Mixed Feelings - Saving and investing vs. paying off car

[Ashes2FIRE]

I am a late starter on this journey at 43 and only this year discovered the FIRE movement. But I want to reach for this goal and am reading, listening, asking, and learning as much as I can to help me on this journey.

My current dilemma is deciding whether to keep saving or put a pause on it and pay off my car. It's the last debt I have other than my student loan but as far as that part goes, I am on the SAVE plan and work at a non-profit so in a handful of years that debt will be forgiven and I have no interest in paying more than necessary on that.

The car, however, that's a different story. I refinanced the loan last year to for one, get a better interest rate since my credit is much better now than when I bought the car in 2020 (previous rate 9.5%, current rate 5.99%, and to get the money to quickly pay off my credit card debt, which was eating me alive in interest.

I have around $10,800 left on this loan. I had plans to pay it off quickly but several people I look to for advice had told me to leave it alone and put the extra money in savings. I have around $700 a month, sometimes more, that I've been splitting between a Roth IRA, Traditional IRA, regular Brokerage account (all invested in index funds, mostly following the S&P 500), and a HYSA at 4.5%. The advice I was given was that since I had a fairly low interest rate on my car loan, I'd be missing out on the compound interest of the other accounts if I stop contributing to pay off my car.

On the one hand, I have a guaranteed rate of 4.5% from the HYSA, and am relying on whatever market does through my index funds in the investment accounts, but I lose a guaranteed 5.99% over letting the car loan ride.

On the other, I could put all the extra towards paying off the car with a guaranteed savings of 5.99% and have the car paid off within a year, but I lose all opportunities during that time period for compound interest and growth in the other accounts.

I am open to any thoughts and suggestions on this and appreciate any input.

[jrhampt]

At 5.99%, I'd pay off the car.

[RWD]

The Investment Order post suggests you should not pay extra on it. But it is a high enough interest rate that I think you'll be fine either way.

[SweatingInAR]

The Investment Order post suggests you should not pay extra on it. But it is a high enough interest rate that I think you'll be fine either way.

I came here to plug the Investment Order, but RWD beat me to it!

Do you really need to split your excess every month between 4 different accounts? Once the HYSA is at a sufficient level to be an emergency fund, you shouldn't need to add more. Skip the regular brokerage until the tax advantaged ones are full for the year. Pick Roth OR traditional depending on your income now vs expected income later.

The HYSA is not an investment account, so you should not be comparing its yield to your car loan. The savings account is there to keep you from going into credit card debt if an emergency hits.

Car loans are a bit of a special case when comparing to the treasury yield and other debts, because the bank usually requires you to keep a high level of car insurance. Once paid off, you can reduce your coverage and save even more. I recommend you follow the investment order and place the car loan at #7. With only $700 extra per month, though, it will take 10 months to reach the IRA limit so you won't be making an extra car payment until November or December of a typical year.

[Laura33]

First, congratulations on joining the bandwagon, and on having no debt beyond the car and student loans.  If you've struggled to get out of CC debt and have gotten to the point you have $700/mo. available to save/pay down remaining debt, you've already come a tremendously long way and should be patting yourself on the back for it.

Second, don't worry about having just discovered FIRE.  People learn and discover at different times.  Often we "hear" ideas for years, but they don't sink in until we're ready for them.  You're ready now, and that's what matters.

Third, I'd suggest doing an actual case study, because the answer here is not black and white.  Generally speaking, you're looking at things the right way:  paying of a 6% loan is financially better than putting that same money toward an account getting 4.5%; at the same time, it's worse than getting, say, 8-10% returns if you invest that money, but there's also no guarantee the market is going to make 8-10% over the time period when you're paying off your car.  But the rate of return isn't the only issue; you also need enough money in lower-risk vehicles (like HYSA) so you don't have to dive back into CC debt the minute your car breaks down or you lose your job.  How much do you have in your emergency fund right now?  IMO, having a decent EF would take priority over paying off a 6% loan.  The investment order post addresses this in some more detail and is a really useful thing to familiarize yourself with.

