[Financial Advice] - Buy an e30M or just keep on the road of debt free?

[uturn]

Op, if you don't already own an E30... get one to thrash until the house is paid off, then if you still want one then my friend has an E30M3 that he has squirrel'd away for his kids college fund. So there will be one on the market. But set your sights higher.... Alpina B6 E30

[Eric]

My wife and I do the Dave Ramsey budget to, and it is immensely helpful as our income is nearly 1/4 what it was when we first met since she has stopped working to peruse a nursing degree.

I wouldn't stop your plan for an e30 m3. They are good cars, but honestly they aren't worth 30k, the price will come down some, and I bet you can pick one up in 6 years at the same price/condition as the ones selling today, or maybe even less. Heck, with your saving skillset (unique in our generation) you could probably save for 2-3 years and bring over one of the rare models that America never got (checotto, cab, EVO, etc).

Having the house paid for by 32 is amazing, and will allow you to retire millionaire/multimillionaire if you invest at a decent rate.


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[Eric]

As far as I'm concerned, credit/FICO score is meaningless when you become debt free and choose to live your life that way.



Jon

I would suggest opening a credit cars that is never used. This keeps your score active. My wife did this and I did not. After 3 years her score was "omg that's an amazing score" (loan officers comment) co paired to mine, which was "it's not that you have bad credit, it's that you have no credit showing!"

I got a credit card that sits in a drawers just to keep my score active as we might purchase a house or something someday.


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[einhander]

Jon - M3 appreciation has likely peaked so if you wait some time, you might not have to pay the ownership deferment premium to get into one. Also, unless you buy at the very top of the market you're going to be spending quite a bit more each month on replacing things and that could get expensive very quickly.

What does the wife say?

[nrubenstein]

I respectfully disagree. I don't see how it would matter whether the rates were low or high, there is still a fee for borrowing the money for money that clearly i didn't have.

I want the freedom of knowing that i don't owe anything, and that anything i want and need can be purchased outright.

I guess what i'm saying that is i just don't understand why anyone would borrow to buy something that they clearly can't afford. The only reason i bought a house to begin with was due to the fact that interest plus utilities were still adding up less than us renting an 1 bedroom apartment.

Jon

*sigh*

This is one of the great misconceptions of debt.

Debt/leverage is a tool. There is nothing wrong with debt. It has costs and it has benefits.

For example:
You pay how much interest on your home loan? Hopefully it's 3-4.5% or so, assuming a 30-year conforming product. If it isn't, that should be fixed. (And if you are just absolutely unwilling to not pay it off early, switch to a 15-year or ARM product and get the interest rate really, really low.)

Anyway, just as one example, the NASDAQ's 5-year return was in excess of 20% per year. So if you had been putting the money that you have been using to pay down your mortgage into an index fund, you'd have been earning 20% and paying around 4%. Obviously, the last 5-year's bull market is WELL in excess of historical averages, but the long term average is substantially in excess of any mortgage rate that you are likely to carry today.

TLDR Summary: Paying your house down, instead of investing the same money is, on average, extremely expensive.

I grant that carrying debt decreases flexibility. It's not good in all situations, and it does increase your risk exposure. (Get too highly levered and outcomes are fairly binary - either you make huge multiples, or you lose a lot of money. I've been in deals with either outcome.) However, when the cost of borrowing is so low, parking money in your house where it can't appreciate is rarely a good choice.

Edit: To be clear, since it often matters to people in these discussions, we could be debt free tomorrow. We carry a mortgage because the marginal benefit of carrying one is greater than the cost. My great regret is that we didn't increase the size when we refi'd at 3%. That money does a hell of a lot more in our investment accounts than it does idling in the home.

[mrsleeve]

I agree that leverage is a tool, also if the cost of borrowing will cost less than if you were to put a equal amount into some investment vehicle that will return your interest and then some over a given time frame. To me this is the only way to barrow, if you want a new 150k house, you better have that 150k someplace that you can get to it with out too much penalty to cover the note if things go south.

It also depends on how you view your house, primarily as an "investment" or primarily as "a place to live" . The "investment" becoming a primary view point of home ownership, and one that "ALWAYS" appreciates is not a good way to look at things. As you say parking your money into your house may not be the best idea.

For us, a house is far more home than investment, if we like it and it works for us, and its affordable then so be it if we lose some cash on it then we do. Its not that things like saleability and value for dollar based on asking price are not considered they are of concern its just that a house is a place to live more than anything. A place that is YOURS, that hard times, a long stint of unemployment, or bread winner illness or disabling injury etc... means your not ending up on the street looking for a place to live after 90 days of missed payments.

