17 August 2007

My car will be paid off in 2 weeks

At some point there was going to be a crossover, where it made my emergency fund balance better if I took money out of it to pay my car off (since I drop 3 payments from its calculation). That point is coming up at my next paycheck. Between the payoff amount, my reserve balance, and my paycheck, I'll come out ahead by paying the car off at the first of the month. Basically, right now I'm $1150 below where I want to be in my emergency fund. To make the payoff and pay my additional monthly bills, I have to pull $1150 out of the fund. By making the payoff, I reduce the need in my emergency fund by about $1800.

The net result? I wind up about $500 down from where I want to be, an improvement from $1150 down before the payoff. With my usual car payment out of the way, my emergency fund will be at full strength by my next paycheck, and I'll have the title in hand. It's a win/win situation and I'm thrilled that I'll be seeing a significant bump in my true take-home pay so soon.

I'm glad I waited the extra month to do this, as this is really the time it finally makes sense. After this payoff my only debt will be my mortgage! What a good feeling. As I've discussed, I consider this car purchase to have been a financial mistake . . . one that I plan to not repeat if possible. Will I have a car loan again? That depends on the terms and interest rates at the time. I don't plan to have one anytime soon though, and that's a nice feeling.

16 August 2007

Bit of a short-term dilemma

I have two voices in my head that are fighting each other a bit right now, as they have been for months. With a downturn possible (and now happening) do I keep investing regularly or do I sit on cash for awhile and wait for an opportunity? Well, the keep-investing-regularly voice won. and maybe it should have. But it puts me in an awkward position now.

I want to buy more. We're going to hit the bottom soon, IMO, and I simply don't have a large enough cash reserve to really make the play I want to make. I've been putting it into the market each month. The downturn doesn't scare me, and most of the money I have in the market was put in at levels lower than this, but it would be nice to be able to substantially increase some positions while investors are irrationally pessimistic.

But the only way to do that is to raid my emergency fund, which I'm not going to do. I have a car to pay off, but I likely won't do that for a few more weeks. I won't really be comfortable putting a BIG chunk into the market until a few months after that, when my cash reserves will be stable and my cash flow will be larger. So of course the contrarian in me is saying "I told you so, you should have saved up and waited." But what is a young investor to do? In the long term this decision may not make a huge difference, but I wouldn't be an investor if I didn't fret over such things.

So now a new question. Do I continue to nickel and dime into my Roth, or do I wait this time? The market is down, down, down, but I really feel that it is going to get worse before it gets better. The contrarian in me is now confused. He wants to buy but he also wants to wait because they may be an even better time on the horizon. That would also allow me to build some cash, finish the car payments, and just generally get myself less cash-poor. But I hate to do that when stocks are on sale.

Decisions, decisions.

06 August 2007

Don't let your life (or your finances) be ruled by dogma

I'm a nonreligious person. Not that this matters much in the context of personal finance, but it does reveal a little about my personality, my desires, and the things I allow to drive my way of thinking.

Specifically, I loathe dogma. Not the movie Dogma, which is actually pretty funny, but dogma in general. "Because it is" or "because it always has been" or "because that's how it's supposed to be" are not valid reasons for doing anything. Period. Make each decision with an eye on history and common thought, but with the bulk of your decision coming from an informed logical thought process.

I began to think about this when I saw a question about a car purchase asked on a popular investing message board:

I'm going to buy a new Honda within a couple of weeks. I have the total money for the car sitting in a Vanguard money market. I can get 2.9% financing for 3 years or 4.9% financing for 5 years. Is there any reason why I shouldn't do the 3-year 2.9% financing. My after tax return from the money market account (about 3.5%) is greater than what money markets are returning. In addition, it's nice to have that extra money liquid for a few years.
The basic question: if a loan makes me come out ahead, should I use the loan offer or pay cash?

I was not the least bit surprised to see two suggestions in response, each stated and seconded at least once by the board regulars (paraphrased):
  1. Your mistake is buying a new car. You'll do better financially if you buy a 1- or 2-year old car.
  2. It's always better to pay cash when you have the option.
Now, does this advice strike you as sound, logical advice? Maybe it does, because both ideas have been crammed down our throats in the personal finance community. But in fact these responses come so readily because they are dogmatic. They are true because they are true.