But financial success is also psychological.  Some people have a very, very strong aversion to any debt; others are happy to take on a big amount of debt because they are optimizing for larger returns elsewhere.  The key to managing your money appropriately is finding an approach that you feel comfortable with, because that's the one you can stick with over time.  As an example, if you have multiple types of debt and different interest rates, the math is pretty clear that the optimal way to pay them off is to start with the one with the highest interest rate, and then the next-highest, etc.  But if you ask Michelle Singletary (Washington Post), she's had a lot of success telling people to pay off the smallest debt first, then the next-smallest, etc.  Because people "feel" the success of getting a specific bill completely paid off, and that re-energizes them to go tackle the next one. 

Part of your journey is going to involve re-training your brain to make the most financially optimal decision.  But you also need to plan around where your brain is right now.  You don't have to be perfect; no one is.  It's far less important that you do the best thing than that you do something.

The fact that you have $700/mo. extra and are debating whether to use it to save or pay down debt means you've already won -- both of the options you are considering are excellent options, and whichever one you choose will help you on your journey.  If it were me, once I had a good EF, I'd pay off the car -- but I'm also pretty damn risk-averse, and you could do just as well or better if you invest the money in a tax-sheltered retirement fund (IRA/401(k)) instead.  Either way, you can't lose.

[lhamo]

I know lots of people dislike Suze Orman, but I like the advice she would often give when looking at situations like this -- rather than choosing one option over the other, split the difference.  In your case that would be putting $350ish of your $700 toward extra payment on the car loan, while splitting the rest across your other forms of saving/investing. 

[neo von retorch]

Everything that Laura33 said, of course. Especially - on a car loan, the time period is so short that there's NO guarantee investments will beat your guaranteed 5.99% compound interest savings.

I've paid off lower interest car loans before (and when the balance was small enough, a very low interest student loan.) It's very satisfying, and the amounts are small enough that it does NOT play a significant role in how well you do in your long-term investment and early retirement plans.

I track all of my finances obsessively, manually entering every transaction for every account into my custom software that I wrote. It's amazing and lovely, but also when I have car loans, that means that every month I have to track/enter at least 3 transactions - interest, payment against loan, payment leaving bank. I LOVE when I wipe out a loan and don't have to track it any more.

Right now, I've got a 2.9% car loan, a 0% (through Feb. 2025) credit card, and a 4.4% HYSA. I plan to keep the equivalent amount owed on the credit card in my HYSA, and wait to pay it off until... January(ish). Part of me really wants to pay it off early. But not doing so is ~$81/month of free, easy money. (The balance is around $22k. Used for a bunch of stuff while preparing to sell a house.) Part of me wants to pay off that car loan, too. But I'll let it ride as long as I am psychologically capable of doing so.

So as obsessive as I am about tracking everything, and while I appreciate efficiency, in the big picture you do not need to be 100% efficient with every single financial decision. The psychological weight of it may have a cost, too, and that is worth assigning some value. (As long as you don't make huge mistakes like paying off a 2.9% mortgage 25 years early! Ha!)

[Samuel]

I know lots of people dislike Suze Orman, but I like the advice she would often give when looking at situations like this -- rather than choosing one option over the other, split the difference.  In your case that would be putting $350ish of your $700 toward extra payment on the car loan, while splitting the rest across your other forms of saving/investing.

That would be my plan too. 6% is right on that line where it's not obvious which path is objectively best so why waste time overthinking it. Both are good plans. Both are progress in the right direction. The optimal path can be retroactively figured out two years from now (based on what the market does in the meantime) but the money difference will be quite small either way.

[Tasse]

Personally, I'd max the IRA before paying the loan, but pay the loan before investing in a brokerage or saving at 4.5%. But the other posters are right, you are choosing between several good options here.

[Ashes2FIRE]

Wow! I really appreciate all the responses. I'm realizing there are more and more ways to look at all of this. A common thread I'm seeing in the responses is a reference to the EF. I hadn't really considered a one step at a time approach. I have been spreading out my extra money over 4 places because I was thinking to avoid all of my eggs in one basket and to reach for multiple goals at the same time.

