It’s hard to let go of your old car. You know which car I’m talking about. The car with the window taped shut because it doesn’t roll down properly. The car with three paint jobs—each a different shade of green. The car that gets shaky after you reach 65 mph, because it was a hand-me-down from your grandma, who’s max freeway speed is 50 mph. It’s been with you through it all, but when car dealerships start advertising 0% financing and cash-back deals, you might feel yourself loosening your grip.  

Before we dig in, it’s important to acknowledge that even though good deals are currently out there, you may not need an upgrade. And that’s okay! Own your steady, functional car, and avoid instant gratification. However, sometimes things do happen that require an upgrade. Your tape job suddenly malfunctions, and your car window won’t roll up in mid-January. Or your car starts shaking at 50mph on your morning commute instead of 65mph.

When planning for a big expense, whether it’s a car or another large purchase you plan to finance, it’s best to create savings goals. But because life is both expensive and unpredictable, this post aims to discuss ways to finance a large purchase in a smart and efficient way. Here’s your list of action-items:

FOCUS ON WHAT YOU ACTUALLY need

Create a list of your needs (not your wants), and then research your options. If you need a car, what kind of car do you need? Something that can haul large objects, or carry the tiny humans safely? Used or new? Find the total cost of the car that can sufficiently meet all your needs. Avoid any options that may push you outside of your budget. Basically, don’t buy more car than you need.

Decide how to finance the purchase 

If you cannot purchase the expense in full, you have two financing options: (1) a lease or (2) a loan.  

Know that when assessing the total cost of the car, it’s important to leave room for the expense to finance the car through a loan.

1. Lease: When you lease a car, you are paying monthly to use the car. Because this finance option doesn’t lead to car ownership, monthly payments for leases are typically lower than loan payments. However, you will not be able to ever own the car or “pay it off.” Because of this, leases will never be profitable and are best saved for professional purposes if necessary.  

2. Loan: When you borrow an auto loan, you are paying monthly to eventually own the car. There are many loan options depending on your budget, credit score, and timeline. Most loans will have an annual percentage rate (APR). That is, the interest rate you pay on the loan. The APR will vary based on the duration of the loan, your credit score, and where you borrow from. Make sure you shop around to find the best loan that meets your needs. In short, try and find a loan with a low APR and pay it off as quickly as you can. Click here to view Rivermark’s auto loan options.

Calculate the monthly payment

In order to budget for your new expense, you need to know the amount of the monthly payment. Let’s say you want a 2020 Subaru Forester because let’s be real, if you’re a true Oregonian, you’ve thought about getting a Subaru at least once. Using data from their website, here’s the breakdown:  

Find the cost of the car: $24,495 

Pick a Finance term: 48 months

Know the APR based on your credit score: 4.19% 

Calculate the monthly cost of the car, including the APR: 

Ta-dah! Your monthly car payment is estimated to be around $700, making the estimated total cost of the car $33,600.  

Let’s take a moment to catch our breath. I know this seems stressful, but don’t worry. Make sure you are taking care of your credit score and budgeting for the expense. If you take the appropriate and smart steps, you’ll be okay!  

Simulate the payment INTO A MONTHLY BUDGET

Before deciding to finance the car, take three months to see if the monthly payment fits in your budget. Whether it be through automatic transfers or manually setting money aside, try not to house the simulated monthly payment in an account used for spending purposes. If you don’t have a budget, click here for resources to get started. 

This practice will allow you to visualize how your car payment can fit into your budget. You may need to re-allocate dollars in your budget, or you might find you have more wiggle room than you initially thought!  

What are you waiting for? Get the car!

You earned this! You took the smart and appropriate steps to finance your car, so make it happen and create new memories. We are rooting for you.  

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@alecbennett95

Looking to go on a “once and a lifetime” vacation to Fiji? Renovate your kitchen? Upgrade your car? Did you know you may be able to utilize your 401k or other retirement plan to take a loan to help finance this big expense? Here are the details, the dangerous reality, and things to consider when taking a 401k loan:

The Details:

If your plan document permits, a 401k loan can help you access up to $50k of likely your biggest pool of assets, avoid creditors, pay interest back to yourself (typically prime rate + 1%) and there is no need for good credit to qualify. You wouldn’t be the only one taking advantage of this opportunity; according to the National Bureau of Economic Research, about 1 in 5 active participants have a 401k loan.

