Author Topic: Investing Priorities vs Paying Down Long Term Low Interest Debt  (Read 1262 times)

snowexplorer

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Hey all, so I'm a long time forum member, but have created this account for anonymity with posting financials due to a revealing normal username and fellow acquaintances on this site.

I'm currently looking for opinions on my current status. Currently 23, and been working in a full time career position 2 years. I have been rigorously investing all additional capital for the past couple years and would like to continue to get a good chunk saved young to take advantage of compounding interests. I maxed my 401k last year and plan to this year as well. My concern is how to handle my investing and how to handle my car loan.

*Disclaimer: I am frugal, but I WILL NOT SELL MY CAR. It's not the most mustachian, but I plan on keeping it until it dies or the repair outweighs its worth. I am active outdoors and require a functional vehicle in a lot of snow. And I repeat, I WILL NOT SELL MY CAR. I am also in a Masters program at nights, which I am not including expenses of here.

Income: $60k/year --> Expected 10-15% raise in two months ~$66k-$69k

Assets/Debts
Cash on hand: ~$3,000
Savings: $10,000
401K: $32,000
Roth: $12,000
Car loan (Subaru): $22,000 (@2.90%) - ($1,660 total interest)

Budget
Rent: $700 (I have a roommate)
Car Payment: $393
Car Insurance: $141
Gas/Fuel: $150
Car Tax: $59
Service & Parts: $20
Food: $300 (I have a girlfriend who I also take out to dinner on occasion)
Internet: $65
Entertainment: $100
Electric Bill: $35
Utilities: $25
Doctor: $30
Total: $2,018/month

I like the idea, of paying off my car loan asap, but the math doesn't add up to be worth it in my view. Assuming a reasonable 7% interest on an investment account, compared to the 2.9% loan, over the course of a couple years would still be a couple thousand dollars in the favor of continuing with the minimum car payments.

1: Pay off car loan over remaining 5 years at normal payment. Anything beyond 401k goes into another investment account.
2. Max 401k and add remaining to car payment.
3. Get 401k match only and remaining to car payment.

MDM

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Re: Investing Priorities vs Paying Down Long Term Low Interest Debt
« Reply #1 on: May 27, 2015, 10:29:16 PM »
Hey all, so I'm a long time forum member...

Car loan (Subaru): $22,000 (@2.90%) - ($1,660 total interest)

I like the idea, of paying off my car loan asap, but the math doesn't add up to be worth it in my view. Assuming a reasonable 7% interest on an investment account, compared to the 2.9% loan, over the course of a couple years would still be a couple thousand dollars in the favor of continuing with the minimum car payments.

1: Pay off car loan over remaining 5 years at normal payment. Anything beyond 401k goes into another investment account.

Putting the above pieces together (and noting the lengthy discussions about "mortgage vs. invest" when the interest rates are higher than your car loan's), it's hard to imagine you doing anything other than the bolded action.  Good plan.

ega41t

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Investing Priorities vs Paying Down Long Term Low Interest Debt
« Reply #2 on: May 29, 2015, 03:21:30 PM »
Also depending on your car loan there may be some sneaky early pay out fees if you pay it off before its full term. I recently thought of paying off my car lease agreement as it was a slightly higher interest rate than my home loan but the substantial early pay out fees negated any interest savings that I would have made.


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« Last Edit: May 29, 2015, 03:26:54 PM by ega41t »

frugaliknowit

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Re: Investing Priorities vs Paying Down Long Term Low Interest Debt
« Reply #3 on: May 29, 2015, 03:56:13 PM »
Keep in mind that prepaying the car loan is zero risk (like buying a US govt. Bond) and that while your expected return on investment return is higher, it is not guarunteed.   Looking at the range of possibilities, what if the stock market tanked AND you were out of work longer than 6 months with your UGLY car loan?
« Last Edit: May 29, 2015, 04:00:16 PM by frugaliknowit »