Car or 401K?

[Cannoball888]

The "car or college?" thread got me thinking. Is anyone sacrificing 401K contributions to pay for their car?

 

[bdepedro]

I bought and have been restoring my '70 fastback using a home equity loan. It's probably not the smartest thing I could have done but it's worth it. I love my car and have a blast working on it and driving it. A friend of mine had a '67 vert back in the day and wants another one now. He just bought a house and has 5 kids so funds are short but I told him to bite the bullet and get one. His wife I'm sure wouldn't appreciate this philosophy but you only live once! He had the opportunity to buy a '68 GT FB w/ a 390 in very good shape for $7500 and didn't. A move he immediately regretted. You gotta pay the mortgage and such but you also gotta have some fun!

 

[dennis112]

First of all, I am against borrowing (assuming you are talking about borrowing) from a 401K, but it is possible to make out by doing it.

Our company plan allows us to borrow up to half the funds we have invested, as long as it gets paid back AND you must also pay interest on the amount borrowed--which is 5%. I doubt that you can find a loan for a classic car anywhere near 5%.

 

[zookeeper]

If you asked me 10 years ago, I would have said you'd have to be out of your mind to borrow from your 401K just for a car. But now I really don't kow the right answer. In '99 a friend changed jobs and took his retirement fund in cash. It amounted to about $30K and he used the money to do a rottisery restoration of a '69 RS/SS Camaro. I thought he was nuts for doing so and told him what I thought. A few months later, the market had a huge drop and my personal 401k dropped like a rock. One of the funds I was heavily invested in actually shut down and even though I transferred what was left into another fund, I still lost about $35k. So who was the dummy in that situation? My money was gone, and he sold the Camaro last year for a healthy profit. At the time my money went bye-bye, '67 GT500's were selling for about $45K. If I had taken the money I lost, plus put the other $10K on a credit card, I could've bought a real GT500, which are selling for somthing in the neighborhood of $200k (and up) these days.

 

[351w_swap]

I would if I had one right now, I'm getting pretty down on my cars problems and wish I had one, but then again, right now I am only 20 so I have a good 40 years to build a 401k.

 

[g12314]

I dont want to sound down on our society, but it so common to spend now and forget about the future.

All my toy $$ comes after the fact that my 401K contribution is maxed out year after year. When I'm 60 I want to be able to enjoy the toys, not sell them to support myself.

Jimmy

 

[fasttback]

It's about your lifestyle and playing within your means.

It would not bother some of us to dip into a 401K plan for fun purchases (or investments as others would call it), but others would not even consider it. Its just how we differ.

I have not dipped into my 401K, but have used some of my home refinance to purchase a Mustang. Was this bad...no, I'm having fun and still paying all my bills.

 

[jerry S]

I was dying to get a classic mustang back in high school, college, law school, and for 10 years after I finished law school. The only problem was that I was $55k in the hole in terms of student loans with a 15 year repayment period. I was actually unemployed for 5 years after graduating because my wife kept dragging me around from place to place and I followed her career. I had deferrals on repayment until 1998. Then my 15 year repayment schedule kicked in. I was lucky to find a good position that gave me enough money to pay the loans off in just 5 years and then and only then could I think about getting a car. I bought it cash and financed the mods out of pocket. I even have enough money to pay cash for the repairs following my crash last night and not feel it. I think the ability to delay gratification is the hallmark of the emotionally intelligent.

 

[joesgt281]

I myself am very conservative with money and, at age 50, am just now beginning to really pour some serious funds and time into my 67.

I have a huge respect for those who have found a way to have and enjoy their Mustangs. Many do so, not by simply diverting 401k funds to the local restorer, but by busting knuckles and doing it themselves, investing "sweat equity" in their dream machine. If done wisely, this can be done with a gain in the investment. And isn't that the point of this discussion? Not "Should I Sacrifice My Retirement for Instant Gratification That Will Surely Result In a Financial Loss?" But rather "Is It A Wise Financial Choice to Divert Retirement Funds Into A Mustang Project (or investment) So I Can Be Investing In Something I Actually Understand, and At the Same Time Enjoy the Passion/People/Ponies That Are All Part Of This Terrific Hobby?"

