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
- 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).
- 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.
So what changed my mind?
- 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.
- 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.
- 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.
- 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!