I'm going to go out on a limb and be very transparent on what my finances actually look like and am grateful for any insight and suggestions. I imagine there will be some room to make changes and I am open to any thoughts. I suppose this is technically a suggestion for a case study and request for input.

Some side notes on this: I am married but due to my husband's fiscal irresponsibility, we do not combine finances in any way. Whatever the shared costs, such as rent, utilities, phone, groceries, sinking funds, etc. are, we split evenly. Anything that is mine alone I pay in full and same for him. I am hoping he gets on board with FIRE goals, but I have no control over that so I don't factor anything of his in these monthly numbers.

Total Net Monthly Income: $3,300 (Includes normal job $2,900 and side hustle $400)

Total Expenses: $2,597 (breakdown as follows)
Rent: $450
Utilities: $100
Internet: $45
Auto Loan: $300 (5.99% interest - $10,800 remaining)
Student loan: $43 (on the SAVE plan and since I work at a non-profit, I will be eligible for forgiveness in a few years)
Phone: $132 (mine and my mom's. I pay for hers to help her as she has a very low income)
Gas: $120
Auto Maintenance: $100 (sinking fund)
Replace car: $200 (sinking fund - intentions to never have a car payment again Currently at $1,400)
Auto/Renter's Insurance: $75 (sinking fund)
Household expenses: $50 (toilet paper, cleaning products, etc.)
Groceries: $250
Child support: $200
Kid fun money: $50 (sinking fund)
Gift fund: $70 (sinking fund - Christmas, birthdays, anniversary)
Vacation: $25 (sinking fund)
Pets: $75 (sinking fund - vet, meds, food for 2 dogs)
Household recurring charges: $32 (sinking fund - prime, Sam's club, etc.)
Personal recurring charges: $75 (sinking fund - audible, zoom, antivirus, OneDrive, licensure fees, etc.)
Hygiene: $25 (sinking fund)
Health: $100 (sinking fund - copays, meds, unforeseen)
Chiropractor: $20
Personal Spending: $60

Typically I have around $700 left after all these things are take care of. This is where it's been going. I've included in parentheses the amount I currently have in each fund.

$200 - to my Roth IRA ($6,330)
$100 - to my Traditional IRA ($1,730)
$200 - to a HYSA at 4.5% interest ($1,000)
$200 - to an index fund in a regular brokerage account ($760)

Technically the available money at the end could be $900 but I hesitate to stop contributing to my replace car sinking fund. Also, I contribute to a Roth 401(k) through my employer but only the amount they will match which is 2% of my salary. I haven't put more in it because I think the funds available in the account stink so I'm only using it for the free match. In the future, I will roll it into something else.

There it is. All of it on the table for suggestions and I am eager to hear them.

[Tasse]

Nothing in your spending jumps out at me as absolutely wild. There are some areas you could trim with effort, but I know that's not what you originally came here to ask about.

Around here we usually talk about the "Investment Order" and tackle things more one step at a time than you are doing here. In particular, there is no reason at all you should be investing in a regular brokerage account if you still have room in an IRA. In a Roth IRA, you can take the money you put in back out if you need it (just not the gains), so it's no less accessible than in a brokerage, but the tax treatment is better in the future. Basically, the brokerage has more downsides without any extra upsides compared to an IRA.

Your traditional and Roth IRAs have a shared limit: this year you can put $7000 into IRAs total, regardless of which kind. Most people figure out which one works better for them and just contribute to one. Most likely one is more useful than the other for you, but both have their advantages, so this is a smaller optimization.

To paste the investment order directly:

0. Establish an emergency fund to your satisfaction. You have an excellent start here ($1000 HYSA + sinking funds), but you should sit down and figure out if it's enough to make you comfortable. A good baseline is to keep 3-6 months worth of expenses in cash ($7800-$15,600 for you), but some people do more and some do less. This is your top priority until you have whatever amount you need to be able to sleep at night.

1. Contribute to your 401k (traditional or Roth - see "Why #4" below) up to any company match. Sounds like you're already doing this, awesome job.

2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield. That's ~4.7% right now, +5% is 9.7%, so yours isn't high enough for this to be relevant.
 
