Smart Reasons to Save, Use and Invest Money

Back In Debt But It’s Different This Time

Well, I decided to break down and buy a new car (a 2010 Toyota Camry, not sexy but nice) for $15,500 so I’m back in debt but it’s different this time, really!

First let me say that I put down $5,500 on the car to make the amount that I’m in debt for equal to $10,000.  There are two reasons I wanted my debt to equal $10,000

  1. I honestly believe that I can make a better return in investments (even with a small increase in the amount that I might pay in taxes next year).
  2. I wanted a simple number for reporting on in this blog.  This was a minor factor, but still a factor all the same.

What you may or may not know is that I was debt free (including my mortgage) before buying this car.  And actually I think I blogged about how nice it would be to never be in debt again.

toyota camry 2010

So what changed my mind?

  1. With my excellent credit score (811 at the time of purchase), I was able to get an additional .5% of a percentage point off the interest rate for the loan.  I believe it made the rate something like 2.5% for the loan.
  2. I’m pretty sure with just a little effort, I can buy investments that can beat that 2.5% interest rate that I would have to pay on the loan.  With low-risk but optimistic investing and barring a market meltdown, I should be able to easily beat the 2.5% yield.
  3. I’m working on a strategy for three future car purchases spaced about 3 to 4 years apart.  This future purchases will include a replacement vehicle for my wife, and two cars for my kids.  Sounds like a lot, but most likely the two cars I buy for my kids will be used and the total of both will cost less than my wife’s replacement vehicle.
  4. If you are financially oriented (like me), sometimes taking on debt for other financial opportunities makes sense and can be the more prudent route.  This might sound a bit odd coming from a guy that paid off his house in about 11 years, but it’s all simple math.

Here’s the kicker, I could have bought my car outright from money that I had in my investments.  Actually, the money was even sitting in cash, so I wouldn’t have even had to incur any capital gains tax on any investments that would have been sold.

So if I had the 10k sitting around doing nothing… what am I going to do with it to make use of it instead of paying off my car?  Ah, that’s the question!  Currently, I’m leaning towards investing in a safe solid utility company that pays out a respectable dividend.  But in the mean time, it’s still sitting in cash.

After I find out the new tax rates on dividends, I’ll make a move at that point in time.  This entire process if evolving and will change dramatically in the next few months.  Stay tuned!



6 Responses to Back In Debt But It’s Different This Time

  1. 2.5% is nothing. I agree. With my lending club account, I’m still getting over 13%… so the math makes it pretty simple. However, debt CAN be a dangerous of game of keeping someone working longer than they have to (this is obviously not the case for you).

    • Sounds like that Lending club is really panning out well for you! Great find!

      I definitely agree about debt, and if the interest rates were a little higher on them, I think I would have paid my car off in full (although doing so would have definitely made me sad…)

      I came up with this strategy on a whim, and for blogging content. It seems like a good experiment.

  2. I have not opened a lending club account yet….but am considering it (as I read posts from around the PF blogosphere with great returns).

    Have you had any negatives from lending your money there?

    • I’m with you Amanda on not opening a lending club account yet, but the more I hear, the better it sounds all the time!

      I’m really thinking about trying one with just one or two thousand to start with. To learn the ropes so to speak. It’s good to see “20’s Finances” is crushing with it!

  3. Wow 2.5%! Just got approved for a 3.375% 30 Year fixed mortgage…I always thought I was going to be one of those guys that finished up their mortgage ASAP but at 3.375% tax deductible, what’s the point?

    • I totally agree! If fact, I’m betting I can get a better return on my auto loan that if I paid it off all at once. I never thought I’d be taking on debt again, and doings so happily. Go figure 😉