4

I have saved money which I plan on using to purchase a used car in the coming years. The amount saved is the purchase price for a used car right now in April 2021 and I would like to make sure that I can afford the same level car in a year or two (or three) when I actually purchase the vehicle. Is there an investment instrument which is indexed to the market of used cars (or at least highly correlated with it)? This would protect me from price fluctuations in that market as well as inflation in the coming years.

3

This seems like over-planning. A car is just one of many things (though one of the larger things) you will presumably buy over the next few years, and you will hopefully be saving additional money over that time as well. A few percentage points of uncertainty about car price inflation seems lost in the noise.

Just keep a reasonable amount in a low-risk investment like high-yield savings, money market, or CD, and make the decision about how much to spend on which car when you're ready to buy. If you start seeing that you'll need to spend a little more than what you earmarked, spend less on other things to make up for it.

3
  • What is over-planning to one person is planning to another. Depending on my outlook on macroeconomic factors, such as inflation (caused by stimulus etc.), whether a recession is coming (used cars will likely go up since less people are purchasing new cars), interest rates (presumably, lower rates would mean that more people can purchase more expensive new cars instead of used ones) and the availability of new vehicles (caused by chip shortages) it wouldn't be crazy to use the 10% figure used by mhoran_psrep or even something higher. – David Apr 18 at 17:30
  • Of course you can disagree with that picture but the point is that I don't think it's unreasonable to be concerned. With those numbers and my savings of $20k that's a difference of more than $6,000 when the time comes. This, in my mind, is definitely an amount to be concerned about undershooting. A car purchase is likely the second largest purchase a consumer will make after a house, and I don't think that other savings (outside retirement savings) will come anywhere near covering the amount needed. – David Apr 18 at 17:30
  • I think that this is especially true, since if the instrument that I'm looking for were to actually exist, it would totally get rid of this risk at essentially no cost (after fees) or effort. – David Apr 18 at 17:31
2

-Short answer: No. If your main concern is hedging against Used Car inflation over such a short time period your best option would be to buy the car now.

All of your other options are gambles (due to the short time frame and the potentially double digit inflation for Used Cars). You could hedge against Core inflation using an I-Bond or TIPS, but that won't come close to hedging against a positive Used Car inflation rate, and there are no safe or relatively safe Corporate bonds that come close to what you would need... even if you could figure that out (which you really can't).

However, you can track the inflation rate for Used Cars at either the FRED Database (St. Louis Fed) or the Bureau of Labor Statistics. The links I've given you go straight to Used Cars. This can help you adjust your savings as you go. You can do it on a monthly basis, if that is how granular you'd be willing to get. I wouldn't do it or recommend it, but that's an option. I think checking it annually is reasonable, though.

Used Cars' inflation rates have historically experienced far greater volatility than other categories of goods. This is why they were removed from the Core-CPI calculation in the mid 1990's. The only other things excluded from the calculation are Food & Energy, and for the same reason: Volatility.

For instance, year over year (March '20 - March '21) the rate was over 9%. However, the rate was negative almost the entire time between 2014 and September 2018 averaging between -(3)% - (4)%. That kind of compounding is significant, but can be undone very quickly and is, in any case, difficult to predict.

I hope you can see that this level of volatility precludes investing/hedging in the way you'd like.

Investments in equity securities whose time frame is <5 years are generally not advisable as they are closer to gambles than investments. I'd extend that to >10 years, actually. The longer, the better. Add to this reasonable forward return forecasts and you can see that you can't do what you'd like in this case unless you're willing to accept having 1/2 the money available when the time comes, instead. But, I assume that's not the case.

4
  • I like your analysis but I would disagree on two points. First, purchasing a car now would introduce storage costs since I don't currently need it and the vehicle would depreciate by some (not insignificant) amount and have a shorter lifespan of actual use when I actually begin to use it. Cars are depreciating assets generally speaking. – David Apr 18 at 17:36
  • I would also disagree with not investing for less than five years. That's generally true and is a good rule of thumb, but here any loss would be offset by the purchasing price being cheaper. It wouldn't matter if I lost half my money since the used car would be half the cost. – David Apr 18 at 17:36
  • Your first comment would have to assume that the unknown risk of inflation is less than the known risk of depreciation. Assuming you'd have a place to park the car you're thinking of buying I either wouldn't consider storage as an additional cost, or I'd apply the same logic as above: if general inflation risk increases at a pace that warrants hedging over the short term, then your storage costs (which you'd presumably still have after buying the car even at a later date) will likewise inflate (at an unknown, but discoverable, rate). – Izzy68 Apr 26 at 15:42
  • I don't understand your second comment. I'm talking about the phenomenon known as Sequence Risk. That usually refers to recent retirees, but applies in any situation where the money must be available at a specific time. If that need coincides with a downturn in the market for whatever asset or assets you own you'd be hurt (i.e., you'd incur losses, from bad to fatal, depending). Regardless, I don't follow your reasoning as to why the car would be 1/2 the cost? Did the cost of a used car (or anything else) drop 30% in March of 2020? Is a market downturn deflationary? I don't think so. – Izzy68 Apr 26 at 15:48
2

Congratulations. You have saved enough money now, to setup a needed purchase that won't take place for another 2 or three years, if there are no surprises.

Lets run some numbers. You have saved $20,000 and that would buy you a 3 year old make and model X. Your concern is that in 2 or 3 years the car price would have risen higher the measly interest would have increased your bank balance. Lets say it is 3 years, and prices rise 10% a year. That means the price will now be $26,620.

If you ignore the interest earned in savings account, that would mean you would have to set aside approximately $184 a month to make sure you kept the bank balance on track. Any interest you could get via a higher interest rate from a CD or higher yield savings account would reduce the monthly goal slightly.

What your savings has done for you can't be ignored. You now have the ability to get the car you want with very little additional funds required. That means that if your current car dies at an inconvenient time, you aren't scrambling to find a car, and find financing in a weekend. This money in the bank gives you the ability to negotiate a price without having to also negotiate a loan.

Nobody knows what cars will cost in 3 years. Are we at the peak today, or will they go through the roof? The last car we purchased was a new car. It was going to be a used car. We saved enough to not need a loan. When we went to look at cars we discovered that all the cars coming off their leases were the ones with all the bells and whistles. We weren't looking for most of those optional items. It turned out that the best prices were the new cars with the options we wanted.

I would slow the savings rate for the car to a trickle. Peek at the prices every 6 months or so. And sleep soundly that the amount I had saved would make the next car purchase a easier transaction.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.