Wednesday, December 2, 2015

Car Loan means Dividend investments

I closed on my new car loan. The interest came in at 0.9%. For the roughly $ 40k balance this means under $ 600 in finance charges over three years. This also means that if I put $10k in my dividend portfolio now, I and I make 3-4% on it, I'll make roughly $1000 in dividends over the three years of the loan. The risk is that the price of the shares may fall, but I plan to hold on to the stocks for the long run. I will probably invest before the end of the year. And I may put in $18k total or half the money from the car fund. I will stop the regular automatic cash transfers -- that money will go the the car payments.

What I really like about this set up is that after my car is paid off, I will still have my dividend stocks. For the 36 months, normally I would have put in $ 500 per month, or $18k. If I put in the $18k right now, I instantly benefit from the dividend machine. The remaining money from the car fund and the additional fresh cash will be drawn down for the car payments. I will also have a higher insurance and property tax bill that I will need to cover. As I mentioned before, I have two 0% loans that will be paid off in November 2016, at which point I plan to split those payments into funding a new car fund and adding fresh cash to the Active Passive portfolio. My wife's car will be three years old by then, and I'll assume we can drive it for 10 years. Conservative, as the previous car lasted 13 years for her, and 15 years for me. Saving up the money in a interest savings account (or CD if rates become attractive) will give me piece of mind that I can buy a car if and when needed. Puts me in a much better position if it's possible to say no to financing.

Roughly my dividend investment plan is as follows
  • 2015: invest $18k in dividend portfolio, halt fresh cash transfers
  • 2016: no additional capital input until other loans are done. Reinvest dividends only.
  • 2017, 2018: slowly add in half of prior loan payments as new investments.
  • 2019: all loans done, evaluate financial situation. Split new car payments into funding new car fund, and dividend investments.
Of course all this can change if significant events happen. Extra bonus, or lack of bonus, extra income or extra bills. Life's unpredictable, but it's good to have a short term plan that gets us closer to the long term goal.

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