When is it OK to splurge? A lengthy post detailing my internal conflict about purchasing a car.

[LuckyDogg]

Hello Financial Loungers --

I was a bit more active on here a few years back, as I had just graduated from school and wanted to ensure I was on a wise path, but dropped away due to other priorities. Things have been going well though, and I feel I'm in a good financial position for my age. Entering my fourth year out of school, I'm itching to own the one thing that unites us all on this site, a new car.

I've never owned one. I drove my parents' through high school, didn't have one in college, and then moved into the city which never warranted a need. I would still say I don't have an overwhelming need, but it would add a good bit of convenience for running errands, visiting friends in the suburbs, taking trips home, etc. Plus, I just want a freakin' car!

The facts:
- Age: 27
- Salary: $72k
- Retirement Account: $44k (listed as $24k in original post)
- Sharebuilder Account: $24k
- Rainy Day Fund: $16k
- Random Savings: $7k
- Debt: --


My monthly take home salary after all deductions (taxes, insurance, retirement, stock purchase plan, charitable contributions, etc.) is $3200. I contribute 21% of my salary to my retirement fund. Rent and utilities total $900, I *try* to put $1700 into savings, and the rest is consumed by food, clothes, etc. (and I'm not a penny pincher -- I eat out a lot).

With that said, I've been inconvenienced by not having a car as of late. I've had to rent cars to make it to friends' weddings, recently moved and had to rent to enable that, went home for the holidays and had to juggle between a $600 plane ticket or $300 car rental, etc.

Obviously, I can afford a car. I'm in a good financial position and have a grasp on what I'm doing. There's plenty of 2008 Toyota Corollas and 2007 Nissan Sentras I can get for a song, pay for in full, and be done with it. I don't like those cars... I like newer cars.


The car that I want is a 2012 Volkswagen GTI, appealing to my longstanding boyhood desire to have a GTI. The sensible side of me is screaming run, avoid this at all costs! They are whores that consume your money. My college roommate had a Jetta that had all the classic MkIV problems: check engine light, coil packs, window regulators, peeling interior, etc. Every logical part of me is saying this is the worst possible car for you to buy, but I still am drawn to it like a gnat to a light bulb.

Emotional reasons aside though, I'm also conflicted because of cost. Can I really afford the GTI? Configured the way I'd like with tax, title, tags would put me out the door at 30g. Volkswagen has some good financing rates at 2.9%, so I'd put about 12g down and finance the rest over 60 months, coming to $350/mo (or $450/mo with insurance).

While by all means do-able, this would slow down my savings rate. I would consider used, but my experiences with Volkswagen make me want to have a warranty. I also fear that I may get that classic itch that car people get, and be ready to unload it sooner rather than later (though as someone raised in a Irish Catholic house I have good practice with squelching my own desires). Obviously I could consider other cars, but I've waited 27 years for this!

Do the almighty posters of the Money and Investing forum have any advice? I've just had to get this off my chest, and my S/O is tired of hearing me *whine* about this...

[AIRider]

You're about my age, and I am super happy to see that you're responsible with your money. You have more saved up than most people twice our age. I'm on a similar path as you with the money I'm able to make, save and spend.

On the other hand, I also believe that in life you shouldn't hold back on things that make you genuinely happy. And if that happiness, urge to own a dream car is to buy a GTI, then the hell with it. Go get a GTI.

Life is too short to withhold living your dream.

Have you considered leasing for a short term, 24/36 months maybe that's what you need, to get it out of your system, to taste the car, and get it over with.

I leased my dream car for 2 years, 2010 CC, I loved it for the time being, but got over it. Now I drive a Jetta TDI which is considerably cheaper to run. Saves me tons of money.

I'm gonna vote against financial wisdom on this one. Go get it.

Ideally tho, would be to invest the 25 grand, and collect dividends from it, which you could supplement with cash and pay as you go monthly.

[ChrisMD]

I'd put about 12g down

Where is that money coming from?

[LuckyDogg]

Where is that money coming from?

Divest some of stock in the Sharebuilder account, then take the remainder from random savings.

My biggest hesitation is that I should be saving for a house down payment, though with Chicago real estate prices I don't see myself buying anytime soon, and I'm not sure if I'm even committed to the city for 5+ years...

