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      10-07-2012, 07:55 AM   #1
daixloxbmw
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Finance Experts: Need Your Advice

Okay here is some background, so in about two years, I plan to trade in my 2011 135i for a new car. Currently leaning towards the new C7 Corvette Grand Sport but the F82 M3 and F20 1M are still being considered.

Anyway, here's the question, I expect to get about a $10k bonus from my company so what should I do with it?

A) Use that $10k as an additional down payment to my 2011 135i trade-in to reduce the monthly payments and obviously pay less interest. Additional background, I have excellent credit so I would assume that I can get whatever is considered a good interest rate in two years.

or

B) Use that $10k to invest in my company's stock. Additional background, my company is in medical software is doing very well financially. Even the 2007-2009 recession had little impact on it. My company is privately traded, so it controls the value of its own stock. Historically (over the past 15 years), the stock has increased its value about $3 per year and pays great dividends at about $3.28 per share annually. So with $10k, I can buy about 200 shares, which will pay about $656 annually in dividends, plus the 200 shares will likely increase its value about $600 per year if the trend continues. Bottom line, my company stock has really been stable and has continued to grow steadily and pay solid dividends for the past 15 years and I see no reason why that would change in the near future.

So having said all that, what would you do with that $10k? Even with my very limited understanding of finances, I would assume that in the short term, it makes more sense to use it as a down payment for the new car since the interest is initially much greater than the stock growth/dividends but in the long term, the stock growth and dividends will eventually surpass interest, right?

Does my logic make sense? So unless I absolutely cannot afford the monthly payments without the additional $10k down payment (not the case but just for argument's sake), is there any reason why I shouldn't invest it into my company stock instead? I realize doing this will mean that I have to pay more in monthly car payments and pay more in interest at least for the first few years but I am okay with that knowing that the investment in stocks will eventually pay off in the near future.

BTW, before anyone else says it, not buying a new car is not an option even though I realize that is the wisest choices financially.

Thanks in advance!
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      10-07-2012, 09:02 AM   #2
amanda hor$t
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how old are you? and do you have your own house?
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      10-07-2012, 09:14 AM   #3
daixloxbmw
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Originally Posted by veloziROTHTOR View Post
how old are you? and do you have your own house?
30 years old and yes.
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      10-07-2012, 09:23 AM   #4
amanda hor$t
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i'd go with the investment, try to make a profit. worst case you stick with your 135 for a few extra years. and, i'm assuming you can always sell the stock if you change your mind. with the car, once you pay into it, it's basically stuck (unless you sell your car which is not as direct as selling stock)

when i got my e36 m3 in '01, i planned on driving it 5 years. still have it lol. i chose to pay my car off early... in hindsight, if i got a condo with that money, i would have done a little better. i'm not counting dollars/cents here, more of a psychological choice where a car is seen as debt (unless it's a ferrari cars don't make money) and stock is an investment

Last edited by amanda hor$t; 10-07-2012 at 09:34 AM.
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      10-07-2012, 11:08 AM   #5
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All variables aside, below is my recommendation based on the material I have studied for the CFP:

Maintain the 10K bonus in your company stock if you're confident the rate of return will be consistent with historical averages and will be hedged or protected in a way from the upcoming fiscal cliff. You didn't list the price per share of the stock, but at a $3 average annual gain, I can assume the rate or return is fairly above 5% unless the share price is way in the triple digits. With that being said, with top tier credit, you should be able to acquire a car loan at under 2% considering the new rounds of QE from the Fed, thus keeping the fed funds rate and all consumers interests rate at historical lows until 2015. ONLY IF YOUR COMPANY STOCK YIELDS LESS THAN THE INTEREST RATE YOU GET ON YOUR LOAN SHOULD YOU THROW THE BONUS AT THE TRADE IN.

*Some food for thought:

PROS - Will your company be acquired any time in the near future by a major publicly traded firm in the same industry? If so, your stocks profits will multiply in your favor.

CONS - Is the US Government a major customer of your company's products? If so, with sequestration and the uncertainty with the fiscal cliff, throwing the bonus at the trade in may provide peace of mind if you plan on buying before January, 2013.

