife and I got into this habit almost 2 years ago. Nowadays budget meetings take all of 5 minutes. Paid off $48k between 401k loans, HELOC, credit cards, and student loans. We've now got no debt, an emergency fund with 6 months of expenses, we're saving 15% of our income towards retirement, kids college savings in going, and we're giving a lot more money to worth causes than we ever thought possible.
Post by: coppertales on June 04, 2008, 07:25:38 AM
Post by: Brad Johnson on June 04, 2008, 08:28:44 AM
Bad Idea
Bad Idea
Bad Idea
Bad Idea
Make min payments on the card until Sept when the car is paid. It goes unsaid to not charge anything else to it.
After the car is paid, take the car payment and add to the min card payment. Start killing the card balance.
Brad
Post by: Balog on June 04, 2008, 09:34:03 AM
Post by: K Frame on June 04, 2008, 09:48:32 AM
If that's the way you're looking at your 401k, you're looking at it the wrong way.
In the past I've always increased my 401K contributions in a falling market. Dollar cost averaging.
Post by: Ben on June 04, 2008, 10:02:01 AM
Quote
In the past I've always increased my 401K contributions in a falling market.
Big 10-4 to that.
Post by: K Frame on June 04, 2008, 10:12:16 AM
Now it doesn't matter. A few years ago I pegged my contributions to max out by the last pay check in November.
Currently I've got 27% of my paycheck every two weeks coming right off the top and going into the 401K.
Post by: Werewolf on June 04, 2008, 10:50:24 AM
Guys - I make my living as a financial analyst and have for the past 13 years. I'm here to tell you that what the OP wants to do is absolutely the right thing - with two caveats (and not withstanding the psychological issues inherent in doing a 401K loan and the discipline required to make it work):
1) Do it only if you are relatively sure you'll be working for the same employer for the next two or three years or at least as long as you set up the loan payback period for. Why? Because if you end your employment prior to the loan being paid off you'll have to pay off that loan to your 401K within some set by law time limit (90 days I think) or pay the 10% income tax penalty on the amount of the loan still outstanding. In addition you can choose not to pay off the 401K loan at all and you'll have to pay the 10% income tax penalties (very common that - not paying off the 401K loan that is - which is why for many people 401k loans aren't all that great of an idea).
2) He must continue to make his regular contribution to his 401K. Don't stop it like so many do when they take out a 401K loan. The payback amount must be incremental to the regular contribution. A lot of people figure out how long it will take to pay the loan off if the payback is the same as their regular contribution. Then they stop their regular contribution while paying back the loand - smirking all the time at how smart they are because they get money out of their 401K they think for free. NOT! Bad idea to do that. It will cost you money in the long run because at the end of the payback period you're back to where you were prior to making the loan. You still earn interest and capital gains on what was there prior to the loan but for all practical purposes if the payback period is two years you've just lost two years worth of contributions and growth. OH! I'm pretty sure (slight chance I'm wrong unless the law's changed in the last 5 years or so) that the loan payback is not considered pre-income so you lose the tax benefit gained from the normal pre-income non-taxable normal contribution.
If 1 above is true then doing 2 is simply a method to refinance high interest debt with low interest debt (and the interest you're paying is actually to yourself and with today's market that 10% is probably more than the annual return on what ever his 401K is invested in). At the end of the payback period the OP would have more in his 401K than if he didn't make the loan (assuming whatever his 401K is invested in doesn't bomb and lose value that is).
I don't even have to break out my financial calculator or Excel to know the truth of 2.
When push comes to shove though the OP has to decide for himself what to do. He's either got the self discipline to make it work or he doesn't.
Post by: Brett Bellmore on June 04, 2008, 11:20:17 AM
I've done it twice, the first time it worked out great, like Werewolf said, better rate of return than anything the rest of the money was invested in. This time, it's going to bite me on the ass if I don't find work fast.
Post by: K Frame on June 04, 2008, 12:32:32 PM
Is the original poster intending to borrow FROM his 401K (an early disbursal), or AGAINST the value of the 401K?
Very very different scenarios.
The 401K may have significant restrictions on what loans can be made for and what types of loans are permitted.
And, you do end up paying tax on the money TWICE:
1. When you repay the loan, your payments are made with after tax dollars.
2. When you withdraw the money when you retire, you pay taxes on it, again.
Post by: Werewolf on June 04, 2008, 12:50:25 PM
Hold on, I'm a bit confused...
