Can I afford the FRS/BRZ? Please help me decide.

[kilrb]

Originally Posted by LeeMaster

Edumacate me.

My local Bank is offering a rate of 1.35% on a 5 year CD. I was using that number to be fair;using a rate from a shorter term would make my point even stronger.

[rmjjensen]

Unless you're truly happy at your current job, you need to go on monster and search for a new one. I also have a BS in Computer Engineering and my first job out of college at 21 years old paid 52k/yr (gross). When I was 26 I had doubled that and was making 6 figures.

For my first car, I was in a similar situation - I had no debt (although I did have student loans) and had very little expenses. I bit the bullet and financed my first car at a whopping 9% interest rate (I had no established credit - "student loans don't count"). You know what you can (and can't) afford.

Go for it, why not? And also, shop around for financing - don't just take the rate the dealer gives you - I will never make that mistake again. Credit is cheap now a days. People are bragging about paying for their car in cash - what stupidity. You could borrow @ 1-2% (on 20-30k the interest accrued is negligible) and instead invest that huge lump sum (mix of stocks and corporate bonds).

TL;DR; If you don't love your job get a new one, shop around for financing, buy the car!

[Turbowned]

Originally Posted by bdub85

Investing in a 401k > buying a new car.

I started my 401k at 21, and it's up to 100k now. (I just turned 27)

This is why I don't want to get the car. I'm torn between investing and having any reasonable amount of wealth in my lifetime and enjoying life right now. The way I see it now is, I haven't been able to save any money thus far, and I'd probably continue to dump my savings into old cars, so might as well dump it into a new car that will retain some measure of value in the next 5 years. As opposed to my '87 $#!tbox that isn't worth hardly anything. I do need to start a retirement account immediately, though. I've got a little put together but it ain't much.

[Celica00]

dont make my mistake. i was making 2600 a month and that a 440$ a month payment was no biggie. which it wasnt, until i got laid off. then 440 became a shitload. plus the 200$ insurance and the 150-200$/month gas. then rent and eating, of course. i'm too upside down to be able to trade it in so now all i can do is work 50 hours a week in a lame ass minimum wage job until i find something better. while going to school.

[silverlegacy]

Originally Posted by kilrb

Question: Why would you borrow $25,000 at 2.9% so that you can buy a CD at 1.25%? If your answer is liquidity, I can understand. If you are saying you're getting ahead by borrowing at a higher rate than the rate of return you can get on your cash, I'm interested in hearing the logic...

There are multiple factors when it comes to this, but here are the basics.

Let's be generous and say that a car loses 50% of its value over 5 years. That $25k car, just became a $12,500 car (using time value of money @3% that is 10,785 in today's money). So that $25k isn't being used for you, it is being used against you. It is being invested in a depreciating asset. You lost over $14k in value putting your money there.

Now there is the time value of money. A low, but good estimate here would be about 3%. So every year that passes your money is worth 3% less than it was the year before. It is smart to use that to your advantage. A 60 month loan $25,000 loan @ 2.9% is about $448 a month. By the end of that 5 years, that payment will be the equivalent of $386 in today's dollars (after 1 year that payment is already down to $435). In essence, if the interest rate is less than the time value of money, you actually start saving money the longer you borrow it. In this case the normal 3% out paces the 2.9% and the interest paid is nullified by decreasing worth of the dollar (barely as the difference is pretty low, so I will ignore the difference for the rest of this - if it was 0% loan it would make a much larger difference).

So now that you haven't used that $25,000 on a depreciating asset, and the interest costs are nullified by the time value of money, you can starting having that $25k work for you instead. If you put the money in a CD, you are not going to get the value out of it that you should, but let's just say you can get 1.1% on a CD. You have 26,405, but in today's money that is actually 22,783. That is a bad investment, but you still gained 12k in value over just buying the car outright. If you take that money and invest in some semi liquid assets in some stocks and bonds. Being conservative that should gain over 5%. That 25,000 then becomes 31,907, in today's money that is 27,530. A gain in value of $17k in today's money. Now if you really want to be picky you can include the total interest costs (which IMO are nullified by time value of money), on that loan ~1,900... so you could take that and subtract that out of the numbers above and you still make 10 and 15k respectively.

Now those are rough numbers, but should give the idea of what is going on. Even a low rate CD is advantageous over putting your money in a depreciating asset. All payments on depreciating assets should be delayed as long as possible as long as the time value of money outpaces the interest rate and in some cases as long as the time value of money + depreciation rate out paces the interest rate.

Clear as mud right?

