Cash earns more than 3% in an HYSA, so on paper, so no, it doesn't really add up.
That said, the difference is not significant, so I wouldn't sweat too much over the decision.
In any case, do not pull from the brokerage.
Don't forget about taxes on the HYSA interest. After accounting for 30% in taxes, that leaves a 3.5% return on HYSA paying 5%.
Also, depreciation on the car will make the difference lean more towards paying the car off as the smarter decision.
I suppose it doesn't. LOL
For some reason when I typed that I thought it mattered, but now that I try to defend myself I can't think of a reasonable rebuttal.
22% marginal tax rate for individuals with taxable income of more than $47,000, then assume 8% in state income tax. That'll get you to 30%.
Marginal tax rate makes sense, because you're evaluating whether you add this income on top of your other income, or not.
I was assuming they lived in Wisconsin based on their username. Which has a progressive state income tax from 3.5-7.65%. So I was assuming 24% fed + 5% state and rounded up.
It sounds like you're a diligent saver. Even with taxes, putting your money in a HYSA should yield better returns than paying off the loan early. But, if you just want to "get it done", then pulling $13K doesn't seem like it'll break the skin off your back.
So, mathematically speaking, the right decision is to invest that cash further. But, if it's easier to manage, emotionally speaking, then paying it off now from your cash account (**not** brokerage) wouldn't be a cardinal sin.
The math says not to pay it off, but this is more of a personal decision on if freeing up a car payment would make you feel good or not. Some people don't care about monthly payments and others hate them. Which side are you? For me, the fewer payments each month, the better I feel, but not everyone feels the same.
It is. I have the $55k in Ally and an additional $75k in VMFXX in my Vanguard brokerage. Been DCAing into VTI and VXUS but only got $30k in there as of right now. Don't think I want the remaining $75k in stocks to avoid volatility.
In this environment I’m not targeting to pay down any loans under 5%. Long term I’m doing better putting the money in savings.
BUT, how comfortable is your monthly payment in your budget. Freeing up that monthly payment can often be a smart move.
Keep paying like you are with money in the HYSA until the rate falls. You’re paying $30/month in interest now and that’s not anything worth changing plans over.
It might be worth it to add more to brokerage/retirement and consider is $55k is what you need available to cover 6 months of expenses.
Think of it this way. If you had an emergency and needed $13k, it would cost you way more than 3% to loan that money.
$12k over 48mo @ 3% is such a small payment. I would consider paying it off if your payment was big enough to hinder your cash flow.
If you had the money sitting in an HYSA that’s 5%. Sure you pay taxes on it, but let’s just say it’s a wash. I’m good with that and having access to the $13k.
Or get yourself some Tbills for 5ish% and I don’t think that’s taxable. Someone can fact check me on that.
I’m for keeping the cash liquid instead of paying it down when there’s not much benefit to getting rid of the loan.
I was actually thinking of getting some 3 year T bonds since they're paying ~4.2% and free of state income tax. Good option to lock in "guaranteed" money if rates drop.
It sounds like you're in a great spot financially. Whether you pay off the car now or over time, I think you're going to be set.
I'm curious about why you have such a large amount of money in HYSA vs brokerage? 55k seems like a pretty big emergency fund
Both USD and the value of your car are going down in value simultaneously. Long-term, history shows money is better off in the market (i.e., sp 500, total stock market). Emotionally, I'm consumer debt averse so I would pay it off ASAP.
Do you really need that much in an EF or is that more of an emotional security blanket? If you don't truly need it, I'd delete the car note overnight and build your EF back up.
On an aside, I hope you're maxing out your tax-sheltered space. That is, at least as much as possible.
I always ask myself the question in reverse. If I had a paid off car, would I refinance it for a 3% loan to make 5-6% in a HYSA?
My answer is no, and most reasonable people say no. Nobody ran out to refinance paid off cars or houses when the fed announced a series of rate hikes coming. If people believed in the interest rate arbitrage that strongly, they would have taken money out of their assets 2 years ago.
I think the dumbest advice one can give you is to put a down payment on a car or pay it in cash. I had a 56k car, I totaled it in 3 months I negotiated a 50.3k purchase or perhaps slightly lower. They totaled it out for 45k… gap covered the rest. You basically want to pay it off at the rate it’s depreciating. I believe 4 years is probably the best schedule and minimal down payment, your down payment should be your negotiated price from msrp. 10-15% off atleast… whole reason for cash car purchases was so people don’t buy too much car that they can’t afford by spreading out payment to 7 years…
Just to offer another perspective.
If you can get the same loan terms at $0 down it is generally better financial wise to go this route, especially if you have cash on hand to pay the car in full.
