Author Topic: Math vs Emotion - Dilemma - Optimizing pay off vs savings  (Read 501 times)

Rosy

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Dilemma - I'd love to see my car loan gone asap but I also want to move the needle on my goal of $50K total in my two CDs.

1. Car loan - $5,548 total O/S Bal remaining (payoff quote) - I already paid ahead (probably a bad idea???) - next pmt $256.05 is due Aug 17, 2019. Interest 3.49%
Should I continue with my newest strategy of paying $256.05 car pmt plus $300 extra on principal mo?

2. Two CDs - current plan is to add $1587 mo until I reach $50K
Would it be smarter to send an extra $300 to my CD instead of paying an extra $300 on the principal of my car loan?

CD details
CD 2 - 3.5% APR - 12 mo matures 1-10-20 - up to $3K. Current TOT $3,031.
CD 2 - 3.25% APR - 17 mo matures 8-10-20 - up to $50K. (I can add $$ anytime up to $50K). Current TOT $30,310.
TOTAL $31,897.

3. Not to confuse matters, but while I wrote up this post it occurred to me that I might actually have a third option:
I could pay off the car with my credit card which currently offers zero percent APR on balance transfers and a zero transfer fee.


(I also have a separate EF ($7.5K) but I will need $6,600 of that in the near future.)

So what would you do if you were me?:)
TIA




MoneyizHere

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Re: Math vs Emotion - Dilemma - Optimizing pay off vs savings
« Reply #1 on: May 24, 2019, 12:32:14 PM »
If you have the zero % card then pay off with the Zero % card. 
Based on the limited info you have on your assets - I wouldn't bother with the CD's as a primary investment - so why are you adding up to $50k in CD's?  are you looking to do a house payoff with that?

Seems too complex and just mental accounting for a net zero gain to me.  You'd playing a liquidity game - where your return would have been better car loan from the beginning instead of locking your $ into a CD that is untouchable till 2020. 

If you're planning on spending your EF soon - that indicates to me that you should not put that much into the CD's since you'd need to build that back up - otherwise you lose your returns. 

MDM

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Re: Math vs Emotion - Dilemma - Optimizing pay off vs savings
« Reply #2 on: May 24, 2019, 02:56:38 PM »
Car loan costs 3.49% after tax (because there is no tax effect on it at all).

CDs are returning less than that after tax, because the interest is taxed.

Between those two options, paying the car loan is better.

But that's rather far down in the usual Investment Order.  Have you taken care of all the higher options?

Rosy

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Re: Math vs Emotion - Dilemma - Optimizing pay off vs savings
« Reply #3 on: May 24, 2019, 03:14:17 PM »
Excellent points MoneyizHere:)

Quote
If you have the zero % card then pay off with the Zero % card.
I hadn't initially considered that, but it would save me about $200 in interest (sort of disappointing, I was hoping for more of a financial impact) since the cc offer also includes zero transfer fees.
Not much in $, but still worth it to me since it has the benefit of owning the car clear and free. As I recently found out, cars that are not paid off can be a complication for the beneficiary in the will, if they do not have the funds to pay off the balance in full.

I am trying to simplify things as much as possible, but sometimes it is hard to see clearly and optimize the outcome.

The $50K CD represents a year and a half worth of cash cushion for us to live on in retirement if things were to go awry. We do have other investments and a paid off home.

Quote
If you're planning on spending your EF soon - that indicates to me that you should not put that much into the CD's since you'd need to build that back up - otherwise you lose your returns.
True, but No, not in this case.
We have separate finances and each of us has an EF - we try to have a combined EF value of $10K. Right now his is more than fully funded and even after the $6,600 is gone from mine I'll still have $900 and plan to build it up again slowly.
Two things in my favor, I don't need the $6,6K all at once - it will be spent over a four-month time period. Second, I am not obligated to pay $1,587 into the CD which means I can use it for an emergency or whatever else if I need/want to. The effect on my returns would be negligible since I'd only lose out on not earning interest on that months $1587.
I'd probably cover it with the cc anyway, get a few rewards points and a free 30-day loan - my slush fund is $1500 for just such little surprises or if it were a larger problem Mr. R. could cover it.

I'm not concerned about locking up funds - the CD's are just one aspect of our retirement plan. I have enough income to live on and still save $1587 while waiting for Mr. R. to retire.
That car loan was not planned. Long story, but I bought two cars and financed one of them and I'm so ready for that car loan to be done with. 

Rosy

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Re: Math vs Emotion - Dilemma - Optimizing pay off vs savings
« Reply #4 on: May 24, 2019, 03:24:07 PM »
Car loan costs 3.49% after tax (because there is no tax effect on it at all).

CDs are returning less than that after tax, because the interest is taxed.

Between those two options, paying the car loan is better.

But that's rather far down in the usual Investment Order.  Have you taken care of all the higher options?

Thanks, MDM I totally forgot about that the interest is taxed. Then again, I pay zero taxes - mostly because the largest payments I receive are not taxed (VA survivor) and that put me under the threshold with SS taxes - so no taxes at all.

Yes, I've looked at the investment order. We are using that for Mr. R's retirement planning.