Is the original poster intending to borrow FROM his 401K (an early disbursal), or AGAINST the value of the 401K?
Very very different scenarios.
The 401K may have significant restrictions on what loans can be made for and what types of loans are permitted.
And, you do end up paying tax on the money TWICE:
1. When you repay the loan, your payments are made with after tax dollars.
2. When you withdraw the money when you retire, you pay taxes on it, again.
Is the original poster intending to borrow FROM his 401K (an early disbursal), or AGAINST the value of the 401K?
Very very different scenarios.
The 401K may have significant restrictions on what loans can be made for and what types of loans are permitted.
And, you do end up paying tax on the money TWICE:
1. When you repay the loan, your payments are made with after tax dollars.
2. When you withdraw the money when you retire, you pay taxes on it, again.
I believe the OP is talking about taking a regular loan against his 401K and not a disbursement for buying a home, medical emergency etc.
re:
1) True enough but those dollars would be pre-tax if he paid off his current high interest debt anyway. Wash
2) Tax rate when you retire is generally way lower than when you're actually earning a wage.
The OP's turning 20% debt into 10% debt as I understand it and that's a good deal providing the OP meets the caveats I noted in my post above.
Post by: Balog on June 04, 2008, 01:46:56 PM
Post by: Green Lantern on June 04, 2008, 03:06:10 PM
Quote
Break the bad habits first rather than dig yourself in deeper.
Oh yes, that is DEFINITELY on the agenda! Though quite a bit of my debt came from unforeseen troubles, the rest was from irresponsible spending.
And to clear up any confusion:
Quote
I believe the OP is talking about taking a regular loan against his 401K and not a disbursement for buying a home, medical emergency etc.
Is right.
Now, I DO plan to be at the same job for the 2 or 3 years to pay off the loan - plus a LOT more. 'Course, as Brett said, that may not be how it works out. Which is really what worries me the most.
As long as I've been in my 401-K, I've kept my contributions at 5%, loans or no - which is the maximum amount my employer will match. Reducing or stopping my contributions was NEVER something I was considering. In fact, after I had some savings amassed I was thinking about going above the 5% level.
Post by: Werewolf on June 04, 2008, 04:31:31 PM
Assuming the CC debt came as a result of lifestyle choices and not a sudden emergency, changing your lifestyle to be able to pay down your existing debt might be wise. Break the bad habits first rather than dig yourself in deeper.
How would the OP be digging himself in deeper?
??He would be replacing 20% debt with 10% debt and paying his 401K back the principal along with interest that goes to his 401K and not the CC companies. In addition when he's done his 401K will actually be ahead of where it would have been if he hadn't taken the 401K loan since he will be continuing his normal contribution and growing it along with replacing the principal and adding the 10% interest he's paying to himself.
I agree that changing his spending habits re: credit cards is probably in order (pay them down to ZERO every month - don't charge more than you can afford to pay to get them down to zero each month). That said: by borrowing funds from his 401K he lowers the amount of interest he pays on the debt and what interest he does pay he pays essentially to himself.
Borrowing from his 401K is a win/win for the OP - if he meets the 2 criteria I set forth previously and it seems he is willing to do that.
Post by: Tuco on June 04, 2008, 04:44:59 PM
Did (do you) contribute to your 401k as a discriminatory income savings account?
I thought not. Cause that ain't what it is. It's retirement savings.
Let it accrue. Don't fiddle with it.
After the car loan and credit card debt is paid, what will be the next obsession you need to feed? Grampster said it best. Change your habits to meet your obligations.
Leave the 401k alone. That's money YOU paid to YOU.
Post by: Desertdog on June 04, 2008, 05:03:35 PM
Check your credit report and FICO score and see where you stand credit wise before you look for other lenders.
Post by: Green Lantern on June 05, 2008, 06:12:31 AM
Thing is, I don't like having more lines of credit open than I HAVE to. I've already had someone steal my CC number once somehow, and go on a shopping spree in a Best Buy on the other side of the country!
Luckily, my CC company (Capital One) caught it fast and dealt with it - with no $$$$ out of my pocket for the unauthorized charges.
Post by: Brad Johnson on June 05, 2008, 11:29:22 AM
Quote
along with interest that goes to his 401K
The amount borrowed from the 401k earns no interest until repaid in full.