* I personally would always put a nice bonus of that size in a tax deferred 401K or even better, a ROTH vehicle if that's available to you.
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      10-08-2012, 07:47 AM   #6
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Quote:
Originally Posted by Fupa92 View Post
All variables aside, below is my recommendation based on the material I have studied for the CFP:

Maintain the 10K bonus in your company stock if you're confident the rate of return will be consistent with historical averages and will be hedged or protected in a way from the upcoming fiscal cliff. You didn't list the price per share of the stock, but at a $3 average annual gain, I can assume the rate or return is fairly above 5% unless the share price is way in the triple digits. With that being said, with top tier credit, you should be able to acquire a car loan at under 2% considering the new rounds of QE from the Fed, thus keeping the fed funds rate and all consumers interests rate at historical lows until 2015. ONLY IF YOUR COMPANY STOCK YIELDS LESS THAN THE INTEREST RATE YOU GET ON YOUR LOAN SHOULD YOU THROW THE BONUS AT THE TRADE IN.

*Some food for thought:

PROS - Will your company be acquired any time in the near future by a major publicly traded firm in the same industry? If so, your stocks profits will multiply in your favor.

CONS - Is the US Government a major customer of your company's products? If so, with sequestration and the uncertainty with the fiscal cliff, throwing the bonus at the trade in may provide peace of mind if you plan on buying before January, 2013.

* I personally would always put a nice bonus of that size in a tax deferred 401K or even better, a ROTH vehicle if that's available to you.
Fupa92, this is excellent advice. Most of which I already considered myself but I wanted to get some confirmation from some experts.

To answer some of your questions...

Currently, the price per share is $43. The years before were: $40, $37, $37, $37, $34, $30, $27, $23 and $20. As you can see, the value of the stock has increased by at least $3 each year. The only exceptions were stagnant years where it stayed at $37 due to the recession. Aside from that, the stock has historically increased in value by at least $3 each year. The year before $20, it was $37 but then the stocks split. Like I said before, very consistent and stable and growing very steadily. Also, dividends are currently being paid at $3.08 per share annually. In the past few years, it has increased about $0.20 each year, which is why I expect it to be $3.28 in a year or so.

So my company stock yields, based on historical performance of the $3 gain in stock price each year and also the consistently high dividends paid of about $3 annually, is significantly higher than interest rates on a a car loan at 2% (or even 3%, worst case scenario).

It is unlikely my company will be bought out anytime soon but I cannot say for sure.

The US government is not a customer of my company but it does have an impact on my company. As I mentioned before, my company is in the medical software industry and our performance is tied to US regulations/policy in the medical sector. For example, Obama signed the ARRA into law, which pumps billions of dollars into the hospitals (our primary customers) to encourage them to invest in the latest technology and update to an electronic system (usually from a paper system) so this resulted in record sales for my company in the following years.

Thanks again for the input!!!
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      10-08-2012, 09:31 AM   #7
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First, Never put too much of your money into your company, generally a bad idea they pay your bills and they should not also be your investments since bad things happen to all companies. Next with car loans running in around 5 or 6% without special deals which are running around 2 to 4% take the loan on the car since I can show you an investment right now paying out about 12% dividends, so put your money in that investment is far better than putting into a car or you own company.

But if can not find an investment paying out more than the loan interested rate put towards the car. Stay away form over investing in your company.
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      10-08-2012, 09:58 AM   #8
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The dividend you get from the Company Stock is a 6.56% annual return on it's own. Factor in the price increase in the stock and it's probably above whatever car loan interest rate you'll be paying. The downside is how hard is it to sell your Company Stock? Being privately traded means it's a lot harder to sell than a public company.

Like Maestro said, as long as you can find something that pays you more in interest than you're paying on the loan, keep the money.
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      10-08-2012, 12:01 PM   #9
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Quote:
Originally Posted by Maestro View Post
First, Never put too much of your money into your company, generally a bad idea they pay your bills and they should not also be your investments since bad things happen to all companies. Next with car loans running in around 5 or 6% without special deals which are running around 2 to 4% take the loan on the car since I can show you an investment right now paying out about 12% dividends, so put your money in that investment is far better than putting into a car or you own company.

But if can not find an investment paying out more than the loan interested rate put towards the car. Stay away form over investing in your company.
Maestro, your recommendation to avoid overly investing into a particular company is just to avoid "putting all your eggs in one basket", right? I understand that point but is there another reason why I shouldn't do it based on the numbers I have provided?

Care to share your investment that is paying out 12% in dividends?

Thanks for your feedback!
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      10-08-2012, 12:07 PM   #10
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Originally Posted by Seminole View Post
The dividend you get from the Company Stock is a 6.56% annual return on it's own. Factor in the price increase in the stock and it's probably above whatever car loan interest rate you'll be paying. The downside is how hard is it to sell your Company Stock? Being privately traded means it's a lot harder to sell than a public company.

Like Maestro said, as long as you can find something that pays you more in interest than you're paying on the loan, keep the money.
Seminole, yes the dividends alone seem to be well worth the investment since 6.56% is likely much higher than any car loan interest. Not to mention the price increase in the stock that has historically gained about $3 each year in the past 15+ years.