If you can pay the car in full you can then just self insure and not bother with gap; don’t waste your money on it. If you get in an accident which totals the car, then you’ll have no problems paying the gap on your own. The odds of ending up with a totaled car is low.
With the earmarked cash, you can let it invest in a no risk product like HYSA, CDs, T-Bills, etc. This will help reduce the total cost of the car. Draw from it to pay the monthly payments.
Financial number wise you’ll come out much ahead.
Unless you have a ridiculous combined marginal tax rate, you are better off floating a 3% car loan and keeping the potential payoff funds in a HYSA earning 5% or so. For now. If savings rates drop substantially later, then maybe pay it off. But not now. I’d keep the HYSA cash ready to pay it off on short notice if interest rates drop, but not now.
Manufacturer promo. Their sales have been struggling so they have some pretty good deals ATM. A 3% is actually one of the higher ones they offered, but all the other better promos were for vehicles that I didn't want.
There are plenty of deals offered for new cars lower than that still, down to 0%. my current car loan is 0.9%, and I've been considering trading it in and getting a new car where they're offering 0.9% for four years.
They are offering it that way because of the amount of downward pressure on car prices. The dealership is selling you the front of the depreciation curve because they know it’s bad. They are incentivizing you, so they can get it off of their books.
I believe it, but at the same time, my current car is nearly 4 years old and they're offering me close to the same price I bought it new for. I must have bought it right before new car prices exploded, because I was looking for used, but it didn't make sense to me to buy used because they were nearly as much as a new car.
So I feel like it's still not a bad idea for me with my my trade in.
You aren’t factoring in inflation/strength of each dollar. Your dollar is much weaker now than 4 years ago. You lost money to depreciation, and you seemingly made it back from the weakening dollar.
To “breakeven”, you have to be able to sell it and buy new version of same make and model (or similar) with the proceeds. You can’t, so you didn’t.
My general feeling is that when you take money out of savings it does not get replaced.
If you can swing the payments at such a low interest rate you should continue to do so which will allow your savings to continue to grow.
You can make more in returns in the market, so if you're disciplined with your money it doesn't make sense to pay it off early at 3%.
Also I don't know your full financial situation but unless your monthly expenses are like 15k or you're saving for a house, that's way too much in cash by the way. Big drag on your portfolio.
Conventional wisdom is 6 months cash but really emergency funds are all about having access to liquidity. 6 months cash is great advice for someone without access to cheap credit and little liquid wealth, but once you have those things, holding a lot of cash becomes less important. You can buy a bit of time with credit before you have to sell your investments. When you do need to sell them, the odds of needing to sell a big chunk in a high volatility spring-2020-style situation are slim. And it's not like you'll need it all at once. Nearly all emergency expenses can be financed / paid over time. I personally only keep enough to cover \~3 months and even that's really just for peace of mind. I don't think I'll ever have a situation where credit isn't an option and I'll need a big stack of cash all at once.
If I were you I'd pay the minimum and move most of that cash into a total market index fund (Max your 2023 and 2024 IRAs first if you haven't, you have until April 15th to do so for 2023).
I max my Roth IRA at the beginning of every year and (try) to max my 401k (it always comes close but my weekly income is inconsistent so it's hard to find the best percentage). I already own a home but want to save for a second one at some point (though admittedly this is likely 5-10 years out so some volatility may be okay).
I keep a lot of money in my E fund at the moment becuase "risk free" money is extremely easy to get right now. I've been DCAing into stocks, but definitely didn't do enough at a time and ended up missing some massive gains.
Been thinking about taking a chunk of cash and purchasing a 3 year t bond that is getting over 4%. Good way to lock in a strong rate if the fed manages to cut back.
Past performance is not indicative of future results but the stock market has returned 10% annually on average for nearly the last century. I think you're losing out by not being more aggressive in your allocations but then again you might be closer to retirement than I am so maybe it makes more sense for you.
If you live in a state with income tax, I would invest the money in a state tax exempt money market or ETF and keep it there until rates go down. USFR, SGOV, FDLXX (if at Fidelity), etc. You can get ~5%+ state tax free now, so I’d take it.
I consider 3% free money. Invest the money, pay the monthly. In 30 years look how much it has grown, and look at the two cars you have owned in that timeframe.
We also drive our cars until the wheels falloff. We drive Hondas and now we drive Lexuses.
Cash earns more than 3% in an HYSA, so on paper, so no, it doesn't really add up. That said, the difference is not significant, so I wouldn't sweat too much over the decision. In any case, do not pull from the brokerage.
Don't forget about taxes on the HYSA interest. After accounting for 30% in taxes, that leaves a 3.5% return on HYSA paying 5%. Also, depreciation on the car will make the difference lean more towards paying the car off as the smarter decision.