Like I have said my situation is a little more unique with the nature of my business, the down turn of 08 I watched my family on my side and hers struggle and do things most people are unwilling to do to make their obligations. My inlaws are still stuck with a mortgage payment on a house that none of us have seen since 2012, and that was only a few days and had not seen since 2007 before that. It cant be rented, (too big and way to nice for the rental clientele in the area most are all section 8 ) and it cant be sold with out taking at least a 33% hit form purchase and nearly 50% hit from the top of the market appraisal in 2006. This albatross has greatly affected their lives as they have found a place they want to settle in, and where they wish to retire but cant unload the albatross hanging around their neck. When purchases in 200 it was a Good loan 25% down, less than 22% income/debt ratio, and not a supper expensive house, but the job market blew up in MI in 2004 especially for my FIL. My FIL has always ascribed to the leverage thing, and is still baffled that a house could lose value 15 years after purchase.

While I get that this is anecdotal and does not prove a point, other than some people are stupid with their money or are unlucky. To me it was a lesson that it can all go wrong despite the best laid plans. That debt will make you do things you never thought you would ever do, my self included. I got into my current line of business, due to my own debts, I had No choices if I were to make my obligations. I dont like having to go do something, I like choosing to go do what I want too. If that is working out on the road 10 months at a time with out seeing my family in return for $$$$$$ then thats my choice not my obligation. If I feel like taking a month, or a summer, or year off, my lack of debt allows me to do that with little trouble. If my industry goes bust for half a decade I am not stuck in a 350k mortgage scrambling to make the note on less than 1/3 of my former income. As I have gotten older I have begun to realize that maybe my grandparents were on to something with the whole live with your means, delayed gratification and not spending money you have not made yet.

[88Alpine]

You will never stay debt free for a long time, period. Heck, you are not even 34 yet. Even if you are, you can afford to take risks because you still have many years left in you life to recover for any failed attempts. Imo, people who are too scared to take risks tend to stay behind or do the same boring things all the time. "No risk no rewards" or "The bigger the risk the bigger the rewards".

Stop dreaming and looking at pics of the E30 M3 already. Buy it and enjoy it.

[mrsleeve]

Odd I know people that have been debt free for my entire life time, and then some... Wish I had listened to them more while growing up..

depends on what your happy with, stuff, or having the freedom to do what you want on your own terms. Until you have had both for an appreciable amount of time, its hard to be objective about it. I believe in no risk no reward, but when its your OWN money and not the banks, your more likely to consider your risk evaluation more carefully.

[88Alpine]

Funny and true story, I have friends who are also debt free that doubted a friend who took a large business loan to open a smog repairs shop. 7 yrs later, that very friend who owns the repairs shop paid off his loan and is about to open a second shop selling parts. Furthermore, he is tearing down his current home to build a new one...under his own design with a four-car garage to store his 2 e30 m3s and two other collectible cars. Oh, and for the debt free friends, most have one toy and whine everytime it breaks down or when we take extensive vacation.

My point is, be responsible and set how high you want your attainable dream to be.

[mrsleeve]

like I said its a tool and thats fine, everyone's situation is different. Not having debts I cant cover with in 30 days works for us just fine and is peace of mind I am willing to pay that price for. I do plenty well enough right now so I will keep on saving my pile of beans....

[bimmerman89]

That said, you clearly can afford it as you have posited this scenario. I agree that a lot of people over extend themselves, but nrubenstein is correct. Financial security isn't the absence of debt, it's the proper leveraging of the debt you have. Will the e30 M3 continue it's incredible price increase over the next few years? If you think so, then it might be worth it. You have to balance interest rates vs appreciation/depreciation vs inflation/deflation.
Some of these are speculation, but regardless any investment is a risk.

I guess it depends how you look at it, technically i can't afford it. I don't have all my debt paid (home loan) and no cash available to buy one as i'm working on paying my loan off.

I think the theory of financial security being a leveraging tool is only applicable if your net worth is positive. Would you agree?

Jon

[bimmerman89]

*sigh*

This is one of the great misconceptions of debt.

Debt/leverage is a tool. There is nothing wrong with debt. It has costs and it has benefits.

For example:
You pay how much interest on your home loan? Hopefully it's 3-4.5% or so, assuming a 30-year conforming product. If it isn't, that should be fixed. (And if you are just absolutely unwilling to not pay it off early, switch to a 15-year or ARM product and get the interest rate really, really low.)