[kilrb]

Originally Posted by silverlegacy

There are multiple factors when it comes to this, but here are the basics.

Let's be generous and say that a car loses 50% of its value over 5 years. That $25k car, just became a $12,500 car (using time value of money @3% that is 10,785 in today's money). So that $25k isn't being used for you, it is being used against you. It is being invested in a depreciating asset. You lost over $14k in value putting your money there.

Now there is the time value of money. A low, but good estimate here would be about 3%. So every year that passes your money is worth 3% less than it was the year before. It is smart to use that to your advantage. A 60 month loan $25,000 loan @ 2.9% is about $448 a month. By the end of that 5 years, that payment will be the equivalent of $386 in today's dollars (after 1 year that payment is already down to $435). In essence, if the interest rate is less than the time value of money, you actually start saving money the longer you borrow it. In this case the normal 3% out paces the 2.9% and the interest paid is nullified by decreasing worth of the dollar (barely as the difference is pretty low, so I will ignore the difference for the rest of this - if it was 0% it would make a much larger difference).

So now that you haven't used that $25,000 on a depreciating asset, and the interest costs are nullified by the time value of money, you can starting having that $25k work for you instead. If you put the money in a CD, you are not going to get the value out of it that you should, but let's just say you can get 1.1% on a CD. You have 26,405, but in today's money that is actually 22,783. That is a bad investment, but you still gained 12k in value over just buying the car outright. If you take that money and invest in some semi liquid assets in some stocks and bonds. Being conservative that should gain over 5%. That 25,000 then becomes 31,907, in today's money that is 27,530. A gain in value of $17k in today's money. Now if you really want to be picky you can include the total interest costs (which IMO are nullified by time value of money), on that loan ~1,900... so you could take that and subtract that out of the numbers above and you still make 10 and 15k respectively.

Now those are rough numbers, but should give the idea of what is going on. Even a low rate CD is advantageous over putting your money in a depreciating asset. All payments on depreciating assets should be delayed as long as possible as long as the time value of money outpaces the interest rate and in some cases as long as the time value of money + depreciation rate out paces the interest rate.

Clear as mud right?

I could agree with your logic if the question was "I have $25,000. Should I buy a car with it, or keep the one I have and invest the money in a CD?" To answer that question by saying that you'd be better off investing your money in a low yielding CD as opposed to a depreciating asset is perfectly sound reasoning.

The way I see it however, the question is "I'm buying a car. Should I borrow or pay cash?" It's a given that you're buying a car; the negative rate of return on that investment is what it is, regardless of whether you pay cash or finance it.
If you have the $25,000 and choose to invest it at 1.25%, but by doing this, it requires you to borrow $25,000 at 2.9%, your investment is yielding less than the cost of borrowing the money. The depreciation of the car doesn't factor in, since it's a constant in both equations.

To put it another way, here are the equations.
Rate of return for borrowing = ($25,000 @ 1.25%) - ($25,000 @ 2.9%).
Rate of return for paying cash = ($0 @ 1.25%) - ($0 @ 2.9%).

[silverlegacy]

Originally Posted by kilrb

I could agree with your logic if the question was "I have $25,000. Should I buy a car with it, or keep the one I have and invest the money in a CD?" To answer that question by saying that you'd be better off investing your money in a low yielding CD as opposed to a depreciating asset is perfectly sound reasoning.

The way I see it however, the question is "I'm buying a car. Should I borrow or pay cash?" It's a given that you're buying a car; the negative rate of return on that investment is what it is, regardless of whether you pay cash or finance it.
If you have the $25,000 and choose to invest it at 1.25%, but by doing this, it requires you to borrow $25,000 at 2.9%, your investment is yielding less than the cost of borrowing the money. The depreciation of the car doesn't factor in, since it's a constant in both equations.

To put it another way, here are the equations.
Rate of return for borrowing = ($25,000 @ 1.25%) - ($25,000 @ 2.9%).
Rate of return for paying cash = ($0 @ 1.25%) - ($0 @ 2.9%).

The depreciation of the car is constant in both equations, but where your money is tied up in (losing money) and how much it earns for you is different. With a car you are always losing money on it (unless you have a classic car). In other words that money you 'invest' will always lose money, and it is best to you somebody else's money to pay for it when you only have to pay a small amount of interest on the loan. Then use your money to work for you. I'm not saying that this is the way that anybody should be buying their cars (I could personally care less what anybody does), but that it is the smartest way to use your money (if that is your only concern). Invest in appreciating assets, borrow for depreciating assets.

