Personal Finance Q & A

Cash Is King When You Buy A Car

Q In purchasing a new vehicle, which is more prudent: to pay cash or to borrow and let your cash earn interest for you? The thought of making a payment each month for a new car is troubling.

- P.R. (e-mail)

A It depends on how much interest your cash can earn. If you have a savings account and earn less than 5 percent, but the car loan is 8 percent, you're losing money. If you invest the cash and earn 10 percent (average return from the stock market), you'll have to pay taxes on the earnings, so you may still come out behind.

If you have the cash, consider buying the car with it and taking the monthly payment you would have made on a car loan and investing it monthly in several good mutual funds, says Lewis J. Altfest, president of L.J. Altfest & Co. in New York.

He suggests you put half the payment in the Neuberger & Berman Manhattan Fund (800-877-9700), a growth fund that is up 6 percent this year, and half in the Vanguard Intermediate Bond Fund (800-662-7447). It is up around 1 percent. But you'll need to pull together a good chunk of cash to begin with: The minimum investment on Neuberger & Berman is $1,000; Vanguard, $3,000.

Q In case I should ever win the lottery here in Colorado and choose the lump sum payout, could I income average the amount on my federal income taxes? Over 10 years?

- C.A., Salida, Colo.

A The answer is "no," according to a spokesman for the Internal Revenue Service in Washington. Income averaging was removed from the tax code in 1986. The only exception: You can still use income averaging on a lump sum distribution involving a pension-plan payout.

By the way, you won't find us urging folks to play state lotteries. It's a form of gambling, not a sound investment or a statistically promising way of building wealth. In Colorado, for example, your likelihood of winning the highest prize is about one in 5.25 million, according to Colorado's lottery office; that's a higher number than the roughly 4 million people who actually live in your state.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com