Author Topic: Pay my only debt off or continue monthly payments?  (Read 2831 times)

grosvenor6

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Pay my only debt off or continue monthly payments?
« on: July 20, 2016, 05:52:35 AM »
I am 21 years old working full time at 42k/year with a lot of advancement in the future.  I still live at home so the only things I pay for are gas, car insurance, a car payment and then money when I go out to eat or do anything with my girlfriend.  My current car payment is 250 a month and I still have about 16k left on the loan.  I don't know if I want this car for the long run, I just wanted to get a car I always wanted before I have kids and have more bills to pay for.  I have no issue paying the 250 a month but should I be paying more of it off each month or just continue the payments as they are?  My interest rate on the loan is 2.2%.  I currently have 19k in savings and 6k in a 401k.

nereo

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Re: Pay my only debt off or continue monthly payments?
« Reply #1 on: July 20, 2016, 06:09:42 AM »
I am 21 years old working full time at 42k/year with a lot of advancement in the future.  I still live at home so the only things I pay for are gas, car insurance, a car payment and then money when I go out to eat or do anything with my girlfriend.  My current car payment is 250 a month and I still have about 16k left on the loan.  I don't know if I want this car for the long run, I just wanted to get a car I always wanted before I have kids and have more bills to pay for.  I have no issue paying the 250 a month but should I be paying more of it off each month or just continue the payments as they are?  My interest rate on the loan is 2.2%.  I currently have 19k in savings and 6k in a 401k.

Well, it depends a bit on who you are as a person.
Mathematically, your best course of action would be to pay the minimum on the car note and put more money towards an IRA and your 401(k) (both of which you should be maxing out with so little in expenses and a $42k income).  It will never be as easy to save money as it is for you now, and compound interest is the most powerful when you are young and have a long time-frame. BUT - this only works if you actually invest the money. 
If you are hte kind of person who will spend that money instead of investing it (and leaving it invested)... pay down the debt.  As always "know thyself".

Also - it sounds like you might not want this car.  You can certainly sell the car, buy something very nice for $6-10k  and come out ahead.  New cars bought no cars (particularly bought on credit) are a huge money suck thanks to depreciation.  NOW is the time to take advantage of your golden opportunity and sock away $30k+/year.

frugaliknowit

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Re: Pay my only debt off or continue monthly payments?
« Reply #2 on: July 20, 2016, 08:04:21 AM »
What is your emergency fund status (do you have one and how many months expenses is it)?  While 2% is a low "hurdle rate" versus long term RISK investing, you might want to consider getting into the cycle of buying used cars for cash, which over your lifetime will save you a boatload of money, lower your stress (especially when you move out on your own...), and give you more financial flexibility.

Jack

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Re: Pay my only debt off or continue monthly payments?
« Reply #3 on: July 20, 2016, 08:15:28 AM »
Mathematically, your best course of action would be to pay the minimum on the car note and put more money towards an IRA and your 401(k) (both of which you should be maxing out with so little in expenses and a $42k income).

+1

IMO, you should easily be not only maxing your 401k ($18,000) and your IRA ($5,500), but you should also be putting $5-$10K in a taxable brokerage account (or saving for a down payment on investment real estate). I see no reason why your car expenses + "fun money" budget should be more than $9K/year (or less).

Also, If you want to sell the car in favor of a $5K or cheaper one, have at it! FYI, there are plenty of fun older sports cars (or whatever your preferred style of "car [you] always wanted before [you] have kids" is) to be had at that price.

Nick_Miller

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Re: Pay my only debt off or continue monthly payments?
« Reply #4 on: July 20, 2016, 08:16:45 AM »
I echo nereo's comments.

1) If you are disciplined enough to divert more of your money into savings, then that's probably the right call. With expenses so low for you, you should be rocking it!

2) But if you aren't disciplined enough, (that's a decision for you to make based on past behavior), then increasing your car payments still reduces debt and increases your net worth. It may not be as optimal as 1, but it's still a "good move," and it's a lot better than wasting money on consumer goods, restaurants, etc.