[PhatazzMkIVJetta]

I say if it makes you happy, then do it. Life is too short to worry/stress about things like this. It seems you are in a stable point in your life, and have the ability to get a new car if you want, without it causing a negative impact on you financially.

You only live once. I say do it, if it makes you happy

[jnm2.0t]

Divest some of stock in the Sharebuilder account

What are your taxes going to be on the sale? Cap gains? What about opportunity cost of forgone future gains on your stocks? All will be much higher than the 0-1.9% VW offers.

My problem with a GTi is I think it is very overpriced for what you get. Cant get leather for under $30k which is crazy for that car. I ended up with an A3 a few years back because the Audi was actually a better deal than VW was offering.

[LuckyDogg]

What are your taxes going to be on the sale? Cap gains? What about opportunity cost of forgone future gains on your stocks? All will be much higher than the 0-1.9% VW offers.

My problem with a GTi is I think it is very overpriced for what you get. Cant get leather for under $30k which is crazy for that car. I ended up with an A3 a few years back because the Audi was actually a better deal than VW was offering.

All stock being sold has been held since at least 2010 -- I would assume the 15% rate is thusly applicable as it has been 1+ year. Opportunity cost is definitely something I'm weighing, though even if I don't go through with the car purchase I am looking to reallocate. Are you suggesting I potentially put less down and finance more due to the interest rate?

I agree that the GTI is at the high end of pricing for the segment, but I don't care about leather, xenons, navi, etc., so I wouldn't be optioning it to high heaven. My sensible side is saying 'look at used', but I won't touch a used VW with a 10-foot pole, and I struggle to think of a comparative 2-3 year old sporty hatchback (Mazda3 is the only that comes to mind, but I'd prefer my car without a ****-eating grin).

[jnm2.0t]

Without question I would hold onto the stock. Even if there were no cap gains taxes on it the new car financing rates are incredibly low. Even if you have stock with losses and you don't want is sell it to buy other stock. 0% is free money and with inflation its a positive to you. Even 1.9% is pretty much free after inflation.

Also, if you don't want to deal with a used VW you may want to consider leasing. When you buy it the car will eventually become used ya know! If it scares you off today why wouldn't it scare you off in 3 years?

[ValveCoverGasket]

would you consider going with a CPO gti rather than a brand new one?

im in a similar position as you and have lately been considering a newer e class... and at least in the case of the merc, the CPO deals seem to be worthwhile unless you have to have a 0 mile car.

[AZGolf]

Not to stray too far off topic but holy smokes you are going to be so much more prepared for retirement than most people. My advice however is to just get it over with and get used to contributing at the federal cap rate. For 2012 you can contribute up to $17,000, and you only need to bump up your contribution rate to 23.6% from your current 21% in order to hit the cap.

Long story short, I calculated you are in a 28% income bracket between federal and state and you can still contribute another $1800/yr to your 401(k). Because the 401k is a tax shelter of sorts, you could look at it as getting an immediate 39% ROI on that $1800. How 39%? Because of math:

$1800 * 0.72 = $1296

In other words, you take your $1296 that you would have made after taxes and put the full value money in your 401(k). Now you will have $1296 less money in your paycheck, but you have $1800 more in your savings: 1800/1296 = 1.389. In other words, you have roughly 39% more money to your name by putting it in the 401(k). Bump up your contribution rate to 23.6% to achieve, or 24% if you have to use whole numbers.

Squaring away your retirement frees you up to really live life to the fullest and not feel badly about giving to charities (which also has that same 39% ROI in a way, since it's tax deductible) or taking the vacation you didn't think you could, or buying the fun car you've always wanted. As long as you're not going in debt to do it, or at least not taking an interest rate hit that's significantly higher than the rate of inflation you're fine. Since inflation runs 2-3%/year, any interest rate under 3% is pretty close to free and rates under 2% could absolutely be considered free. As others pointed out, a 0% rate is basically paying you to take their money.

[jnm2.0t]

getting an immediate 39% ROI

I don't think you understand how this all works and what ROI is. You can't account for a return that way. You have to pay the tax at some point, either today in payroll deduction or in retirement with your plan withdrawal. There is no special 'return' on your investment, you are trading off taxes today for taxes tomorrow and vice-versa. That is all. If you want to talk about marginal brackets today vs tomorrow that is a very different conversation and completely hypothetical as nobody knows.