Brad
Post by: Werewolf on June 05, 2008, 12:01:09 PM
Quote
along with interest that goes to his 401K
The amount borrowed from the 401k earns no interest until repaid in full.
Brad
Not true. The amount he pays back into his 401K starts earning the day it goes in plus the 10% interest he pays earns once it is in there.
At the end of the payback period the amount in his 401K will be greater than it would have been without having taken the loan. The only way that would not be true is if he doesn't continue his normal contribution and what ever vehicles his 401K is invested in actually lose value over the payback period (which would be true even if he didn't take out the loan).
The interest he's paying goes into the 401K instead of to the CC companies.
Guys this isn't rocket science.
If you've got excel just create a simple simulation. Assume a fixed rate of return (5% is a good choice), a starting value for the 401K, a fixed contribution over a fixed amount of time and walk it down to see the Future Value. I'd recommend using a monthly interval.
Do the same thing again only this time take out the amount of the loan from the beginning value. Assume the same fixed rate of return. Add in the payback amount plus interest in addition to the fixed contribution for each period (since the OP says he will continue that). Again walk it down month by month for the same period of time. You'll see that he'll have more doing the loan than not.
I set up an example:
Assume the OP has 25K in his 401K and it is earning 5% per annum compounded monthly. He is contributing $200 per month. At the end of 24 months his 401K will be worth $32,326.03.
Now assume that he borrows 10K from his 401K. At 10% and a 24 month pay back his monthly pay back will be $461.45. He continues to make his $200 contribution. Since he took 10K out of his 401K it is now worth $15,000. For 24 months he continues to make his $200 contribution and the $461.45 loan payment.
Assuming his 401K continues to earn 5% per annum at the end of the payback period his 401K is now worth $32436.74. His401K is worth more by $110 dollars.
The OP is actually better off than that because his interest rate was half what it would have been but I'm not going to waste any time figuring that out because it is self evident.
I've run this at various positive rates of return on the 401K and it always is beneficial to the OP to take the loan out of his 401K.
I'm really having trouble fathoming why this is so hard for y'all to understand. Maybe y'all put more value on the intangibles than the hard numbers. <shrug> I'm done.
Post by: Brad Johnson on June 05, 2008, 12:18:15 PM
Quote
Not true. The amount he pays back into his 401K starts earning the day it goes in plus the 10% interest he pays earns once it is in there.
That depends on how his 401k and the loan is set up. Some do, some don't. Some even charge a "service fee" for borrowing against them.
Brad
Post by: Werewolf on June 05, 2008, 12:31:27 PM
Quote
Not true. The amount he pays back into his 401K starts earning the day it goes in plus the 10% interest he pays earns once it is in there.
That depends on how his 401k and the loan is set up. Some do, some don't. Some even charge a "service fee" for borrowing against them.
Brad
That I did not know. Learn something new every day...
Post by: Brad Johnson on June 05, 2008, 12:53:33 PM
Brad
Post by: mek42 on June 05, 2008, 04:42:15 PM
One of the things that has helped us is that we have locked our cards up in the gun safe. This eliminates the vast majority of impulse buys.
Post by: K Frame on June 05, 2008, 04:44:03 PM
Yep, the employer and plan administrator have a LOT of control over loans.
My employer will only allow loans for purchase of a new home.
Post by: Green Lantern on June 05, 2008, 04:58:20 PM
There are also two "classes" of loans - Primary Residence and General Purpose. Don't really know the diff offhand - IIRC, it may be the repayment period. The MINIMUM you can stretch out your payments for a GP loan is 1 year, I think it may be 3 years for the home loan.
Hmmm, hmmm, and hmmm....
Again, though I'm a good employee of 9 years and (IMO
) a very valuable asset (I even abide by their stupid "no guns at work" policy 
), I'd HATE to take the give-or-take 50% "hit" on that loan courtesy of Uncle Sam if I lost my job and couldn't repay it in time. Some things in life you just can't predict.Then again, regarding the risk of messing up my income during retirement - not to be morbid, who can predict for sure that I'll REACH retirement???
Post by: K Frame on June 05, 2008, 05:04:17 PM
Of course, if my Mother outlives me, she gets it all.
Post by: The Annoyed Man on June 05, 2008, 05:23:17 PM
"That I did not know. Learn something new every day..."