The truth in the matter is that #1 is usually true but not always, and #2 is false even more frequently.

First let's talk about #1, because I have purchased a new Honda in recent years, and also because, well, I labeled it #1. Some vehicles hold their value far, far better than others, to the point where the first-year depreciation is not very dramatic. Specifically I'm talking about Hondas and Toyotas here, which have proven over time to be reliable vehicles that are inexpensive to maintain. Their residual value is so good, in fact, that shopping for used Hondas and Toyotas can be very, very frustrating. We feel, as consumers, that in addition to a year's wear and tear, we ought to get a price break on a used car because, well, it's not brand new. And in fact, we are completely right when we're talking about most cars. But these days, there is very little premium to be had when buying a used Honda or Toyota. If it's a "certified used" vehicle, in fact, sometimes the used car is more expensive than a new one because there's an extended warranty built in. This has happened over time due to market pressures, to the point that many shoppers have concluded that buying new may be the more sound decision. I know my new Pilot, which I bought under invoice, was cheaper than any used Pilot I had found with under 30,000 miles. So while it is good advice to pay attention to used cars and what they may offer financially, to say that you are always doing better by buying used is not a statement based in logic or fact, but instead is one based on dogma.

Response #2 is fraught with even more problems because there is a clear, quantitative message that the loan is a better financial decision. A simple read will tell you that the original poster's cash works harder for him in his money market fund than it would if he sunk it into the vehicle. Not only that, but using the cheap loan allows him to keep more cash on hand for the life of the loan, effectively extending his emergency fund and giving him a more liquid overall financial picture. For the life of the loan, he will have the option to pay it off if that becomes the more sound choice based on prevailing money market rates. But he will also have the option of maintaining the payments for as long as he finds it to be to his advantage. Refusing the loan and paying cash closes off this second option unnecessarily, and will make him more cash-poor in the short term and less wealthy in the long term. So why, why, why, do so many people seem to say "buy with cash regardless?" DOGMA! another infuriating example of a failure to think because one thinks the answer lies within their tried and true dogma.

I could give a hundred more examples of misleading dogma in the personal finance area alone, and the problem infests our entire way of being in all other areas as well. Challenge conventional wisdom, peer pressure, and your own beliefs. Only by doing this will you truly make the smartest decisions in your life. Reliance on dogma can lead to poor decision making and, more importantly, a more feeble mind due to inactivity.

01 August 2007

Net Worth Update

One word for the market this month: UGLY. The US total market, as measured by Vanguard's Total Market ETF (VTI), dropped 4.6% in July. I had some domestic funds that fared better, and some that fared worse, but my international holdings helped soften the blow . . . a little. In total, my investments dropped 3.5% in July. This did offer a nice buying opportunity for my Roth IRA (bought Friday) and my employer retirement accounts (bought yesterday). However, those low purchases won't show much benefit until down the road a bit. For now, my net worth isn't looking so hot.

Since I started tracking in late February, this is my first period of negative change in Net Worth. I had quite a bit in new investments and debt reduction, but they were edged out by market losses. In total, my Net Worth dropped 0.3% from June 2 to July 1. It's not that bad in the context of the market, but you never like to be moving backward.

This month's setback means that progress toward my goal of 34.8% net worth growth this year falls back to about 22.3%. This is still ahead of the necessary pace, so if the market picks back up at all I am confident that I'll get there by next February.

My net investable assets (-0.4%) and net liquid assets (-0.6%) both fell this month, since they both have a higher correlation to the market than my net worth as a whole. Both were hurt significantly by market losses, and were not helped enough by new investments and debt reduction to offset the drop.

I'm not going to get down about this month's setback. I did my part, reducing debt, saving, and investing new funds, and it was simply a bad month in the market. This is going to happen from time to time and as long as I keep plodding ahead, I'll come out in good shape in the end. In a month where the market dips 4-5%, I consider only losing 0.3% in net worth a minor success.