Edit... here try this out at home.

Take a $100k investment and setup 2 scenarios, 1 pays 25% tax today and then invests the rest tax free for 30 years at 8%, the other pays no tax today, invests at 8% for 30 years, and then pays 25% tax on the back end. The results the exact same, $754,699.27.

[Forgot My Password]

If you are this stable at the age of 27, I would buy it and not stress about it at all. I went through almost the exact range of emotions last month when I bought my Range Rover (my first car in about 8 years). I called my brother (a CGA) and was expecting him to hang up the phone on me. Instead, he encouraged me to get it. His rationale? You only live once, and if you're in this rosy of a position at such a young age (I'm 26), have some confidence in yourself and your future and don't be afraid to splurge now.

[AutobahnTDI]

Configured the way I'd like with tax, title, tags would put me out the door at 30g.

I agree that the GTI is at the high end of pricing for the segment, but I don't care about leather, xenons, navi, etc., so I wouldn't be optioning it to high heaven.

What options are you choosing to make it 30k out the door?

The base model GTI is a good value but once you start to move up the model range that completely goes out the window.

My two sense: Only buy it if you can comfortably pay it off in 36 mos without raiding your savings account.

[LuckyDogg]

Without question I would hold onto the stock. Even if there were no cap gains taxes on it the new car financing rates are incredibly low. Even if you have stock with losses and you don't want is sell it to buy other stock. 0% is free money and with inflation its a positive to you. Even 1.9% is pretty much free after inflation.

Also, if you don't want to deal with a used VW you may want to consider leasing. When you buy it the car will eventually become used ya know! If it scares you off today why wouldn't it scare you off in 3 years?

You bring up an excellent point, in that the low financing rate makes it more attractive to finance a larger amount than to pay that up front. I hadn't really considered that, though I've always had a fear of debt so I'm not sure I could handle the larger amount. It's not like I'd be investing that money in an high yield financial vehicle either, as I'd likely just keep it in a separated savings account.

I also do realize the GTI becomes used as soon as I use it, but in those circumstances I would know the vehicle's history and maintenance records three years down the line, as opposed to buying a 3-year old model directly... I have to weigh the cost-benefit of piece of mind versus potential gremlins.

[LuckyDogg]

What options are you choosing to make it 30k out the door?

The base model GTI is a good value but once you start to move up the model range that completely goes out the window.

My two sense: Only buy it if you can comfortably pay it off in 36 mos without raiding your savings account.

GTI 4-door DSG with Sunroof and Convenience Package: 28,745 (MSRP + destination)
Chicago tax, title, registration fees: 2,925

Total transaction value: 31,670

Obviously there's some room to negotiate, but it's still in the 30g ballpark.

[jnm2.0t]

You bring up an excellent point, in that the low financing rate makes it more attractive to finance a larger amount than to pay that up front. I hadn't really considered that, though I've always had a fear of debt so I'm not sure I could handle the larger amount. It's not like I'd be investing that money in an high yield financial vehicle either, as I'd likely just keep it in a separated savings account.

if you get 0% I'd consider putting $0 down, cash in bank > cash in car.

[jnm2.0t]

GTI 4-door DSG with Sunroof and Convenience Package: 28,745 (MSRP + destination)

The thing is, the A3 with DSG, pano sunroof is 31,3. For that you also get leather, bluetooth, better choice of colors, and the pano sunroof. Just something to consider.

[AZGolf]

Take a $100k investment and setup 2 scenarios, 1 pays 25% tax today and then invests the rest tax free for 30 years at 8%, the other pays no tax today, invests at 8% for 30 years, and then pays 25% tax on the back end. The results the exact same, $754,699.27.

I don't understand your post - the OP does not have $100K. Let's stick to reality here, what he has is the opportunity to put another $1800 in a pre-tax account. Let's run the numbers, just like you said:

$1800 at 8% for 30 years = $18,113
$1296 at 6.8% for 30 years = $9,327

Why 6.8% for the second scenario? Because it's in a taxable account. He has to pay taxes on it every year. There's no way to know for sure what that tax rate will be since there's so many options for stocks, real estate, short term, long term, dividends, etc, but I used the Mitt Romney approach and figured he can keep his investment taxes at no more than 15% a year even though his combined federal & state marginal rate is 28%. Thus 85% of 8% = 6.8%.