I used to believe that maxing out my 401k was the way to go....until a year ago.
That's when I went out to the garage to work on some household chore and happened to notice the registration sticker on my old steed.
July 2000.
It had been sitting for over 5 years.
Had I done nothing on it in all that time? Of course not, I'm a Mustanger through and through. But money was always tight and my dream machine could not just be thrown together just to get it going again.
But 5 years had passed without getting to experience the thrill that this car had once given me.
Was I going to wait until I was retired and draw on my 401k to start enjoying her again?
No, I want to live life while I'm still young (yeah you young pups, 50 isn't dead yet!).
And because I do all the mechanical work myself, and have only bought new parts when there was no other alternative, I expect to have a car worth at least twice what I have in it when it's all done.
Want instant gratification where you're literally pouring money down the drain? Buy a new car.
Want an investment that can out perform the mutual funds in your 401k? Consider a classic Mustang.
Not when you're too old to depress a stiff clutch pedal, but now.

 

[zookeeper]

Good point. I've been taking the slow road on my '68 to keep from going into debt as well, and while it seems like it's taking forever, at least when it's done I won't be paying on a credit card for the next 10 years. The thing that makes me cringe is when I see some people go all out on a car project that either they can't afford, or it's their only car or both. A guy at work poured over $40K into his '67 coupe and lives in a rented house. It's a very, very nice car, but because the tires rub, the headers drag, the gears are too low and it has a few motor bugs, he doesn't drive it very much at all. It also gets lost in a sea of Mustangs because the "look" of the car is kinda boring so it's never done well at car shows. So now he has a car that's not worth half what he has into it, he's broke (but still spending money on it!) and will be paying rent for the rest of his life. He doesn't make a lot of money, and he has two high-school age kids so considering the current local property values, it's unlikely he'll ever get caught up, money-wise. Over the years I've seen more financial horror stories surrounding cars than I care to remember. I remember a neighbor rebuilding the motor of his '67 Camaro under the parking awning of the apartment complex I once lived in in Phoenix. His wife was about 8 months pregnant at the time, and I don't think he was the best mechanic in the world. One of my freinds' Dad used to own more bitchin' FE Ford parts than anyone I can remember. 427 Tunnel port engines, rare intakes, he had it all. There were 6 kids in that family and they lived in a trailer on his mom's property. Sweet. My car will get done whenever it get's done, but I'm not gonna starve or go broke to do it.

 

[joesgt281]

Great discussion going here....
I agree that there is risk with the car hobby.
Those same people that make bad restorations decisions would probably make other bad investment decisions.
We can't save people from themselves.
I haven't made the smartest decisions every time on parts or cars, but my success ratio is pretty good.....better than with stock investments!
At least I can get my feable mind around car stuff.
Reading a stock prospectus? Knowing how the industry is going to behave?......not so much.
Coincidentally, I've recently been wondering if there's an investment avenue that would actually be 401k approved, that would involve the car hobby. Sure, I can buy Ford stock with my 401k funds, but that wouldn't have been a wise decision lately. And I wouldn't be enjoying, or controlling, the way that my investment dollars are used. For any of you tax accountants/attorneys out there....is there a way to "invest" 401k (or other retirement) dollars into a personally controlled entity? Can we set up small businesses whose purpose is the restoration of Mustangs? Maybe by the time I retire I'll have several nicely restored stangs and I can take my pick of what to sell, if I need to, to live comfortably. And all the while enjoy them more than I enjoy getting the monthly statement from Fidelity that shows me if I've lost money since the last one.
Somebody's enjoying playing with my retirement dollars but it's not me.

 

[zookeeper]

My 401k's with Fidelity as well. We recently had an investment rep from them do a seminar and try to get us to see how investing just a small percentage would pay off big-time over the years. I've been involved in our 401k from the start ('93) and my numbers don't match their claims. But at least I'm getting the company's matching funds. But still, if I'd bought one of those $40K GT500's a few years ago I'd beat the crap out of any of Fidelity's funds...

 

[66forfun]

I am maxed on the 401 and have been for years with the exception of following the divorce. The stang is an investment be it good or bad, cant tell until it actually sells otherwise its speculation. borrowing on the 401 is last resort money required to live on, that 5% (or whatever rate) is only a front, there are loan fees, the loss of investment principal while the loan is being repayed, and the money is payed back with post-tax dollars then if you loose your job the loan balance is turned into a distribution and is fully taxed. In other words you never want to borrow on the 401k, it is a retirement account, use it for retirement! With the housing prices declining in my area going with a home equity loan can also lead to trouble...It is a hobby folks, dont spend your bread and butter cash on an investment (fad, be it harleys,rods or boats) that can be almost worthless when you need the payout the most.

 

[88Stang331]

It would not bother some of us to dip into a 401K plan for fun purchases (or investments as others would call it), but others would not even consider it. Its just how we differ.