Yep, the employer and plan administrator have a LOT of control over loans.
My employer will only allow loans for purchase of a new home.
Yep, the employer and plan administrator have a LOT of control over loans.
My employer will only allow loans for purchase of a new home.
My employer gives out personal loans to "valued" employees. Some have purchased their homes or remodeled with these loans. All our employees even the "non-valued" ones can borrow $1,000 at any time during a fiscal year for any purpose.
Post by: Tuco on June 06, 2008, 04:12:34 AM
Quote
...Maybe y'all put more value on the intangibles than the hard numbers. <shrug> I'm done.
Yep, you're right. I place more value on integrity, responsible behavior and family duty ("intangibles") than hard numbers.
Silly me.
Post by: BrokenPaw on June 06, 2008, 06:25:30 AM
Quote
...Maybe y'all put more value on the intangibles than the hard numbers. <shrug> I'm done.
Yep, you're right. I place more value on integrity, responsible behavior and family duty ("intangibles") than hard numbers.
Silly me.
Don't bang your head when you ride that high horse under a low bridge.
The OP asked a question about what made financial sense, and Werewolf, as a financial planner, gave hard numbers and a couple of strict caveats for the OP to follow in order for those numbers to apply.
Werewolf said "if you do this, and strictly do this, what you said makes good financial sense". At what point do those numbers change because of "integrity, responsible behavior, and family duty"? Such condescension is unseemly.
-BP
Post by: Firethorn on June 06, 2008, 09:16:07 AM
Ah yes, there IS a pesky $50 fee. They make SURE you know about it, at least when requesting a loan by phone. But when compared to the money I SHOULD save on CC interest charges alone...
There are also two "classes" of loans - Primary Residence and General Purpose. Don't really know the diff offhand - IIRC, it may be the repayment period. The MINIMUM you can stretch out your payments for a GP loan is 1 year, I think it may be 3 years for the home loan.
There are also two "classes" of loans - Primary Residence and General Purpose. Don't really know the diff offhand - IIRC, it may be the repayment period. The MINIMUM you can stretch out your payments for a GP loan is 1 year, I think it may be 3 years for the home loan.
It's sounding a lot like a TSP loan then. The difference I've seen for the TSP versions are how much you can take out, and the maximum repayment time. I took a TSP loan out to help buy my house, it was substantially cheaper than bank loans at the time(still is), even considering 'lost income' because the interest rate I'm paying myself is less than industry returns.
Post by: Tuco on June 06, 2008, 12:02:59 PM
At what point do those numbers change because of "integrity, responsible behavior, and family duty"?
At this point...
I'm really having trouble fathoming why this is so hard for y'all to understand. Maybe y'all put more value on the intangibles than the hard numbers. <shrug> I'm done.
The op has made a habit of spending more than he makes. Until that behavior changes, there will be no professionally formulated financial magic act that will solve the problem.
We can spend all night posting different scenarios into excel, but with income less than expenses, the problem will appear again and again. Men who thrive on debt (bankers, financial professionals) seem to ignore this simple fact, and offer to toss another pin into a failing juggling act.
You may call that condescension, that's your right. I'm calling a spade a spade.
I apologize if my curtness offends you. This is an arena in which i have vast personal experience and am able to speak from the high horse only because I got my ass kicked out from under me. And if I ever knock my head on the bridge, I know how to cure the pain... that's right, by spending less than I make.
Post by: Werewolf on June 06, 2008, 12:32:51 PM
Quote from: Cold Soaker
Men who thrive on debt (bankers, financial professionals) seem to ignore this simple fact, and offer to toss another pin into a failing juggling act.
Except in this case the OP would be exchanging high interest debt for low interest debt and paying the interest to himself. That's a good thing not a bad thing as it saves him money.
This reduces his expenses and as long as he continues to contribute to his 401K he is ahead.
Should he change his spending habits? Based on what little he's told us probably.
As for your description of men who thrive on debt - I'm not a believer in personal debt except for CARS, and homes, neither of which the average person can pay for out of pocket. Credit cards are useful if they are paid down to zero each and every month and that's what I advise people who ask about them to do. If you can't pay them down to zero each month then you're charging too much. At that point you reduce what you're charging and consider the CC's to be for emergencies only when you absolutely have to get something done NOW and you don't have the money to pay for it NOW! And I'm not talking about buying that stereo you really want or those once in a life time concert tickets.