Now if you want to get technical you could run something that shows takes out the car payment every month from that amount. Basically put 25k in some sort of savings, and pull the payment out of that bit by bit. You would still end out on top, by doing that. That would be far too long and boring that it would turn everybody off on the subject (it would be the ramblings of a mad accountant). So the basic theory is above, nobody really has to subscribe to it if they don't want to. I know from life experience that this sort of thing works, and works very well.

[Dadhawk]

Originally Posted by silverlegacy

...Clear as mud right?

Or, you could spend the $25K now, save the interest over the two years, and dollar cost average what would have been the car payment into an investment and end up in relatively the same place, or better depending on market conditions, without the risk (and yes, there is one) of carrying a loan.

Also, on the investments in your example you are leaving out the taxes you would need to pay to realize your gain.

We've gone around this many times on the forums here. It's a polarizing issue (almost as much as AT vs MT). In the end, the OP just has to decide how they prefer to handle their money.

[silverlegacy]

Originally Posted by Dadhawk

Or, you could spend the $25K now, save the interest over the two years, and dollar cost average what would have been the car payment into an investment and end up in relatively the same place, or better depending on market conditions, without the risk (and yes, there is one) of carrying a loan.

Also, on the investments in your example you are leaving out the taxes you would need to pay to realize your gain.

We've gone around this many times on the forums here. It's a polarizing issue (almost as much as AT vs MT). In the end, the OP just has to decide how they prefer to handle their money.

There are a lot of variables... too many to go through on here. The realized gains on those numbers above would likely be higher than the 5% if you were smart about your investment, and the tax rate is so low on capital gains that even with the taxes added on to it, it doesn't make a material difference in the calculation. 15% of the gain is at most on any of those ~1000.

Also 1900 + any interest is over 12* lower than 25000 + any interest.

[lemonspeakers]

Originally Posted by Dadhawk

We've gone around this many times on the forums here. It's a polarizing issue (almost as much as AT vs MT). In the end, the OP just has to decide how they prefer to handle their money.

Well, lets say I keep my current car and make pretend payments each month for $400 into a car savings account for the future. When I finally have enough to buy a brand new 20K car, I don't think I'll want to put it all down immediately, do I?
Let's say I was able to get a super-duper low interest rate at 0.95% for 3 years. What are better ways of stretching that saved up money for the next three years rather than using it all immediately on that car?

[russv]

Something my father (depression era kid) always told me when I wanted to buy something: "Do you really need it"?

[strat61caster]

Originally Posted by russv

Something my father (depression era kid) always told me when I wanted to buy something: "Do you really need it"?

I think I speak for all millennials; "No, but I want it and I want it faster"

[Dadhawk]

Originally Posted by lemonspeakers

Well, lets say I keep my current car and make pretend payments each month for $400 into a car savings account for the future. When I finally have enough to buy a brand new 20K car, I don't think I'll want to put it all down immediately, do I?

You have to answer that question for yourself. For me, if that is the reason I have been putting the money in savings, yes, I would write the check and be done with it. It's how I'm wired.

Originally Posted by lemonspeakers

Let's say I was able to get a super-duper low interest rate at 0.95% for 3 years. What are better ways of stretching that saved up money for the next three years rather than using it all immediately on that car?

It depends on how you look at "having" money. From a pure net worth prospective, you don't "have" the money if you owe it to the bank. To me, it's the same logic as "you have to have a mortgage so you have a tax deduction". I'd rather give $25 to Uncle Sam than give $100 to Bank Of America to avoid giving Uncle Sam the $25. I'll keep the $75 and do something with it.

I know I'm wired differently than most Americans when it comes to my view on this, and I'm OK with it. Finance is as much a personal decision as it is math. You have to go with what works for you.

[silverlegacy]

Originally Posted by Dadhawk

You have to answer that question for yourself. For me, if that is the reason I have been putting the money in savings, yes, I would write the check and be done with it. It's how I'm wired.



It depends on how you look at "having" money. From a pure net worth prospective, you don't "have" the money if you owe it to the bank. To me, it's the same logic as "you have to have a mortgage so you have a tax deduction". I'd rather give $25 to Uncle Sam than give $100 to Bank Of America to avoid giving Uncle Sam the $25. I'll keep the $75 and do something with it.

I know I'm wired differently than most Americans when it comes to my view on this, and I'm OK with it. Finance is as much a personal decision as it is math. You have to go with what works for you.

I agree with this 100%. It is all in how you view it, and how much effort you want to put into it. With more risk comes more reward, but not everybody wants to take risk (understandably so).