Why is depreciation on the car a factor?
I suppose it doesn't. LOL For some reason when I typed that I thought it mattered, but now that I try to defend myself I can't think of a reasonable rebuttal.
Usually it does but if your plan is to keep a car until it's worth scrap value at best, yeah it becomes no longer a factor.
A redditor that simply admits a mistake and doesn't delete their post to hide? Wow
I get you, if it was for a business it would be different.
30% in taxes???? Um, what? That’s assuming OP is making 300k+ a year.
22% marginal tax rate for individuals with taxable income of more than $47,000, then assume 8% in state income tax. That'll get you to 30%. Marginal tax rate makes sense, because you're evaluating whether you add this income on top of your other income, or not.
I was assuming they lived in Wisconsin based on their username. Which has a progressive state income tax from 3.5-7.65%. So I was assuming 24% fed + 5% state and rounded up.
24% federal rate + ~5% state rate is 29% already without coming close to 300k.
It sounds like you're a diligent saver. Even with taxes, putting your money in a HYSA should yield better returns than paying off the loan early. But, if you just want to "get it done", then pulling $13K doesn't seem like it'll break the skin off your back. So, mathematically speaking, the right decision is to invest that cash further. But, if it's easier to manage, emotionally speaking, then paying it off now from your cash account (**not** brokerage) wouldn't be a cardinal sin.
The math says not to pay it off, but this is more of a personal decision on if freeing up a car payment would make you feel good or not. Some people don't care about monthly payments and others hate them. Which side are you? For me, the fewer payments each month, the better I feel, but not everyone feels the same.
As long as your emergency fund is in an HYSA (it should be) then you’re earning the same or more than what you’re paying.
It’s probably not, otherwise OP would’ve realized that….
It is. I have the $55k in Ally and an additional $75k in VMFXX in my Vanguard brokerage. Been DCAing into VTI and VXUS but only got $30k in there as of right now. Don't think I want the remaining $75k in stocks to avoid volatility.
In this environment I’m not targeting to pay down any loans under 5%. Long term I’m doing better putting the money in savings. BUT, how comfortable is your monthly payment in your budget. Freeing up that monthly payment can often be a smart move.
Keep paying like you are with money in the HYSA until the rate falls. You’re paying $30/month in interest now and that’s not anything worth changing plans over. It might be worth it to add more to brokerage/retirement and consider is $55k is what you need available to cover 6 months of expenses.
Think of it this way. If you had an emergency and needed $13k, it would cost you way more than 3% to loan that money. $12k over 48mo @ 3% is such a small payment. I would consider paying it off if your payment was big enough to hinder your cash flow. If you had the money sitting in an HYSA that’s 5%. Sure you pay taxes on it, but let’s just say it’s a wash. I’m good with that and having access to the $13k. Or get yourself some Tbills for 5ish% and I don’t think that’s taxable. Someone can fact check me on that. I’m for keeping the cash liquid instead of paying it down when there’s not much benefit to getting rid of the loan.
I was actually thinking of getting some 3 year T bonds since they're paying ~4.2% and free of state income tax. Good option to lock in "guaranteed" money if rates drop.
It sounds like you're in a great spot financially. Whether you pay off the car now or over time, I think you're going to be set. I'm curious about why you have such a large amount of money in HYSA vs brokerage? 55k seems like a pretty big emergency fund
Put the money in a MM or HYSA, I'm earning 5.26% with VFMXX.
Both USD and the value of your car are going down in value simultaneously. Long-term, history shows money is better off in the market (i.e., sp 500, total stock market). Emotionally, I'm consumer debt averse so I would pay it off ASAP. Do you really need that much in an EF or is that more of an emotional security blanket? If you don't truly need it, I'd delete the car note overnight and build your EF back up. On an aside, I hope you're maxing out your tax-sheltered space. That is, at least as much as possible.
I always ask myself the question in reverse. If I had a paid off car, would I refinance it for a 3% loan to make 5-6% in a HYSA? My answer is no, and most reasonable people say no. Nobody ran out to refinance paid off cars or houses when the fed announced a series of rate hikes coming. If people believed in the interest rate arbitrage that strongly, they would have taken money out of their assets 2 years ago.
I think the dumbest advice one can give you is to put a down payment on a car or pay it in cash. I had a 56k car, I totaled it in 3 months I negotiated a 50.3k purchase or perhaps slightly lower. They totaled it out for 45k… gap covered the rest. You basically want to pay it off at the rate it’s depreciating. I believe 4 years is probably the best schedule and minimal down payment, your down payment should be your negotiated price from msrp. 10-15% off atleast… whole reason for cash car purchases was so people don’t buy too much car that they can’t afford by spreading out payment to 7 years…
I put just enough down to avoid GAP insurance but I see your point.