As for the retirement account, because you have no payroll income your investments are only taxed at your total income rate, not the top marginal rate. This is because when you're retired you no longer have your high paying job acting as an income base under your investments or distributions. Effective tax rate on the 401k distributions will be lower, maybe 20% even if we assume taxes higher in the future because of the budget deficit. So the post-tax value of that $18,113 comes down to $14,490

14490 / 9327 = 155%

If anything you just made the case even stronger for putting money in a non-taxed account like a 401(k).

[LuckyDogg]

All of my retirement savings is in a Roth 401k, so taxes have been paid.

The thing is, the A3 with DSG, pano sunroof is 31,3. For that you also get leather, bluetooth, better choice of colors, and the pano sunroof. Just something to consider.

I appreciate the thought, but the 'Well, for 2k more' game is a slippery slope. :p

[GTiTOM]

Nothing wrong with splurging, but $12k will get you a lot of car. Even jumping up a little to $20k will get you a lot of car too, without signing your life away to a bank for the next 5 years. I made that mistake when I was slightly younger than you --- now I'm slightly older and never want to make it again

My car's been paid off for years. My wife has an outback that we paid in full cash+trade. We both could afford much more expensive cars, but when I got laid off last year, I was sure glad we didn't have to come up with another grand each month for car payments. I'm also thinking of going back to school ---- if I had just taken out a 5 year loan last year, it might not be as feasible.

My point is, life changes quickly and I've found that having as few payments as possible is really advantageous. Being able to "get out" of a payment is also key. In other words, if you buy a slightly used car for $20k in cash and need to sell it in 2 years, you might be able to get $15k for it --- a loss, but you still got fair value for what it's worth and got your $5k in use out of it. If you finance a brand new GTi, you might still be upside down in 2 years, and selling it is going to be a huge pain in the ass involving paying it in full, getting the title, waiting weeks/months for it, finding a buyer willing to wait for the title, etc, etc, etc.

So I say splurge, but just not as much as you're thinking. Buy a $15k car in cash. Or buy a CPO Gti for $25k, and pay $500/mo for 2 years in order to pay it off quickly. But a brand new car with a 5 year car payment? That's a long time, and there's a lot that can happen in 5 years

Also, this is worth really thinking about:

I would still say I don't have an overwhelming need, but it would add a good bit of convenience for running errands, visiting friends in the suburbs, taking trips home, etc

$30,000 --- financed over 5 years --- is an ass load of money to spend for something that you're maybe going to use on weekends and to add some convenience for running errands. How much are you really going to use this car? 5,000 miles a year? And if you're in the city, you're talking door dings, scrapes, wheel curbings, etc.

If you don't need it, and it's just for convenience, and it's going to get inevitably beat on, then I vote to definitely go with a used one. But good luck with whatever you decide --- it's not like you can't afford a new one

[AZGolf]

All of my retirement savings is in a Roth 401k, so taxes have been paid.

OK, that's good to know; I didn't even consider that possibility initially. Does your employer apply matching even to the Roth 401k, or conversely, do they not do matching on the traditional plan? At any rate, my real point was that if you already have everything else squared away there's no reason not to use the remaining money for whatever you deem appropriate.

[GolfVIDriver]

Personally, I lease cars and take the downpayment I would have put in a new car and reinvest/save it.

I am leasing a 2012 GTI SR/CV 6M for $389 a month. Nothing down, 15K a year, and 3 year lease.

I make my monthly payment, I have no maintenance or repair costs, and at the end of the 3 years, I walk away. if its worth more than the payoff, I buy it and have a ridiculous used car deal.

I like leasing because it requires only the money you need to track depreciation, and nothing more. In other words, its the cheapest way to run new cars, and therefore, the smarter way to manage your money.

[jnm2.0t]

[QUOTE=LuckyDogg;75661511]All of my retirement savings is in a Roth 401k, so taxes have been paid./QUOTE]

Something to consider, as a single guy making 72k you are solidly in the 25% marginal bracket today. What you are doing with this strategy is paying 25% tax on everything today so you pay nothing later. What most people try to achieve is a balance of pre and post tax savings. If you have both available you use the one that makes most sense when you need it. If taxes are high when you are 70, use the Roth 401 money, if they are low use the normal 401 money. If there is a really low first marginal rate use the normal 401 money to a point and then supplement with Roth 401. Doing this you gain some control over your tax bracket in retirement which can become very important.

