‘I'd like to keep an emergency fund of $20k and just buy the car in cash’: I have $70K in savings, a mortgage, and a student loan. Should I use $50K cash for a new car?

Hi Money Minder,

So, I’ve got a Rav4 Prime—yeah, it’s around $50K, if that matters. Been stuck with a clunker for like a decade, and it’s finally biting the dust. I’m 27 and just snagged a small house.

Income: $105K per year before taxes. I can pull in an extra $25K if I do overtime.

Debt: Mortgage is $240K at 7%, which costs me $2300/month. I’ve also got a student loan that’s $20K at 3%, with an $800/month payment.

Savings: Got $70K chilling in a high-yield savings account and $75K in retirement funds.

I’m thinking of keeping a $20K emergency fund and paying for the car in cash with $50K to avoid another loan. I take good care of my cars and plan on driving it until it dies.

Is this a smart move, or totally crazy?

Thanks,

Always Wondering

Response from THE MONEY MINDER:

Hello There,

Congratulations on your new house and for maintaining your financial discipline over the years. It’s impressive that you’ve been able to save so much while managing your debts and making a significant income. Concerning your decision to purchase a new Rav4 Prime with the funds you have saved, there are a few points to consider to ensure it is a sound financial move.

Firstly, your desire to avoid another loan is understandable, particularly given your existing liabilities—a $240k mortgage at 7% and a $20k student loan at 3%. Allocating $50k in cash towards the car does allow you to avoid additional monthly payments and interest expenses, thereby simplifying your financial commitments. Given that you baby your cars and plan to keep this one until it dies, it seems like a rational long-term investment and could potentially minimize future repair costs common with older vehicles.

However, you currently have $70k in your High-Yield Savings Account (HYSA) and plan to maintain a $20k emergency fund. Using $50k from this account would deplete your HYSA, leaving you only with your emergency fund. While your HYSA can be rebuilt over time, having a larger liquid reserve is generally advisable, especially as a new homeowner who may face unexpected expenses like repairs or maintenance.

A realistic and practical approach might be to consider financing part of the car purchase. Auto loan interest rates are often lower than mortgage rates, and financing a portion of the vehicle would allow you to retain more liquidity. Given your strong income, including potential overtime, you could manage a reasonable car payment without compromising your financial stability. For instance, if you finance half of the car’s cost ($25k), you could maintain a healthier balance in your HYSA and still avoid overburdening yourself with another large monthly obligation.

As an alternative, you could also explore the possibility of refinancing your mortgage to a lower rate if market conditions allow. Lowering your mortgage rate from 7% to a more manageable figure could free up additional funds each month, making it easier to absorb the cost of the new vehicle.

In conclusion, outright purchasing the vehicle in cash is not necessarily a bad decision, but considering a financing option could provide a more balanced approach, keeping you well-prepared for any unforeseen expenses. Make sure to continually reassess your financial situation to align with your short-term and long-term goals.

Best of luck with your decision, and may your new car serve you well for many years to come.

Kind regards,
THE MONEY MINDER.