Debt is a tool and like any tool it can be mishandled, abused and cause problems. This is as true for businesses as it is for individuals.
No responsible (pay attention - key word responsible) person in the financial industry creates unnecessary debt for any of his/her clients - that's a losing proposition for both the financial person and the client. Unfortunately a combination of government regs that force banks and other lending institutions to lend to people not qualified to repay and a desire to test the limits of risk by some has led to a perception of finance folks much like you've developed. There's nothing we can do about the gov regs but the marketplace will take care of the extreme risk lenders.
Post by: Northwoods on June 07, 2008, 04:20:50 PM
As for your description of men who thrive on debt - I'm not a believer in personal debt except for CARS, and homes, neither of which the average person can pay for out of pocket.
Bull hockey on the cars. Partial bull hockey on the house. The average person can certainly pay cash for their cars. They just need to get out of the mentality that they need a brand new car every four years. Start out with whatever you can afford to pay cash for, even if that's a $1000 beater, and pay yourself a car payment. Average payment is close to $450/month. After just 10 months you can step up to a $5500 car. Within 4 years total you can be driving a paid for $20k car. Most people won't even pay off that $20k in 4 years if they follow your advise to finance their cars.For a house, the ability to buy one for cash depends on where you live, how much you make, and how cheaply you're willing to live until you buy that house. Where I'm living in Seattle if you want anything but a 700sf cottage in a bad neighborhood it'll take too many years, even with a 6-figure income, to get there without a mortgage. But, my sister lived in Columbia, SC in a pretty decent house that cost $90k. A house like that could be bought with cash with a few years of savings if you have a good paying job and are motivated.
Quote from: Werewolf
Credit cards are useful if they are paid down to zero each and every month and that's what I advise people who ask about them to do. If you can't pay them down to zero each month then you're charging too much. At that point you reduce what you're charging and consider the CC's to be for emergencies only when you absolutely have to get something done NOW and you don't have the money to pay for it NOW! And I'm not talking about buying that stereo you really want or those once in a life time concert tickets.
Dunn and Bradstreet did a study that showed that people on average spend 12-18% more with plastic than with cash. There have been brain pattern studies done (sorry, no reference handy) that showed why. When handing over Uncle Ben's to buy that item a person actually experiences something very similar to physical pain. That effect is greatly reduced when swiping a CC. The newfangled chips they're putting in cell phones and such to charge purchases reduced that effect to almost nothing. Quote from: Werewolf
Debt is a tool and like any tool it can be mishandled, abused and cause problems. This is as true for businesses as it is for individuals.
Debt amplifies whatever you're doing. If whatever you doing is working it can increase your returns. But it will also amplify your mistakes and can sink you faster than you can blink. The stock brokers that jumped in 1929 were the ones that were highly leveraged.
Post by: Fly320s on June 07, 2008, 04:41:00 PM
Have you tried calling your CC company and asking for a lower interest rate?
Post by: MechAg94 on June 07, 2008, 05:51:05 PM
It sounded like he only has to bite the bullet for a little while longer to get that car paid off and then he can apply his resources to the CC. Yeah, the interest is a problem, but as long as you have a plan, you aren't talking about a great deal of time. Me personally, I don't like the idea of juggling loans when it comes to personal finances. I know it can be done right and it can work, but it isn't for me.
Post by: MechAg94 on June 07, 2008, 05:57:44 PM
If you really want to do the loan, fine, just make sure you are very careful and make sure you live within your means and take care of paying everything off. I wouldn't do the loan myself. In the example above the debt wasn't something he could pay off in a reasonable time.
Post by: MechAg94 on June 07, 2008, 06:08:24 PM
I remember a financial guy I listened to a little a few years back suggested that no one should buy a car unless they can pay off the loan in 2 or 3 years. His opinion was also than new cars make no financial sense. I think he was one of those guys who says you should live on only 50% of your income. Now that I am where I am, I can see the sense in this. At the very least, it is a good idea when you are figuring your basic monthly expenses.
Post by: Green Lantern on June 07, 2008, 06:19:05 PM
Quote
Have you tried calling your CC company and asking for a lower interest rate?
Not yet, but I think I AM going to do that before considering the loan. What's the worst that can happen, right?
Uhhhhh...they wouldn't RAISE my rate, would they???
