If you Vintagers don't mind, I'd appreciate a bit of financial advice from those who could speak from experience, and possibly set my logic straight.

To wit:

In the last 17 months, I've been paying down the loan on my S very quickly, and at this point I've pretty much paid off half of my $30K 60-month loan (4.29%), which feels great because I can see that my monthly interest payments have dropped accordingly. It's nice when I see that my next payment isn't due for over a year.

With the recent thread regarding the Federal Debt Limit increase (and what I anticipate to be a period of accelerating inflation, stagnant economic growth, and the decline of the dollar vs the euro and the yen), I've started looking into fixed-income investments to try to hedge myself.

But-- and my logic might be flawed here-- it seems to me to not make any sense to put money into a fixed-income vehicle (such as a bond, CD, etc.) if the interest rate that it pays is less than the interest I am paying for my car loan.

That is to say, if I have $1000 cash currently, if I put that towards my S2000 loan, that is $42.90 less of interest that I have to pay for that loan over the next year (approximately anyway, since not all of it would go towards the principal). So if I were to invest it in a bond, it would only make sense if that bond had a coupon rate of better than 4.29%... and good luck finding one like that that isn't a junk bond, especially with such low interests rates.

On top of that, for those who carry a balance on their credit cards with their high interest rates (and the fact that the interest compounds daily), it *really* seems to me to make sense to sell any and all investments in bonds or stocks whose rate of return is less than the interest rate and put that money towards getting out from under the CC debt. (Which is why I never really carry any CC debt.)

(I'm not mentioning home loans, because with a home that is an appreciating asset, and so the cost/benefit analysis is a bit more complicated. Besides, I can't afford any home I'd want to live in... not here in the SF Bay Area anyway )

So... and I'm seeking opinions here... I'm thinking I should just continue paying down my S2000 loan, with it's 4.29% loan until such a time that interest rates rise high enough that it would make more sense for me to start shielding my money in safer investment vehicles such as I-bonds or municipal bonds.

Thanks for all the input, and thanks to ralper for mentioning (and educating me about) munis in that other thread, as I hadn't previously considered them and their tax saving opportunities.

 

While your logic is sound, it has a few flaws.

The car is a depreciating asset. Thusly, paying it off quickly not only reduces debt, it protects your investment should you want to trade that asset for another.

While not holding fixed income (or rather fixed rate) vehicles when they pay less than the interest in your loan might look good on the face, the fact is, it makes sense to have your money in an appreciating asset. It also makes sense to diversify your funds, as if natural disaster struck and your car was lost, you'd be out your substantial investment in it.

Low balances on credit cards is always a good idea, and with each on time payment, you make an investment in your credit, which is always a good thing, even if it costs you money to do it.

So, in looking at your overall financial picture, it's pretty normal to:

1. Have 1-1.5 years worth of salary in funds you could get to in 30 days time.

2. Have 3 months worth of funds in cash or cash-like instruments.

3. Structure your debt so that you are paying as little interest as possble, and the value of your debt (house or car) is worth more than your remaining payments (don't be upside down).

Beyond that, you can either work to reduce debt, increase long term savings, or simply spend money. But until those 3 are in place, I'd be working hard to get them done.

Others will surely have other varied opinions.

 

Trit,

It helps to know how old you are and what your goals are. It also helps to have an idea of your income and savings, but I don't recommend you post too much personal information here.

Paying the car quickly makes sense if, as you say, you don't think you can do better with your money. Still, more info would be needed to give you any real advice. First, do you plan to keep the car long term? By that I mean do you want to keep it longer than the life of the loan? If so, then you have to be sure that you cannot find any investments that will pay better than 4.3% annually over the next few years. Plus, now that you have accelerated your payments, I think you have effectively lowered your interest rate for the remainder of the loan. I'm not sure how your loan is structured, but I think you referenced that you now see more of your payment going to principle.

If the money you are using to accelerate your car payments is money you can invest long term (say 10 years) then you might consider some growth equities depending on your sensitivity to risk. I prefer mutual funds because I have no interest in watching the market or doing a lot of research of individual stocks, but you may like doing that. If the money will be needed short term, then the safer investments you mentioned might be preferable.

With interest rates expected to rise, many think this is a bad time to get into real estate, especially if it is your first time and you are not sure how long you will stay where you are. Still, others think the interest rates for mortgages will go up and make homes less affordable without lowering property values too much. Personally, I think real estate is a crap shoot right now, so don't feel too bad about not being able to afford to get in at this moment.

 

[QUOTE=SCoach,Nov 23 2004, 07:26 PM] While your logic is sound, it has a few flaws.

The car is a depreciating asset.

 

Hi Bill,

I agree. Without delving too deeply into my finances, I'm just wondering if I'm missing something.

See, I was contemplating selling some winner stocks and purchasing some I-bonds in the next year (since I anticipate a market turn-around and rising inflation, and I could be wrong about this too...)

But then, when I was doing the math for I-bonds (or munis, or most other investments), I came to realize that any money that I invested and thus didn't use to pay down my car payment has to earn me atleast 4.29% after taxes for it to be worthwhile. And it got me thinking that there might be some Vintagers (and others, really) who could be buying bonds and saving $, but really would do better to put all their money into paying down debts on depreciating (non-property) assets.

(BTW, my auto loan is a simple interest 60-month loan @ 4.29%. I'm paid way ahead, so my next payment isn't due for 12+ months. Since I've paid off half of the principle, the amount I pay in interest each month is thus 50% less than what I paid when I first got the loan.) And you asked how long I intend to keep the car... I intend to keep it for many years to come.

Regarding investing long-term in a mutual fund, I would normally agree that it's probably a good investment, as many mutual funds (or a properly researched stock, for that matter) will return better than 4.29% APR over 10-yrs, and having the long time horizon will smooth out any dips in the intervening years. Since I anticipate a coming dip in the market (that is to say, a correction) and rising interest rates, my near-term (2-4 yr) investment desires leaned towards something that shields well against inflation, such as I-bonds, or perhaps munis within my state, which are tax-free.

Regarding real estate, that's a whole 'nother beast. It seems like the best time to have bought into the SF Bay Area is 10+ yrs ago. You're right about it being a crap shoot, but with my current finances it's a moot point. The houses I could afford to buy are either too far, or not desirable enough for me to live in. So I'm just investigating where to put my cash; bonds, or pay down my debt.

I appreciate your input!

 

Keep paying down your loan- you're on the right track. The only reason I see not to, would be if you found a fixer-upper you could get into. You won't go wrong in real estate in the Bay area. We've had periods of slight decline, but the other periods of growth make up for them, plus. Ppl on the other coast don't understand the Bay area unless they have lived here. (no offense to anyone here)
Also don't skip any payments even though you have paid a year ahead, unless you are sure you can. Some loans require a monthly payment (the minimum) be paid each and every month even though you may be making additional principal payments with each monthly payment.