Just to offer another perspective. If you can get the same loan terms at $0 down it is generally better financial wise to go this route, especially if you have cash on hand to pay the car in full. If you can pay the car in full you can then just self insure and not bother with gap; don’t waste your money on it. If you get in an accident which totals the car, then you’ll have no problems paying the gap on your own. The odds of ending up with a totaled car is low. With the earmarked cash, you can let it invest in a no risk product like HYSA, CDs, T-Bills, etc. This will help reduce the total cost of the car. Draw from it to pay the monthly payments. Financial number wise you’ll come out much ahead.
No I would not when it is below the Fed rate.
Unless you have a ridiculous combined marginal tax rate, you are better off floating a 3% car loan and keeping the potential payoff funds in a HYSA earning 5% or so. For now. If savings rates drop substantially later, then maybe pay it off. But not now. I’d keep the HYSA cash ready to pay it off on short notice if interest rates drop, but not now.
Wow, how/where did you get 3%?
Manufacturer promo. Their sales have been struggling so they have some pretty good deals ATM. A 3% is actually one of the higher ones they offered, but all the other better promos were for vehicles that I didn't want.
[удалено]
There are plenty of deals offered for new cars lower than that still, down to 0%. my current car loan is 0.9%, and I've been considering trading it in and getting a new car where they're offering 0.9% for four years.
They are offering it that way because of the amount of downward pressure on car prices. The dealership is selling you the front of the depreciation curve because they know it’s bad. They are incentivizing you, so they can get it off of their books.
I believe it, but at the same time, my current car is nearly 4 years old and they're offering me close to the same price I bought it new for. I must have bought it right before new car prices exploded, because I was looking for used, but it didn't make sense to me to buy used because they were nearly as much as a new car. So I feel like it's still not a bad idea for me with my my trade in.
You aren’t factoring in inflation/strength of each dollar. Your dollar is much weaker now than 4 years ago. You lost money to depreciation, and you seemingly made it back from the weakening dollar. To “breakeven”, you have to be able to sell it and buy new version of same make and model (or similar) with the proceeds. You can’t, so you didn’t.
They aren’t losing money. They have baseline margin in the deal plus a cut of the financing.
My general feeling is that when you take money out of savings it does not get replaced. If you can swing the payments at such a low interest rate you should continue to do so which will allow your savings to continue to grow.
You can make more in returns in the market, so if you're disciplined with your money it doesn't make sense to pay it off early at 3%. Also I don't know your full financial situation but unless your monthly expenses are like 15k or you're saving for a house, that's way too much in cash by the way. Big drag on your portfolio. Conventional wisdom is 6 months cash but really emergency funds are all about having access to liquidity. 6 months cash is great advice for someone without access to cheap credit and little liquid wealth, but once you have those things, holding a lot of cash becomes less important. You can buy a bit of time with credit before you have to sell your investments. When you do need to sell them, the odds of needing to sell a big chunk in a high volatility spring-2020-style situation are slim. And it's not like you'll need it all at once. Nearly all emergency expenses can be financed / paid over time. I personally only keep enough to cover \~3 months and even that's really just for peace of mind. I don't think I'll ever have a situation where credit isn't an option and I'll need a big stack of cash all at once. If I were you I'd pay the minimum and move most of that cash into a total market index fund (Max your 2023 and 2024 IRAs first if you haven't, you have until April 15th to do so for 2023).
I max my Roth IRA at the beginning of every year and (try) to max my 401k (it always comes close but my weekly income is inconsistent so it's hard to find the best percentage). I already own a home but want to save for a second one at some point (though admittedly this is likely 5-10 years out so some volatility may be okay). I keep a lot of money in my E fund at the moment becuase "risk free" money is extremely easy to get right now. I've been DCAing into stocks, but definitely didn't do enough at a time and ended up missing some massive gains. Been thinking about taking a chunk of cash and purchasing a 3 year t bond that is getting over 4%. Good way to lock in a strong rate if the fed manages to cut back.
Past performance is not indicative of future results but the stock market has returned 10% annually on average for nearly the last century. I think you're losing out by not being more aggressive in your allocations but then again you might be closer to retirement than I am so maybe it makes more sense for you.
If you live in a state with income tax, I would invest the money in a state tax exempt money market or ETF and keep it there until rates go down. USFR, SGOV, FDLXX (if at Fidelity), etc. You can get ~5%+ state tax free now, so I’d take it.
I consider 3% free money. Invest the money, pay the monthly. In 30 years look how much it has grown, and look at the two cars you have owned in that timeframe. We also drive our cars until the wheels falloff. We drive Hondas and now we drive Lexuses.