(only semi-joking)Ya know, when I first got that card, the limit on it was $500. Then about every year or so they'd automatically increase it - $500 to $1000, $1000 to $1500, until I eventually got a $6k limit on my card.
Should I take it as a "sign" for anything (especially getting a better rate) that they HAVEN'T raised the limit in over a year now?
******************
Quote
Bull hockey on the cars.
I live out in "the sticks" with a 30-mile commute each day - a car is NOT an "option" for me, it's a must.
My car is a 2003 Subaru Impreza 2.5 RS (thank GOD I didn't get a Turbo, between ins. rates and PREMIUM gas prices!). I bought it "very lightly used." As I said, I plan on paying it off and keeping it until it falls apart. My dad asked when I was gonna trade up, I looked at him like he'd grown another head. And I plan on SAVING my car payments, so I'll at least have a nice down payment when it does go kablooey.
I've driven my share of $1000 rattle-traps. For the time, money, and AGGRAVATION in keeping them running smoothly - I'd much rather spend the $$$ on a newer and reliable car, and keep it up with proper maintenance. Lordy, I don't know what I'd "trade" for it though, but how I wish I had some hardcore MECHANICAL know how, like my brother or my cousin's hubby. The latter has kept a $500 Ford Escort running for years now. Though at the cost of a LOT of his time, sweat, blood, and probably money too...
Then AGAIN...
A big hunk of my debt was about $1K I had to spend on new struts and mounts - I guess all the gravel roads I have to navigate weren't kind to it. But the humdinger that could have RUINED me, if not for being under WARRANTY, was some odd engine troubles. Some really major work had to be done. But, at least there wasn't a penny out of my pocket for any of that (even the rental for two weeks).
Right, now I might have mentioned my earlier loans. Two big problems with those were that I didn't have enough in my 401K at the time to totally wipe out either debt. And what I did take, I didn't FOCUS on ONE debt, I spread it out. "Seemed like a good idea at the time!"
But no, now, IF I do this thing, one or the other is getting NUKED.
So, I got some calls to make. Need to call the CC company about the possibility of a lower rate. Need to call the bank that financed my car loan to see what my actual amount owed is. I've always tried to pay at least a SMIDGE more than the minimum, but I think a few payments have gotten delayed in the mail, too...so late charges might have wiped out those gains..
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Anyway, the Lanterns NEW plan, PD (post-debt):
-SAVE SAVE SAVE!
-If I can't pay cash (or write a check) for it - SAVE some more then come back when I CAN!
Ummm, and I probably need to work on the whole RESIST TEMPTATION thing, to avoid depleting the savings too much.
...you guys won't think TOO harshly of me if I pay cash for my very first 1911, as a present to myself after I'm debt free and have at least a 3-month emergency fund in the bank, will you?
Post by: Firethorn on June 07, 2008, 07:04:04 PM
His opinion was also than new cars make no financial sense.
I think that it depends on your knowledge. Today, by getting a new car you get the warranty, lower interest rate, and you know the maintenance and driving the vehicle undergoes.
Yes, you lose a lot of value in the first couple years - but the only reason I got rid of my saturn after 6 was that it ended up being totaled. The truck I replaced it with I plan on driving until a similar situation occurs. I have a 5 year note on it, but plan on making double payments. That should have it paid off in ~2 years. Part of the reason I went new is that I simply couldn't find a used truck that fit what I wanted at a good price. I had been looking for a truck for months, intending on having two vehicles. The loss of my primary vehicle put the vehicle search in a new light.
Yes, if you plan on keeping a car for only four years, you're probably better off leasing if you MUST have a new vehicle.
Not to mention, that if you have good credit a new car can actually end up cheaper considering all the above given that you generally get a lower interest rate.
On the debt thing - It can make sense to get a loan for something when the cost of the loan is lower than the opportunity cost of not taking it. Take a house, for example. There are substantial costs involved with buying/selling a home. Commission fees, moving expenses, deed transfers, title insurance, etc...
Given the combination of low interest rates and the tax deductions, it can make sense to move into the home you'd be able to pay cash for in ten years now. By doing so, yes, you pay thousands of interest, but you also save thousands of expenses and get to be in the nicer house now.
Same can be said with a car - why go through the expense and hassle of getting a 'make do' car now, when for around a grand of interest you can get the new car now.
