Does My Financial Decision Make Sense?

[joeb]

If you financed at 3.85% in an 8% inflationary world, is the bank paying you 4.15% to borrow that money?

I'm not sure I understand your question.

I Financed the Bronco for 5 yr @ 3.85

The cash on hand, I can get 4.25 % for 5 yrs.

Thanks

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[joeb]

Hello. What was the premium you used to open the CD? We need the amount to figure your annual interest. Then deduct for taxes and you will get your net CD interest. How close you are to covering the Bronco loan interest depends on how much $ is in the CD.

I would open cd with 50k. I think total return is 11,500$.

 

[MnLakeBum]

None of us have a crystal ball but with the stock market down about 25% this year, historically this is a good time to buy stocks. The concept of dollar cost averaging works over the long term and if you invest 10-15% of you salary each month in the S&P500 or BRK.b you will do as well(or better) than most professional money managers.

 

[Rdonohoe]

I'm not sure I understand your question.

I Financed the Bronco for 5 yr @ 3.85

The cash on hand, I can get 4.25 % for 5 yrs.

Thanks

If the bank charges you 3.85% interest, but inflation makes each dollar worth 8% less, it seems like you are coming out ahead.
Or am I offbase?

 

[joeb]

If the bank charges you 3.85% interest, but inflation makes each dollar worth 8% less, it seems like you are coming out ahead.
Or am I offbase?

Oh, Ok. Yeah, my amateur finance knowledge tells me I'm making out, at least a little. Plus if I just pay it off now, I do not have that money if critically needed.

But, if my Bronco loan was pushing 4 % or more, I would likely pay it off.

 

[JohnnyBronco]

Disclaimer. I only got through page 1.

Vehicle purchase for cash is only feasible if you have that cash on hand above and beyond what Dave Ramsay would be comfortable with leaving you the 6 months of income sitting in the bank or under the mattress.

In fact Dave would tell you that if you need a loan to buy a vehicle then you do not need that vehicle

But that message aside (I was always taught that debt is a tool, it can break but it can also work) the vehicle purchase by cash or loan should not play into any decision concerning your savings.

Now, if comes down to one simple argument.

Can you make more money on your money at 4.25% than at .55% after accounting for any conversion losses. It is essentially the same argument in reverse when interest rates were falling regarding refinance of a mortgage.

It has nothing to do with your income tax unless you are adverse to earning more money.

 

[RHeinz]

It seems most everyone is forgetting one factor, Inflation. If your loan rate is less than the the inflation rate, you probably don’t want to pay it off early. As far as CD rates, there are simple “Future Worth” calculations.

In the mid to late 70’s CD were getting around 17% if I recall correctly, due to the high inflation rate.

I might be one of the “Financial Idiots” however…..

 

[0ne]

Oh, Ok. Yeah, my amateur finance knowledge tells me I'm making out, at least a little. Plus if I just pay it off now, I do not have that money if critically needed.

But, if my Bronco loan was pushing 4 % or more, I would likely pay it off.

I think you just figured out what you should do, keep paying on the loan, a little extra if possible and keep the cash for a rainy day fund and go out and enjoy your Bronco! The time commitment for the best returns will include the upcoming slowdown of unknown severity.

 

[JohnnyBronco]

I'm not sure I understand your question.

I Financed the Bronco for 5 yr @ 3.85

The cash on hand, I can get 4.25 % for 5 yrs.

Thanks

He is talking current value, or at least alludes to it. $50,000 cash today can only purchase $46,000 in goods one year from now and $42,320 in two years and $38,934 3 years from now and in five years that $50,000 is only worth $32,954 in buying power. That is with a flat 8% annual inflation across the board for 5 years

Not equal, but if you can borrow at a rate that is less than the annual inflation rate of what you are buying, then you are slightly ahead

Of course that assumption is based on a $50 000 2022 Bronco costing $68,000 in 2027

I might also add that even in these times you can earn 8% cash on cash and up to 15% IRR by investing in a real estate fund or syndication of rental properties.

 

[sjudas]

I would open cd with 50k. I think total return is 11,500$.

Ok. Your total loan interest is $4,542. It comes down to personal preference. Some clients like to pay the loan off and have no auto debt. Doing that you lose the asset. If you keep the CD and keep paying the loan you are basically borrowing for zero $. You could also use the annual interest from the CD to make an extra annual principal payment on your loan. That's about $7,000 of additional principal payments. It will reduce the overall duration of your loan. It comes down to personal preference.

 

[joeb]

Ok. Your total loan interest is $4,542. It comes down to personal preference. Some clients like to pay the loan off and have no auto debt. Doing that you lose the asset. If you keep the CD and keep paying the loan you are basically borrowing for zero $. You could also use the annual interest from the CD to make an extra annual principal payment on your loan. That's about $7,000 of additional principal payments. It will reduce the overall duration of your loan. It comes down to personal preference.

I like your philosophy on this

Thanks

 

[Mo’ Money Mo’ Broncos]

I mean either way, it sounds like you can comfortable afford the bronc. If you’ll love it and get a lot of use out of it then sounds like it makes sense for you. That CD wouldn’t be a bad way to recoup some money in the safest possible way, but I’d personally just invest it in the market. I’d absolutely love having 60k around to invest during a crash. Start DCAing into an ETF through 2023/24 that covers a large portion of the market. Buy the dip and buy the rise after. I’d talk to a financial advisor about it. Buying a 4.24% CD in 08 sure would’ve brought poor results compared to how the market would perform. Especially when you seem to have the ability to be patient for at least a half decade.

Either way, enjoy your rig and congrats!

 

[dadjoke]

Oh. And do I open cd with same amount financed OR a little more to account for taxes paid on cd.

Thanks

I know there's four pages here and I promise I'll go back and read 'em, but ....unless you're trying to build your credit, you are better off paying the full loan off and investing (or opening a CD with) what remains.

 

[Roger123]

You need to factor in risk, if your Bronco (or house) was paid off would you borrow against it to invest? Of course not, why? Because you're factoring in risk.

If you have no payments and the world goes to hell (you lose your job, spouse needs to quit to care for a sick family member, you get fed up and want to do something else, etc.) and you have no payments AND money in the bank then you have peace.

Everyone will tell you "but if that happens then you just sell the asset or sell investments". If (when) the economy goes in the tank there's not gonna be a long line of people to buy your upside down Bronco that gets 16 MPG when gas is $6 and the market is down 50%.

Yes, it happens, risk is real and you cannot discount it when making financial desisions.

People that are not factoring risk into financial decisions have not lived through down markets (financial) or "normal" car times (i.e., there was a time when cars actually went down in value the second you drove them off the lot) and if you don't think it's coming again you don't understand reality.

 

[nwGTS]

TBill pays 4.4% for 26 week term. Auction (non competitive on new issue) is tomorrow at TreasuryDriect.gov. (Or buy from your favorite broker. No commission on TBills via Fidelity, Vanguards, Schwab, et al)
You're only locked in for 6 months. Then, you can spend it or roll it over or choose a different duration. They have TBills for 4 wks, 7, wks, 13 wks, 17 wks, 26 wks, 52 wks, et al.

Tbills are killing it right now and rates are going up. Its NOT a good time to lock into a 5 year CD...

^^^ This.
I Bonds and TBills will net you more than your CD and the gain is guaranteed unlike your ETFs or OTC trades.
I bonds are at record highs right now 9-10%. Dont know many who would say no to an annualized 10% guaranteed return. Everyone who can float $10k ($20k for married HHs) should have one.

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