3. Max Health Savings Account (HSA) if eligible. Doesn't sound like this is relevant.

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level  This is what I'd tackle after you have an EF. Here's the rule of thumb from the investment order thread: "traditional if current federal marginal rate is 22% or higher; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise."

5. Max 401k. This is what you'd tackle next if your funds covered all the previous steps. It doesn't sound like you're there yet, but you may want to look forward to this as a future goal. Saving in your 401k, even if the options aren't great, could reduce your taxes by a lot.

I'm skipping the next steps that definitely aren't relevant to you at this point, but I do want to emphasize that investing in a taxable brokerage account isn't until step #8.

Following these steps would suggest you shouldn't bother paying off the car at all, but as you've seen, different people do things differently. If it's emotionally important to you to get rid of the debt, I think there are arguments for paying that off in between any of the steps presented here, as long as it is after you have an emergency fund you are comfortable with.

[lhamo]

What is your income tax filing status?  Are you eligible for the Savers Credit? 

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

I understand aversion to carrying debt, but I just ran the calculator here and even if you add $700/month to your auto payment it looks like you will only save around $300 in interest total. I had to guess at length of the loan period and remaining months, but should be close:

https://www.360financialliteracy.org/Calculators/Auto-Loan-Early-Payoff

 It would cut 1 year 5 months off the repayment, but since the interest cost is relatively low you are probably better off getting more money into your retirement accounts so that you can benefit from the long-term growth there.  Savers Credit eligibility would make that a financial no-brainer, since you would likely save more on taxes from increasing your retirement contributions than you would pay in interest.

Remember that Roth IRA CONTRIBUTIONS can be tapped at any time if you need to.  So if you wanted to create a little mini-emergency fund within your Roth, you could just park some of the money in your Roth in a money market or similar low-risk bucket while you are building up.  You forego some potential growth, but money markets are earning around 5% currently so it isn't a bad option to minimize risk and ensure you have at least your contributions to tap if you really needed to.  I have moved some of my Roth contribution money into MM funds recently as I am waiting to see if I have enough non-retirement cash to bridge the next 4 years until I can tap my trad IRA money easily/without penalty.  I probably WON'T use my Roth money, as my intent is to let that grow for as long as possible.  But my Inner Bag Lady feels better knowing my contributions are available to cash out without taking a hit in a possible down market, should I need them.

[EchoStache]

First, I would like to say that I think you are, overall, doing quite excellent with living expenses.

I think you are running quite a slim surplus each month income wise for having such a low emergency fund.

The biggest opportunity I see is to instantly trim $100/month from expenses with no sacrifice at all.  US Mobile $15/month including all taxes and fees.  Unlimited with 10GB of high speed.  Instant 14% increase in excess income(from $700-$800).

My vote would be:
1) Switch cell service today
2) Devote 100% of extra income to EF until you are happy.
3) Devote 100% of effort to clearing the car payment.  This might only be 6 months once your EF is in place. 

At this point, you now have $1100/month "extra".  Safe EF in place.  Lots more wiggle room in the budget.  The EF and the car can be cleaned up quickly, then it's all out saving/investing.  If you had 3+ years to go on the car payment, I agree it would not be wise to postpone saving and investing to pay this down aggressively.  But 6-9 months to knock it out will be very rewarding.

[mistymoney]

given your low amount of money current in the market, I would push all excess there. Roth or 401k.

[zolotiyeruki]

I'll suggest an option that others haven't touched on yet:  Is your car worth enough that you could sell it and and purchase something perhaps older, but similarly (or more) reliable with cash?  You get the best of both worlds that way--no debt AND you can still contribute to your investments.

The biggest opportunity I see is to instantly trim $100/month from expenses with no sacrifice at all.  US Mobile $15/month including all taxes and fees.  Unlimited with 10GB of high speed.  Instant 14% increase in excess income(from $700-$800).

This is the big thing that jumps out at me.  That's a comically huge cell phone bill.  I'm on Airvoice for $18/mo for 5GB, but I now recommend RedPocket (and we use it for our kids) instead of Airvoice.

[Ashes2FIRE]

I'll suggest an option that others haven't touched on yet:  Is your car worth enough that you could sell it and and purchase something perhaps older, but similarly (or more) reliable with cash?  You get the best of both worlds that way--no debt AND you can still contribute to your investments.