I assume when you say "investments" your referring to cars. however the majority of people that are "money wise" will tell you and anybody else that a car is hardly an investment. There is almost nothing that depreciates faster in value than a car. In order to find a car that is going to be come a collectors item and actually go up in value, you have to keep low miles on it, keep it in excellent condition and basically not use it. Not to mention the amount of time you would have to keep it in order for it to gain value if in fact it ever did, you could have done many other things with your money that would net you more income faster than a car ever would.

I would consider buying a house an investment, and a descent one at that. I am 22 years old and in the military, however I plan on buying a house within the next 2 years before my first enlistment is up. For the record i don't come from a rich family and i myself am not rich...obviously because i'm in the military. But what may be right for me may not work for you.

 

[joesgt281]

...dont spend your bread and butter cash on an investment (fad, be it harleys,rods or boats) that can be almost worthless when you need the payout the most.

Very true.
Rule #1: Don't throw your money into stuff that's got a good chance of depreciating. All the above-mentioned items included. Right now it's fair to say that any Stang, if bought right, has the chance to appreciate.

We're developing some pretty good rules here for playing the money game.

Others:
- never borrow against your 401k. The penalty and tax consequence is too costly
- if your employer matches some amount into your 401k always put in the amount they match up to....you instantly double your money
- then evaluate if you think the contribution beyond that will yiels a better return than what you can get in the investment. Not to mention the enjoyment factor of being able to drive this investment.

Any others?

 

[zookeeper]

You may want to watch one of the auctions on Speed Channel. I'd say a '70 Hemi 'Cuda purchased new for under $6,000 and sold recently for upwards of $2,000,000 is kind of an investment. Or how about cars like the Cobra Daytona coupes that were practically given away after '65 for about $4,000. Today those cars are worth what? $5,000,000? Maybe as much as twice that? Granted, not many of us will ever own one, but what about cars like plain old vintage Mustangs? Did anyone ever think they'd see the day when barely saveable '67 fastbacks are selling for twice what they did new? What about buying a vintage Mustang, driving it for a couple years, then turning around and selling it for more than you paid for it? Isn't that the true definition of an investment? What's the FIRST thing any investment counselor has to tell you BY LAW? They can and will tell you that "past performance is no indication of future gains". Wanna know something else? The musclecar market in general and Mustangs in particular defy all the rules as far as investments go. If you invest in stocks or mutual funds, maybe you make money, maybe you don't. It all depends on how good the company that sells the stock is or how smart the fund manager is. Remember Enron? I remember seeing lots and lots of teary-eyed investors that lost everything. Some of them lost millions of dollars. Have you EVER read about anyone who invested in collector cars losing millions of dollars due to devaluation? Nope, if you buy the right cars, and you treat the car right, you make money. Now all bets are off if you start hoarding AMC Gremlins or Nash Metropolitans, but you get the idea. The added bonus to buying a vintage Mustang is you get to enjoy your investment without hurting it. Again, if you take your GT500 to the autocross or rev your Boss 429 to the moon, you probably won't get as much on your return as the guy who simply drives his on special occasions, but as long as the vin# says it's the real deal, it's pretty tough to lose money. I remember seeing a '67 GT500 body shell ONLY on ebay a while back that sold for $26k. The car was in a body shop to be restored, parts started getting stolen while it was there until there was nothing left but the shell and the vin#. Even with nothing left to restore, it went for more than five times what it sold for new. Don't get me wrong, I'm glad to be in a position to have a couple bucks to invest and a vintage Mustang to enjoy, but if someone wanted to invest purely in cars, I'd have a hard time proving them wrong.

 

[zookeeper]

I am maxed on the 401 and have been for years with the exception of following the divorce. The stang is an investment be it good or bad, cant tell until it actually sells otherwise its speculation. borrowing on the 401 is last resort money required to live on, that 5% (or whatever rate) is only a front, there are loan fees, the loss of investment principal while the loan is being repayed, and the money is payed back with post-tax dollars then if you loose your job the loan balance is turned into a distribution and is fully taxed. In other words you never want to borrow on the 401k, it is a retirement account, use it for retirement! With the housing prices declining in my area going with a home equity loan can also lead to trouble...It is a hobby folks, dont spend your bread and butter cash on an investment (fad, be it harleys,rods or boats) that can be almost worthless when you need the payout the most.

You are also bringing up an extremely painful, but very, very common, and very, very expensive problem and that's divorce. My brother is going through a divorce right now and is buying half of the house from the soon-to-be-ex. Total cost? About $125,000 if he's lucky, then he gets the thrill of paying child support for the next 16+ years. I'd think you could buy a pretty bitchin' Mustang for that kinda money!