NBER Working Paper No. 21102

The Dangerous Reality:

Does all of this sound too good to be true? Well, it just might be. A 401k loan can come at the cost of hundreds of thousands of dollars in future retirement income (see graph below). So, whether you have a loan or are planning to take a loan, it is important to know some of the dangers of borrowing against your future self:

Forfeit the tax advantage of your retirement plan dollars - When you are paying back your loan, interest payments are done so after tax. This forfeits the tax advantage of these retirement dollars as taxes are paid when you contribute and later withdraw.

Leaving your employer? Think again - If you leave employment at your company, whether by your choice or your employer’s, you will find yourself in a sticky situation. The remaining balance of the loan will need to be paid back by the time you file taxes for the current year. Defaulting on your 401k loan comes at a great cost. The remaining loan balance will be considered taxable income. If you are under age 59 ½, a 10% early withdrawal penalty will be tacked on as well.

Abandon free money – If your 401k has an employer match you may miss out on free money if you cannot afford to continue contributing to your 401k while paying back the loan.

Miss out on market growth - Your dollars are not fully invested while you have an outstanding loan balance. This means a portion of your portfolio would miss out on opportunity for growth, specifically when market returns are greater than the interest rate paid to yourself.

Detrimental impact on retirement income - A 401k loan can have a detrimental impact on your retirement savings and your potential income in retirement. The below graph shows the effects on an individual’s retirement savings and monthly retirement income. Three scenarios shown are 1) take a 401k loan and push pause on contributions; 2) take a 401k loan while continuing to save; and 3) don’t take a loan.

This graph is for illustration purposes only. It highlights the impact a loan has on an individual’s retirement balance and monthly retirement income after 30 years of investment growth during working years (assuming 7% annual market return and annual contributions of $7,500) and 30 years of income through retirement (assuming 4% rate of return). In this example an individual takes a $15k 401(k) loan from a $50k balance to pay down some bills and a finance a vacation.

The “once in a lifetime trip to Fiji” can ultimately cost more than $1,400 per month in retirement income.

That’s $515k over 30 years of retirement!

Options to consider:

For some, a 401k loan can be a helpful tool when “life happens,” allowing participants of retirement plans the ability to access a pool of assets intended for retirement. However, while this can be an attractive tool for some, borrowing from your future self can have its drawbacks. Either way, here are issues worth thinking about:

• Want to go on a once in a life time trip to Fiji, or finance some other big expense that isn’t worth putting your retirement income in risk? Budget for future big expenses, plan and start saving today.

• Building an emergency reserve (3-6month’s income) to keep you on track financially and avoid a last resort 401k loan when an unexpected expense comes up.

• Are you in a pinch and need to take a loan or have already taken a loan? Continue saving in to your retirement account so as to not miss out on valuable retirement savings and possible employer match.

• Want to take a 401k loan? Check with your HR representative or 401k advisor to see what options are available to you.

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401k’s are purposed for long-term retirement savings; for what comes after the working years. They are arguably our best means of influencing our financial futures – through diligent, faithful saving. Still, life happens. And what’s ideal doesn’t always copy and paste perfectly onto each of our own realities. Thus, there are sometimes¹ allowances that permit 401k participants to borrow dollars from their current accounts in the form of a loan. Though borrowing from a 401k is not the intended use of the account, we aren’t saying they’re always the worst option. What we are saying is that 401k loans are worth thinking twice about. And in my experience, there are a few points that consistently surprise people.

For example, do you know what would happen if you stopped working with a company while you had an outstanding 401k loan? In many cases, you’re left with two options:

1. Pay back the loan in cash within approximately 60 days

2. Default on the loan, and pay taxes and any applicable penalties on what’s owed

So, especially if you’re considering taking out a larger sum, it’s important to know the implications of what taking a loan means for both the short and the long term. See below for some more thoughts…

¹401k loans are not available through all 401k Plans, and the logistics of how they work and when they’re allowed can differ between Plans. With questions, call Human Investing at 503-905-3100 or email 401k@humaninvesting.com.

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