I appreciate the thought, but the 'Well, for 2k more' game is a slippery slope. :p

Just check out used values of your GTi and the similar A3 in your area and see if they hold their value equally or if the Audi comes out ahead, which I suspect it will. Most people expect leather for $30k, totally fine you don't but it may show up on the resale side.

[gtguard]

Your rent and utilities are 900? In Chicago? You ARE lucky!
By the way, get the GTI or the R for that matter. I lease a regular Golf and every time I get in there I have a blast, even driving to the dentist's office. This Golf is also my first car.

[LuckyDogg]

would you consider going with a CPO gti rather than a brand new one?

I would definitely consider a CPO vehicle, and am starting to lean predominately in that direction. There's a local 2011 VW certified model equipped how I'd like for 22k, though it's a former 'VW company car' -- trying to figure out what that means. I presume if it was in their press fleet, it's been beat to ****?

That would also negate the low financing rates currently provided, so I'd be more in tune to pay more up-front. I wonder if "I'll give you 20k, cash" would suffice?

$30,000 --- financed over 5 years --- is an ass load of money to spend for something that you're maybe going to use on weekends and to add some convenience for running errands. How much are you really going to use this car? 5,000 miles a year? And if you're in the city, you're talking door dings, scrapes, wheel curbings, etc.

You've hit the nail on the head of what are my primary detractors. I'm starting to think any transaction where the vehicle price is >20k is not in my best interest...

OK, that's good to know; I didn't even consider that possibility initially. Does your employer apply matching even to the Roth 401k, or conversely, do they not do matching on the traditional plan? At any rate, my real point was that if you already have everything else squared away there's no reason not to use the remaining money for whatever you deem appropriate.

Employer does match, though it's not a huge amount, and that money is considered taxable, so it's placed in a separate traditional 401k.

Just check out used values of your GTi and the similar A3 in your area and see if they hold their value equally or if the Audi comes out ahead, which I suspect it will. Most people expect leather for $30k, totally fine you don't but it may show up on the resale side.

Let's just say I don't love the A3.

Your rent and utilities are 900? In Chicago? You ARE lucky!

I'm in a pretty serious relationship. The S/O and I live together, so living costs are split. That being said, we did nab a ridiculously cheap deal on our place.

[LuckyDogg]

Not to keep bumping my own thread, but I checked my accounts this morning (I do on te first of every month) and my 401k is at $44,000, not $24,000 as originally reported.

Not sure if I made a typo or looked at the wrong statement... also not sure if that should have any relevance on decision making.


Definitely feeling good though... not everyday you find 20g

[JCJetta]

Or even consider a MKV, which you can get for half the price of a new GTI. Find a decent, well maintained example, have "just in case" cash set aside for potential issues, and still have a decent car that you won't cringe when you find your first scrape.

Yeah, scrapes, dents - you live in Chicago. It hurts a lot less to find them on a "cheap" car than it does a brand new one.

Also, going with the half price daily driver option, you are left open to other vehicular possibilities. One Chicago poster in this thread might have you consider something that floats. Or you could look in to RWD options for weekend pleasure (Miata, Fox Body 5.0, etc.) Or you could consider the crazy idea I had a while back and get a ~2000 Ranger 4.0 4x4 plus 2-place Sea-Doo set up.

Course, then you need to consider storage.

[philndz]

