Help a Reader: What to Do with Money

Here's an email I recently received:

I'd love your readers' ideas of what to do with $6000 that I would like a sure return on. I put my retirement money into index funds, but this is to pay off a car loan.

We have about half of the money needed to pay off the remaining $14,000 on our car. Our car loan is a 0% loan and there is no benefit to paying it off early (except more monthly cash flow). What should I do to make the most of $6000 that will eventually be needed to pay off the car loan?

Since we'll need to be making $380/month payments for three more years, my first thought was a CD ladder with CDs maturing monthly.
Since this is money to pay off a debt, we don't want to put it into any thing speculative, but we'd like to get more than the 3% it's making in our ING savings account.

Other factors:

• We're aggressively adding to the car money till we have enough to pay it off in full, some time in early 2009.
• INGs CD rates are 4% for 1 year CDs and 4.5% for 18 month CDs.

What would you tell him to do?

Comments

[Kevin M]

For me the lack of flexibility of a CD is not worth the extra 1% annually. I'd probably just keep it in the ING account and have it easily accessible. I'm not sure a vehicle (no pun intended) exists that is safer than cash and earns more than the 3%.

Add to that the fact that you're going to pay it off in early 2009 (not even a year away) - so why waste the time setting up a CD ladder that will end in less than 6 months? I bet the monthly CD rates aren't much better than the cash.

[Andy]

They are not going to pay the car off in early 2009, they will just have accumulated enough money to do so. They will pay the car off 3 years from now.

Setting up some CD ladders is a sure fire way to get a better return than the high-yield savings account. I'm not sure of a much safer way. My guess is the yields on savings accounts will be going down in the near future since the latest 50 point rate cut.

But, if you don't have much of an emergency fund, you may want to keep it in your high-yield account and just put the money back when you are able to.

[dr. blues]

i know the (stock) market is scary right now. but there are some places to make a decent return on your money. i won't name any particular stocks 'cause i don't want to be accused of hyping something i long in. look in the energy sector particularly oil and gas mlp's (master limited partnerships) and (canadian) energy trusts. these companies have a structure that requires them to pass profits on to the share holders. most are paying 10%+ annually. some of the canadian energy trusts pay dividends MONTHLY!. do your due diligence; diversify; good luck.
ciao...dr. blues

[Jim]

Setting up CD ladder would be a guaranteed way to capture a decent and safe return.

Kevin raises a good point about the CD locking the money away. Do you have a sufficient emergency fund outside of this money? If not then maybe you should keep the money liquid in case you need it in an emergency like loss of job or illness. Otherwise if you're setup fine financially otherwise and have no other expectation you might need money then the CD is a good route.

I am assuming you don't have other debts outstanding like a credit card loan? If you did have something like credit card or other loans with a higher interest rate then you'd be better off paying back a loan with the money rather than putting it in a CD. Avoiding paying interest 10-20% is a better return than gaining 4% on a CD.

Jim

[Ben]

As Dave Ramsey would ask, "would you borrow money to invest it?" Most of us wouldn't, even if the math might suggest otherwise. I say get debt free and then invest.

[JimL]

Sell the car and buy something cheaper that does not have a loan. You can then keep the $6K and eliminate the payment.

[ignorance_intolerant]

I think being debt free should be more important. I agree with Ben.

[Miss M]

I just paid off my car 15 months early, I stashed my cash in my FNBO Direct account until I had enough to pay it off in one lump sum. Their rates are a little higher than ING. I wanted to keep the money liquid and accessible in case something else came up that I needed the money for. They are still at 3.5%, not much of a difference from the 4% CD and much more flexible.

[segfault]

It's different when you're talking about 0% loans and a guaranteed return... Would I borrow money at 0% to invest it in an FDIC-insured CD? Heck, yes!

[Richard]

Hi, original poster here.

@Jim
"Do you have a sufficient emergency fund outside of this money?"
Yes, we have enough to live for 3 or 4 months with no more employment and are contributing from each paycheck into a Roth IRA.

@dr. blues
"i know the (stock) market is scary right now."
I'm not scared of the stock market. The money I have going into my IRA goes right into index funds. I'm in this for the long run. But this money effectively isn't mine, it's for paying back debt, and I'm not willing to gamble with it regardless of the odds.

@Ben
"would you borrow money to invest it?"
We've already got the loan, so now the question for me is "how do I get the most out of the situation"

@JIM
"I am assuming you don't have other debts outstanding like a credit card loan?"
We'll have my wife's student loan to start paying off eventually, but she's still in school and we're saving to be able to pay it off before they start charging interest.
Credit Cards are paid off every month. We haven't paid interest in years.

[Dave Farquhar]

Staggered CDs are your best bet. They give the best balance of rate of return, safety, and flexibility for a short-term investment. I paid my college tuition by staggering my CDs every 6 months. It worked out well.

I don't like the idea of dumping the $6K into stocks. Yes, you could get a nice double-digit return on it if you bet right. But when the time comes to pay the car off, the stock could just as easily be down double digits. Any healthy company's stock will eventually rebound, but there's no way of knowing when. If you can't stay in the stock market for at least five years, you shouldn't do it.

[Patrick]

I wouldn't pay off the car since it's a 0% loan.

I'd put the 14k ($6k now and future payments through 2009) in a CD ladder or high interest savings account and consider the car paid off in my mind. The money IS there if for some reason it became imperative to pay off the actual loan. I'd get the same peace of mind having the money on hand to pay off the loan as I'd get from actually paying it off.

You get the benefit of earning interest on 14k now, possibly boost your credit score by making on-time payments for three years, and have the money for an emergency if needed.

Unless freeing up the cash flow of the combined car loan and savings payments gives you a better opportunity to invest the money.

[Bob S]

I lot of Dave Ramsey types won't like this suggestion, but at these discount prices, I'd put it in stocks. Dollar cost average it into stocks over the next few months.

[Gino]

HSBC just sent me an email advertising a 6 month CD at 4%. Pretty good return, pretty short amount of time to lock up your money. I love their high yield savings account I have with him.

Bob S,

Actually Dave thinks it is a good idea to keep investing on a dollar cost average basis.

Dave would also tell this person to sell the car and not have a loan. He would then not have a payment and keep the savings.

[medgar]

I would not hold on to it. Just send it in to the bank. There is less chance to spend it.

Smartypig is offering 3.9% and you can set up pay car off as a goal.

[gdrmuzak]

Unless you make more than 6%+, you're not going to beat your savings rate AND taxes which you'll pay on the interest earned, so you'd actually lose money because of taxes.

If you really want to build wealth, sell the car, use the $6k to pay cash for a good vehicle, and invest the resulting payment savings.

[jr]

This is all too confusing, you simply need to send it to me. I will invest it wisely. :0)

While there's no reason to be concerned with the loan's existence if you are disciplined, I am not sure just paying off the loan early is that bad of an option. Even assuming a generous 5% with all the money locked up until the end of 3 years, you are talking about 970 dollars in interest income compared to probably 270 in interest income (assuming you've paid of the loan in a year and then are investing the monthly car payments at 3 percent for the remaining two years). I'm not saying don't do it, but just keep in mind that you are talking about only 700 bucks three years from now. If typing up $380 of your monthly cash flow for three years is worth the equivalent of two month's of car payments in interest income to you then of course do it. But at least that's the realistic perspective on the trade off.

meant tying up