This Free Car Might Change Our Lives

Free Car
If you have been keeping up with our posts, you know that we were gifted a car by some very generous family members. We finally sold our extra car that we were making payments on, and now we have an extra $463 each month to do whatever we want with…. what should we do???

It was bitter sweet as we said goodbye to the car that we brought both of our boys home from the hospital in.  However, the breathing room we now have because we won’t be paying a $463 car payment each month is huge.  We have an unexpected $463/month for the next 19 months, about $8,800, and we need to decide what to do with the extra money.

I’ve done some math on a few options for what we could do with the extra money at our disposal every month.  If you want to skip all of the math and explanations, you can scroll down towards the bottom to see a nice, neat chart the results of the number crunching.

Free Car

The websites/calculators I used are:

Compound Interest Calculator

Amortization Calculator

Loan Payoff Calculator

The Math Starts Now

Real value of our free car – $10,900

$13,000 (KBB Car Value) – $2,100 (Repairs)

This is a standard value that I will use for each scenario, it is the calculated base value of the new car minus the repairs it requires to fully function.

Debt Destroyer Option

This strategy will purely focus on paying down our debt (Home Equity Loan and Mortgage) before investing anything.

We are currently paying a ripe 6.74% rate on the original 20 year $65,000 loan.  We pay $475 every 2 weeks, which averages to $1,030/month and turns our 20 year loan into a 6.5 year loan.  At our current balance ($57,734.45) with bi-weekly payments, we will pay off our Home Equity Loan in another 68 months (July 2024).

If we split the $463 equally into the bi-weekly payments, our payments would change from $475 to $688.  If we were able to keep up that payment schedule, we would pay off the Home Equity Loan in “just” 44 months (July 2020), and we would save $4,249 in interest.

Total value of our free car with extra payments toward HEL – $15,149

$10,900 + $4,249 (HEL Interest Saved)

But that’s not all the potential value we would get if we took that route.  By paying off the HEL even earlier, we could then spend the extra 20 months of $1,490 payments that were going to the HEL and put it towards our house payment.  In 44 months, our home loan will be at $185,940.65.  If we started devoting the $1,490 per month towards the principal, our payoff date would move from March 2042 to April 2029 and would save us ~$52,415 in interest payments.

Total value of our free car with HEL payments going towards our mortgage grows to = $67,564

$15,149 + $52,415 (Home Loan interest saved)

That is crazy.  When I first calculated that out,  I just thought about Dave Ramsey and the power of the debt snowball.  After we finished paying off our debt, we could invest the amount into an S&P fund for the 15 months leading up to our July 2030 deadline (although it wouldn’t count towards the retirement account goal).  The amount extra that we could amass by July 2030 would be ~$32,540 (mostly contributions).

Total value of our free car using this strategy by July 2030 = $100,104

$67,564 + $32,540 (8% annual gains for 15 months at $2,605/month)

Invest it All Option

Next, I’ll look at what could happen if we invested the amount, didn’t add any extra money towards debt and just let it all ride in an S&P 500 index fund.

Total Value after 68 months of investing $463 = $48,900

$10,900 (real car value) + $38,000 (8% annual gains for 68 months at $463/month)

At the end of the 68 months, we would roll our Home Equity Loan monthly payment into the investment (which is would now be paid off), bringing the total monthly investment to $1,493.  We don’t capture any interest savings on the HEL because we continued to make the same bi-weekly $475 payments.  Because we don’t add extra payments towards our home loan, we also will not capture any interest savings on that loan either and will make the same monthly investment all the way to July 2030.

Total Value after 84 months of investing $1,493 = $245,540

$10,900 + $234,610 (8% annual gains for 84 months at $1,493/month on a $38,000 initial investment)

Nearly a quarter of a million dollars in liquidity.  That is a significant chunk of change and just goes to show the power of compounding a reasonable amount of money over a shorter period of time.  If we continued that same monthly investment for 17 more years, we’d have $2,000,000 from that money alone.

Free Car

Build Up Our Savings Option

A third option that we are considering is to build up our savings account to $10,000, and then snowball the car payment money into our Home Equity Loan and invest the money after we pay off the HEL a bit early.  Here’s the breakdown for that strategy:

10 months to save $10,000 (estimated based on our other savings coming in).  In 10 months our HEL will be down to $50,504, at that point we will add the $463 to the payment.  Our bi-weekly payment would be $688 and we would pay off the HEL 38 months later (November 2022).  By adding the extra $463 per month, we would save $3,076 interest.

Total value of our free car through paying off the HEL = $18,606

$10,900 (Car value) + $4,630 (amount saved in 10 months) + $3,076 (interest saved on HEL)

­Now we would take our extra money and start investing into an S&P 500 index fund.  We would have a total of 7 years and 7 months to invest before July 2030.  Our monthly contributions would be $1,493.  After 7 years and 7 months we would accumulate about $186,000.

Total value of our free car by July 2030 = $204,606

$18,606 + $186,000 (8% annual gains for 91 months at $1,493/month)

The Nice Graph Summary

Free car

All our options on what to do with this money are wide open.  There are appealing aspects to each of the three strategies that I mentioned:

Pay Down Debt Option

+ Eliminate mortgage in 10.5 years

+ Highest savings in interest payments

+ Debt free by 2029

+ Money saved from interest payments is “guaranteed”

– Money sent off to pay down bills can’t be used for emergencies until April 2029

– Illiquid net worth growth

– Lowest extrapolated value

Build Savings Option

+ Emergency savings is replenished (peace of mind)

+ Money is available month to month for emergencies

+ Liquid net worth grown

+ Investing risk is mitigated by emergency savings

– Mortgage continues until 2042

– High risk (90% at the mercy of the market)

Invest it Option

+ Significant growth in taxable wealth

+ Money is available month to month for emergencies

+ Liquid net worth growth

– Mortgage continues until 2042

– Highest risk (96% at the mercy of the market)

– Total return is highly variable

The More Likely Scenario

Right now, I feel like the option we are most likely to gravitate towards is the Build Savings Option.  We’ll get a nice chunk put away into our Ally Savings account, devote money towards the HEL, and buy some of the things we need for the house (finish our basement gym and update the guest bathroom that really needs a face lift.)  We are also going to replace the siding on our house as it is rotting in some places… that isn’t going to be cheap.

As I have mentioned in previous posts, we aren’t all or nothing about saving and being frugal.  We won’t put 100% of this windfall towards any one of the options.  But we will do our best to balance the money with some extra things we have been talking about for our house for some time.

Outside of buying $463 of canned Canadian air every month, there aren’t many ways we can screw this opportunity up.  We need to keep an eye on our spending, and decide how much of the monthly amount we are going to devote to saving/investing/paying down debt.  Once we make that decision, it needs to be automatic.

One thing is for sure, the next 4,248 days are going to be a little less stressful for us because of the enormous gift we received a few weeks ago.  A gift that looks to benefit us far beyond the face value of the car and the monthly payments we won’t send to a finance company.

What would you do?

If you were in our shoes, and suddenly had an extra $463 per month at your disposal, what would you do?

What is the worst way you can think of to spend $463 each month?

Thanks for reading,

MB2030

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