I LOVE THIS THREAD! I am 27, similar financial freedom. The kicker?.....I did THIS! I bought a $30k GTI, the only splurge of my life. It was a 2008, and by 2010 I just couldn't do it. I had another car (paid for), hated seeing the depreciation, and as a financial minimalist, it just felt like too much car. I sold it privately for a good price and felt so much relief. Not really financially, but mentally. It sounds like you pay a similar amount of attention to your numbers as I do. I justified the purchase, but at the end of the day I couldn't live with paying for more than I need. Now fast forward to present day; the used market is up, way up. I still have a paid for SUV that I utilize for recreational pursuits, dog hauling, trailer towing etc. I was looking to buy a used car that would be economical, easy on gas and all that. I quickly discovered that even over a short 36-month term, a brand-new bare bones Nissan Versa, Kia Rio, or Hyundai Accent, bought brand new would cost about the same as most of the overpriced used cars. I worked all the numbers, and figured out that even when you factor the additional insurance and tax, these new cars would pay for themselves in fuel savings over my 4runner in under 36 months. The 2012 Accent 6-spd that I finally purchased for under $14k (employee program) also gives me the stress relief (HUGE WARRANTY) of not having to worry about repairs, or the re-conditioning that a used car would inevitably need. It is averaging, I'll repeat that for emphasis, AVERAGING 42mpg on my 30 minute commute and will equal money in my pocket well before the 36th, and final payment. I don't regret the decision for even a slight moment. It makes so much financial sense, and even as a 'gear-head', SCCA-member, 'car-guy' person, the balance of affordability and sensibility of this car allow me to enjoy it, unlike the much racier GTI. It sounds strange to some, but if you are programmed the way that I think you are.....don't write off the financially better alternative.

[LuckyDogg]

Well Financial Loungers, I did end up purchasing a GTI.

Token Instagram Photos:





I've been walking around with a ****-eating grin for the last two weeks, I am so giddy about this thing it isn't even funny. I purchased a 2011 CPO model that came off lease, so I have the remaining factory warranty plus two years / 24k CPO warranty on top of it. It's fully equipped with 18" Serron wheels, navigation system, HID headlamps, sunroof, etc. Only feature I could ask for would be remote starter, and I'll deal without that one considering it's my first car (I need to aspire for something with the next one, heh).


I felt were I to purchase a different vehicle, I would get the itch to jump sooner rather than later. This is the car I want and the car I have wanted for a long time, so while I am paying more than an Elantra or a Cruze, I will be happier with it for a longer time, and though that isn't quantifiable, it does have value to me.

Out the door my total cost was 30k, the amount I anticipated and budgeted toward. I put just $2500 down (used my CC for some airline miles, but don't worry, I paid it off two days later) and financed the remaining $27500 at 2.9% for 5-years. It's a simple interest loan and the monthly payments are ~$500, but I'm making a $7000 payment toward the principle with my first month's payment.

I have not yet decided if I should sell some stock to pay more toward the principle or live out the loan terms for a while, but I am comfortable financially and have some time to make this decision.


On a personal note, I appreciate all of the advice and guidance provided in this thread. I feel most every contributor provided sound, personal advice and sought my best interest. While I did not follow everyone's guidance, it did not fall on deaf ears. Thank you all.

Time to go drive!

[ValveCoverGasket]

nice of someone to follow up on one of these posts.


enjoy the gti!
probably not how id spend my $30k... but hey... different strokes

[hugoaswho]

congrats!

I'm in a similar situation as you are unfortunately I did the stupid thing and bought a condo in 2009 with 20% down, that money is now gone since prices have depreciated that much in 2 years. I am happy that I have my own place, nice bathroom and I'm redoing the kitchen and I have a huge garage only 30 min from Manhattan but I am paying 1100k a month with taxes and cannot refinance my rate of 5.375%...

so the money that I have lost and dumped into the condo could have instead been enjoying a nice car like you. I am driving a 10 yo passat wagon.

So lesson of the story sometime what seems like the best thing to do, getting a killer deal as I thought on a condo it ended up a BAD deal...and the bad thing like buying a new car and enjoying it is a GOOD deal because in the end you are happy...

[GolfVIDriver]

Congrats! I am local to you. Next time you are out and about and see a '12 Shadow Blue GTI, shoot me a wave.

[Diamond Dave]

First of all, congratulations! You've got a very strong base for someone at your age. I'm a little green of your position w/r to debt.

When to splurge and buy a car? When you can buy it with cash and when you plan to keep it. Buying a brand new car always puts you in a position to take a bath on value anyway.


How about motivating yourself with learning more about buying a new car using the European delivery program?

Why not a new S4? M3? R32?

[bruno110]

thank you[IMG]http://www.********************[/IMG]

[BetterByDesign]

OP put something down on a condo first, see how things work it then grab the GTI.

To me, your post is about guilt.

If you get married GTI's and condo's are out the door.