Anyway, just as one example, the NASDAQ's 5-year return was in excess of 20% per year. So if you had been putting the money that you have been using to pay down your mortgage into an index fund, you'd have been earning 20% and paying around 4%. Obviously, the last 5-year's bull market is WELL in excess of historical averages, but the long term average is substantially in excess of any mortgage rate that you are likely to carry today.

TLDR Summary: Paying your house down, instead of investing the same money is, on average, extremely expensive.

I grant that carrying debt decreases flexibility. It's not good in all situations, and it does increase your risk exposure. (Get too highly levered and outcomes are fairly binary - either you make huge multiples, or you lose a lot of money. I've been in deals with either outcome.) However, when the cost of borrowing is so low, parking money in your house where it can't appreciate is rarely a good choice.

Edit: To be clear, since it often matters to people in these discussions, we could be debt free tomorrow. We carry a mortgage because the marginal benefit of carrying one is greater than the cost. My great regret is that we didn't increase the size when we refi'd at 3%. That money does a hell of a lot more in our investment accounts than it does idling in the home.

A fixed home mortgage sum of 200k for 30 years at 3.5% will accrue a total of 123k in interest during the life of the loan. In our current plan, the ratio of our early payments to the amount of differed interest is at 56% (and will keep climbing as the PMI ratio will invert). So in essence my return on all my early payments towards my loan had given me so far a 52% return.

From what you've mentioned in your edit, sounds like your net worth in assets and liquid is positive. Would my decision make sense to you if my net worth is negative?

Jon

[bimmerman89]

You will never stay debt free for a long time, period. Heck, you are not even 34 yet. Even if you are, you can afford to take risks because you still have many years left in you life to recover for any failed attempts. Imo, people who are too scared to take risks tend to stay behind or do the same boring things all the time. "No risk no rewards" or "The bigger the risk the bigger the rewards".

Stop dreaming and looking at pics of the E30 M3 already. Buy it and enjoy it.

I understand your point with regards to right risk and high rewards. I guess my wife and I decided to build our wealth more conservative and debt free.

Funny and true story, I have friends who are also debt free that doubted a friend who took a large business loan to open a smog repairs shop. 7 yrs later, that very friend who owns the repairs shop paid off his loan and is about to open a second shop selling parts. Furthermore, he is tearing down his current home to build a new one...under his own design with a four-car garage to store his 2 e30 m3s and two other collectible cars. Oh, and for the debt free friends, most have one toy and whine everytime it breaks down or when we take extensive vacation.

My point is, be responsible and set how high you want your attainable dream to be.

Interesting story on both accounts. I guess the choice that we made was to make investments after we remove all potential risks. Meaning pay off home, and then invest with cash and not by applying for a loan. Sure it will be a slower achievement, but it will be more stable with less risk.

Jon

[nrubenstein]

A fixed home mortgage sum of 200k for 30 years at 3.5% will accrue a total of 123k in interest during the life of the loan. In our current plan, the ratio of our early payments to the amount of differed interest is at 56% (and will keep climbing as the PMI ratio will invert). So in essence my return on all my early payments towards my loan had given me so far a 52% return.

From what you've mentioned in your edit, sounds like your net worth in assets and liquid is positive. Would my decision make sense to you if my net worth is negative?

Jon

No. It's even more important for you to put money into investments now, rather than later, as you don't have that much cash to invest.

Your return calculation is ignoring the money that you have lost by not investing the money that you are using to pay down your mortgage. To be quite frank, I don't really understand where you are getting your "52%" calculation from. However, a 52% return over 30 years is 1.4% annually. So that would be pretty awful.

As an example, $1 invested and averaging a 7% return will be $7.61 in 30-years. Every extra dollar that you put towards paying down your mortgage today is a dollar that you are not investing exactly when it is most important to do so! Very simplistically, if you had an interest only mortgage (I'm not advising this, but it's a handy reference), you would have paid $2.81 in interest on that dollar. What is your return? In that scenario, it's $4.80, or around a 5.4% average return.

All of this is predicated on not blowing the money, of course. The great advantage of a paid off house is that it's harder to spend it. Investment accounts are easy to siphon off.

[evandael]

I would advise against buying an M3 (or any car) as an investment. The bubble is growing unsustainably on investment-grade cars and will undoubtedly burst.. when? Who knows.


It also increases anxiety of having it damaged or worn, when the main motivator for buying a car should be to drive and enjoy it.



Also debt and credit (while scary) != stupid. You have to understand it and use both wisely.