Note that I'm assuming a house is necessary, or at least can be had for less than renting, even with insurance. That a car is necessary - that alternate transport is either more expensive than the interest or not available. It can be stretched to things like home appliances, even a TV, but for a TV I'd rather recommend doing without for a month or two then buying(if you KNOW that the 19" TV won't satisfy you).
Post by: Desertdog on June 07, 2008, 07:26:31 PM
My son recently paid off his wife's car that they have had for several years and they wanted to buy a newer model car for his wife. I kelp telling him that one months car payment could pay for a lot of repairs. They changed their minds and still jhave their old car.
Post by: Firethorn on June 07, 2008, 09:05:46 PM
I feel that if you have decent running "town cars" that is paid for, it is cheaper if you want to go on a fairly long trip to rent a car than to have a almost new car with payments.
I've proposed something much along these lines if electric cars ever become popular. It's not much of a stretch if you want to take a long trip, for say, one week a year outside of town to simply take your electric down to the rent a car place and pick up a gasoline model if you need the longevity.
A rental car for a week is going to run $480-$350.
Let's look at the cost difference between a truck and a 'decent'* car. About $5k in price, from what I've seen. I'm going to go with a 5 year lifespan, simply to keep it simple.
That's $1k a year in extra capital cost. The truck will probably use 50% more fuel. Figure going from 30mpg to 20mpg. 6K miles/year. For the car, that'd be 200 gallons of gas. For the truck, 300. @$4/gallon, that's an extra $400/year in gasoline.
So, discounting cost of capital, extra insurance, etc... The truck(or SUV) will cost you ~$1400 more a year.
You can rent a U-Haul, moving van, or otherwise more capable vehicle for ~$50-100/day. If you're not using the extra capacity for at least two weeks a year, it's not worth it. Personally, the truck is worth it for me - I needed a vehicle more capable in the snow&ice(4WD vs 2WD w/unlimited slip, 4 months a year). I'm working on my house, so need to be able to haul wood & other large supplies. Delivery companies want more to go out to my area. I bought one of the smaller trucks available(grumble, still a bit big in my mind).
Once I get it paid off, I'm likely to buy another fuel-sipper, preferably a real one. My saturn was a fast little car and got 30mpg despite my lead foot. I test drove an even smaller car, anemic, and it's only rated at 34mpg highway? They should be able to do better.
*Everybody has different ideas of 'decent'. Feel free to change the assumptions to fit yourself and your area and usage.
Post by: Green Lantern on June 09, 2008, 06:26:51 PM
"Payment Protection" - worth it or not? I've always had it, but I hear that it may not be worth ANYTHING (let alone what I'm paying for it...)
Post by: Desertdog on June 09, 2008, 06:39:12 PM
Your health, are you in good health are is there a possibilty that you may die or get disabled?
Your lifestyle, do you do things that may result in your death or disability?
Post by: Northwoods on June 09, 2008, 09:13:19 PM
Post by: MechAg94 on June 10, 2008, 04:30:10 AM
I agree that news cars make sense to me. I was just relating that guy's opinion. IMO, there are a lot of "commodity" cars that are relatively cheap and have long warranties. As long as you make sure they have a reputation for durability, it is a good plan.
I think where new cars don't make sense is for people who don't make enough to pay the payment and still be able to save. If the payment takes away too much of your disposable income, it isn't worth it or you need to wait and put down a bigger down payment.
Post by: Green Lantern on June 10, 2008, 05:55:51 AM
Quote
IMHO I hink it probably depends on a number of things, such as;
Your health, are you in good health are is there a possibilty that you may die or get disabled?
Your lifestyle, do you do things that may result in your death or disability?
Your health, are you in good health are is there a possibilty that you may die or get disabled?
Your lifestyle, do you do things that may result in your death or disability?
Decent health. I don't smoke or drink at all. I DO like to drive kinda fast...
And, as I said earlier, I abide by the "no guns at work" policy...
Hmm, "upon further review" I did see a case where CO refused to honor the insurance on a guy - but the "biggie" (a State sued them) was 'cause they sold it to people who didn't work in the FIRST place and thus weren't eligible for the protection.
Post by: Green Lantern on July 12, 2008, 06:34:53 AM
Finally got around to calling the CC company. They shot me down, but told me to check back again every so often...
Anyhoo, no worries about me borrowing from the 401K in the immediate future - turns out the amount available for a loan isn't what I was expecting at the moment...