It’s another Q&A Edition of Optimal Finance Daily: Episode 1553. Today's questions are on investment strategy and car loans.
And I’m your host and personal finance enthusiast, Diania Merriam. We are going to change it up today and address some audience questions on the show. But quick disclaimer, just like all the content shared here, this is for informational and entertainment purposes only… or “infotainment” if you will. I’m not a certified financial planner, and encourage you to take my opinions with a grain of salt.
That being said, if you want to send a question in to be answered here on the show, just send a message to finance AT oldpodcast.com
But for now let’s get to today’s questions and start optimizing your life!
Personal Finance Question 1: “Should I Change My Investing Strategy?”
Our first question is from Paul who writes:
“I came a bit late to the game at 37 years old and started investing last year. I got in during a dip and invested a bit more with the March lows but I do foresee another crash coming, probably not while the market is stimulated but I cannot see all this money being printed lasting forever and with all the moratoriums on mortgages, that debt is not just going to go away.
I know Main St is not Wall St but they are somewhat related. I've also heard the old rule “time in the market beats timing the market” and I know that it is never the case of “this time is different.” But I feel right now it is different and while my long term strategy would not be to time the market, it doesn't seem to make sense to buy at close to all-time highs.
Right now it seems we are in a bubble and I could buy the same thing in maybe a few months for 50% less. What is your take on it?”
DIANIA MERRIAM: Thanks so much for this question Paul, and I think your concerns are really normal. It’s tough to start investing your money when you fear that a big crash could be looming and so you worry about getting in at the wrong time.
While I hear you that it does seem like “this time is different”…there just isn’t a good track record for literally anyone being able to correctly time a market crash. Professional fund managers can’t time the market with much success and not only do they have reams more data than you have, but they also have the time to pore over all of it and to understand what that data is telling them.
And they still do worse than the market more than 80% of the time! But the good thing for you is that you are at the beginning of your investing journey, and you have plenty of time to ride the investing roller coaster. Even if you invest more right now, and the market dips, you won’t realize that loss if you don’t sell, because you’re in it for the long term, right?
One thing I wanted to point out here is the concept of dollar cost averaging when it comes to investing…this is a strategy where your money is invested in relatively equal and consistent periodic purchases in an effort to reduce the impact of volatility on all the money you’re investing over time. The purchases occur regardless of the stock prices and at regular intervals. This strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices.
A great example of this is your 401k, your contributions are deducted from every paycheck and invested regardless of what the market is doing. Dollar cost averaging is a good strategy for most investors because over the long term, asset prices tend to rise, but they don’t consistently rise over the short term. So if you’re purchasing equities every month let’s say, If the market is up, you will be buying fewer shares. If the market is down, that just means you get to buy more shares at a lower price!
I think the best part of dollar cost averaging is building the habit of investing, regularly socking away money and letting the magic of compound interest do its thing is simply a more reliable way to build wealth than trying to time the market.
Question 2: “What Should I Do With My Car Loan?”
Our next question is from Myles who writes:
“I have $24,000 in Savings/Investments ($7500 in savings, $16,500 in ETF’s). My car loan is now down to $24,000. It has 4 years left at 3.49% interest (I pay $550/month for it). I love the idea of being debt-free, and this loan is my only debt. But I also enjoy having the cash on hand in case I want to travel in the next few months.
I’ve done the math and if I was to cash out all savings/investments to pay off loan completely, it will take me 17 months to get back to $24,000 in assets. My other option is to pause my investing ($720/month), and redirect that onto my car loan, which would get rid of the loan in 18 months. Either way, net worth will be $24,000 18 months down the road. What would you do?”
DIANIA MERRIAM: Hey Myles, thanks for the great question and I love how motivated you are to get out of debt!
My first thought is to not sell your investments. There is a bigger opportunity cost here in losing momentum on compound interest, and selling means you’ll most likely incur capital gains taxes which would eat into the money you planned to use to pay off the car.
You also need an emergency fund or cash on hand so that you’re not forced to raid your investments when life throws something unexpected your way. I don’t think you need to completely pause investing or in other words choose between investing and paying down debt. Why not do both?
You could pay a little bit more towards the car each month and a little bit less towards investments each month- let’s say $635 towards each. That alone will cut down your 4 year timeline on the car, but also a lot can change for you during this process.
If you get a raise, or pick up a side hustle, you could shorten your timeline even more on that car loan. Now I don’t know how you feel about this car, but I will tell you that I bought a brand new car once, and I’ll never do it again. I probably got around a $20k loan, and I owed $12k when I got rid of the car. I was able to find a buyer to just pay what I owed on it so I could get rid of it. The next car I bought was for $6k cash and I really love not having a car payment.
You might not like hearing this, but if it were me, I would probably try and get rid of the car and buy something much cheaper so that I didn’t have a car payment.
Investment Strategy and Car Loans: Sign-Off
Well I hope you enjoyed another Q&A edition of Optimal finance daily.
If you have a question you’d like addressed on the show, go ahead and send it over to finance AT oldpodcast.com
I hope you have a great rest of your day, and I’ll see you tomorrow, where I’ll be back narrating your favorite authors, and where your optimal life awaits!