The biggest opportunity I see is to instantly trim $100/month from expenses with no sacrifice at all.  US Mobile $15/month including all taxes and fees.  Unlimited with 10GB of high speed.  Instant 14% increase in excess income(from $700-$800).

This is the big thing that jumps out at me.  That's a comically huge cell phone bill.  I'm on Airvoice for $18/mo for 5GB, but I now recommend RedPocket (and we use it for our kids) instead of Airvoice.

Selling the car wouldn’t be a good option for me in this case. I got rid of my credit card debt last year by refinancing for enough to pay them off. The 5.99% interest rate on the auto loan was a huge break from the amount of interest I was paying on the credit cards. I did manage to refinance without extending the original loan term but at the moment the remaining balance on the loan is higher than the value of the car. And I don’t want to sell it without the ability to purchase another with cash. And since I have a good car with reasonably low mileage, 2017 Toyota Corolla with 125,000 miles, I think it’s better for me to hold on to it. I believe it will last quite a while as I am very consistent with oil changes and routine maintenance. I keep it in excellent condition.

But yes, the cell phone bill must be dealt with ASAP. Working on that now. Thank you for the service suggestions.

Also, currently working on negotiating a raise at work as well as working on another side hustle. Hopefully in the next few months my income will increase and I will have more options available to me.

[zolotiyeruki]

Selling the car wouldn’t be a good option for me in this case. I got rid of my credit card debt last year by refinancing for enough to pay them off. The 5.99% interest rate on the auto loan was a huge break from the amount of interest I was paying on the credit cards. I did manage to refinance without extending the original loan term but at the moment the remaining balance on the loan is higher than the value of the car. And I don’t want to sell it without the ability to purchase another with cash. And since I have a good car with reasonably low mileage, 2017 Toyota Corolla with 125,000 miles, I think it’s better for me to hold on to it. I believe it will last quite a while as I am very consistent with oil changes and routine maintenance. I keep it in excellent condition.

But yes, the cell phone bill must be dealt with ASAP. Working on that now. Thank you for the service suggestions.

Also, currently working on negotiating a raise at work as well as working on another side hustle. Hopefully in the next few months my income will increase and I will have more options available to me.

You can see my comment on your other thread, where I changed my tune once I heard it was a 2017 Corolla, and now that we know that you're underwater on it...  Keep that thing until the wheels fall off!

Keep up the good work!  You've got a lot of momentum in the right direction, so keep on truckin'!

[Heckler]

I concur with first increasing your HYSA emergency fund to the ~3 to 6 months expenses level (depending on job and relationship security), then max out your Roth IRA with investments, then pay off extra on the car loan.

 A 2017 Toyota, that's good as new!  Our 2006 Pontiac Vibe (aka Toyota Matrix) is our “newer” vehicle.  Another 11 years of your new car sinking fund, you’ll be in a Telsa!  😉

[Heckler]

2017 Toyota Loan: $300 (5.99% interest - $10,800 remaining)
Replace car: $200 (sinking fund - intentions to never have a car payment again Currently at $1,400)

Addendum to my suggestion:

Don’t save $200 a month for your new car when you loan payment is so low and balance so high.  I would put the full $500 to todays carloan. After its paid off, then start saving the full $500 to your 2035 new to you vehicle.

[PhilB]

2017 Toyota Loan: $300 (5.99% interest - $10,800 remaining)
Replace car: $200 (sinking fund - intentions to never have a car payment again Currently at $1,400)

Addendum to my suggestion:

Don’t save $200 a month for your new car when you loan payment is so low and balance so high.  I would put the full $500 to todays carloan. After its paid off, then start saving the full $500 to your 2035 new to you vehicle.

I was going to suggest something similar, but looked at from a different direction.  I would use the car loan as effectively a 5.99% tax free savings account to hold the car replacement fund.  I may be missing something in the niceties of US car financing, but if you need to replace the car in the short term then paying off / refinancing the existing loan would all be part of the same thing.  You could keep a spreadsheet record separating the sinking fund from the loan if that made you happier.