Traditionally, my company's Profit Sharing Trust has been an active buyer of company stock when employees want to sell them. I have not heard of any issues with employees selling stocks in a reasonable amount of time but I appreciate you bringing up this point anyway.

Thanks again!
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      10-08-2012, 12:47 PM   #11
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Quote:
Originally Posted by daixloxbmw View Post
Maestro, your recommendation to avoid overly investing into a particular company is just to avoid "putting all your eggs in one basket", right? I understand that point but is there another reason why I shouldn't do it based on the numbers I have provided?

Care to share your investment that is paying out 12% in dividends?

Thanks for your feedback!
Yes, all eggs in one basket is one reason, as others pointed out, it is privately held, which in this day and age is not too bad, since you do not have Wall Street Analysis telling the company to do dumb things to increase share value. But this is a down side if you do not have independent view of what they are doing, they could be heading for a wall and you will not know it until it is too late. Some small privately held companies like making employees buy in, why it makes you committed to them. Forces you to work harder. Do not get me wrong, I buy my companies stock, always have, but I do not hold it long, I am in an out and make what I can especially if I get a discount buying it.

Here is an investment, and this is not advise do you own research on this NLY, it just paid out a 3% dividend and does so every quarter for a total of 12% for the year, but it depends on when you buy in. It has been bouncing between $15 and $18, it does not grow in value, just kicks out dividends. Right now the value is trending downward so if you buy in below $16 the return could be higher.

I have another investment like this one which is not worth getting in now, but 8 yrs ago I bought in and keep reinvesting the dividend and today base on my initial investment it is kicking out 15% yearly and the value of the investment less the reinvested dividends is up 80% or about 10% per year.

The simple decision is this, if you can find an investment that will return more than a loan, make the investment and take the loan.

Today I can pay cash for most anything I want except for a house, but I have always taken loans for a car especially if I can get a loan for less then 5% or 6%. The only reason I put cash down on a car is to reduce the monthly payment.

Last edited by Maestro; 10-08-2012 at 01:28 PM.
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      10-08-2012, 03:57 PM   #12
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Originally Posted by Maestro View Post
Yes, all eggs in one basket is one reason, as others pointed out, it is privately held, which in this day and age is not too bad, since you do not have Wall Street Analysis telling the company to do dumb things to increase share value. But this is a down side if you do not have independent view of what they are doing, they could be heading for a wall and you will not know it until it is too late. Some small privately held companies like making employees buy in, why it makes you committed to them. Forces you to work harder. Do not get me wrong, I buy my companies stock, always have, but I do not hold it long, I am in an out and make what I can especially if I get a discount buying it.

Here is an investment, and this is not advise do you own research on this NLY, it just paid out a 3% dividend and does so every quarter for a total of 12% for the year, but it depends on when you buy in. It has been bouncing between $15 and $18, it does not grow in value, just kicks out dividends. Right now the value is trending downward so if you buy in below $16 the return could be higher.

I have another investment like this one which is not worth getting in now, but 8 yrs ago I bought in and keep reinvesting the dividend and today base on my initial investment it is kicking out 15% yearly and the value of the investment less the reinvested dividends is up 80% or about 10% per year.

The simple decision is this, if you can find an investment that will return more than a loan, make the investment and take the loan.

Today I can pay cash for most anything I want except for a house, but I have always taken loans for a car especially if I can get a loan for less then 5% or 6%. The only reason I put cash down on a car is to reduce the monthly payment.
Sound advice all around. Thanks for the tips.

I need to find me a solid investment like yours!
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      10-10-2012, 08:58 AM   #13
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I would lean toward the investment into your company...

Don't know the specifics of US tax law as an Aussie but I am guessing more interest and amortization expenses related to your car can be used as deductions for the times you may use your personal vehicle for work purposes - which we all sometimes do even if we have a pool company car.
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      10-10-2012, 05:54 PM   #14
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If you really intend to use the money towards a new car in two years:
Invest the money in a CD with a two year term.

If your credit is good enough, so that you do not need the 10k in order to buy, then consider other investments beyond CDs.

If the 10k is a significant portion of your total investment portfolio, consider NOT investing in your company's stock and instead focus on a more diversified portfolio, such as a stock mutual fund.

If you invest in your company's stock and if the investment is significant, then you are doubling down on risk. If your predictions are wrong and your company does poorly, you could lose money on your investment and lose your job.

Since you are reaching out to strangers for investment advice, it's a good idea to take it slow so you don't learn things the hard way. A diversified portfolio is a good approach.
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