Tjat

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Re: Pay my only debt off or continue monthly payments?
« Reply #5 on: July 20, 2016, 08:35:21 AM »
C) none of the above. Regardless of this being the time to buy the car you want, dumping excess funds into a depreciating asset where the function can be replaced by something for a 10th of the cost is silly. This is the easiest time in your life to save and leverage time to maximize your lifetime earnings. Sell your car, buy a functional replacement for a fraction of the sale, and invest the rest. Your car may be underwater and you'll have to pay the difference, but consider this a reasonably priced lesson. It's certainly less expensive that keeping your car.

onlykelsey

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Re: Pay my only debt off or continue monthly payments?
« Reply #6 on: July 20, 2016, 08:53:39 AM »
C) none of the above. Regardless of this being the time to buy the car you want, dumping excess funds into a depreciating asset where the function can be replaced by something for a 10th of the cost is silly. This is the easiest time in your life to save and leverage time to maximize your lifetime earnings. Sell your car, buy a functional replacement for a fraction of the sale, and invest the rest. Your car may be underwater and you'll have to pay the difference, but consider this a reasonably priced lesson. It's certainly less expensive that keeping your car.

Agreed.  You should really be killing with essentially no expenses.  Replace the car with something more reasonable (I wouldn't say 1/10th like Tjat, but say a 6K-8K car), invest the difference.  Cars lose value every day.  If it makes you feel better, once every couple years, go rent a super nice car for the day (you can still do this at 30 and 40, for the record).

Do you not have a 401(k) option?  Do you have a side hustle you could set up a solo plan through? You could make incredible progress in your early 20s if you can max out your tax advantaged space.

Tjat

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Re: Pay my only debt off or continue monthly payments?
« Reply #7 on: July 20, 2016, 05:45:11 PM »
Fair criticism on the 1/10th comment. My real point is to buy something that accomplished the functionality you needed at the lowest price possible without it being a complete embarrassment to drive. My biggest financial blunder was buying a $24K car right out of college and keeping my savings rate < 10% (I also paid a stupid amount of money to rent a luxury house with 3 other guys). All that and my girlfriend (now wife) hated my car...liked the gourmet kitchen and bath though!

Metric Mouse

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Re: Pay my only debt off or continue monthly payments?
« Reply #8 on: July 21, 2016, 01:41:19 AM »
Mathematically, your best course of action would be to pay the minimum on the car note and put more money towards an IRA and your 401(k) (both of which you should be maxing out with so little in expenses and a $42k income).

+1

IMO, you should easily be not only maxing your 401k ($18,000) and your IRA ($5,500), but you should also be putting $5-$10K in a taxable brokerage account (or saving for a down payment on investment real estate). I see no reason why your car expenses + "fun money" budget should be more than $9K/year (or less).

Also, If you want to sell the car in favor of a $5K or cheaper one, have at it! FYI, there are plenty of fun older sports cars (or whatever your preferred style of "car [you] always wanted before [you] have kids" is) to be had at that price.

You may have forgot taxes in there...

After car payment, with those savings numbers I'd get less than 4K for the year, including gas, car insurance, girlfriend, etc.

But yeah, for a dream car, totally worth keeping it as long as you can; that's an experience you'll not likely have for a long, long time. Keep the loan, max out the tax deferred accounts and enjoy the ride!

Jack

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Re: Pay my only debt off or continue monthly payments?
« Reply #9 on: July 21, 2016, 08:23:14 AM »
IMO, you should easily be not only maxing your 401k ($18,000) and your IRA ($5,500), but you should also be putting $5-$10K in a taxable brokerage account (or saving for a down payment on investment real estate). I see no reason why your car expenses + "fun money" budget should be more than $9K/year (or less).

Also, If you want to sell the car in favor of a $5K or cheaper one, have at it! FYI, there are plenty of fun older sports cars (or whatever your preferred style of "car [you] always wanted before [you] have kids" is) to be had at that price.

You may have forgot taxes in there...

After car payment, with those savings numbers I'd get less than 4K for the year, including gas, car insurance, girlfriend, etc.

I didn't forget taxes; I ignored them because I assumed they were negligible. Let's do the math to find out:

$42,000 gross income - $18,000 401k - $5,500 IRA = $18,500 AGI. $18,500 - $6,300 standard deduction - $4,000 for 1 exemption = $8,200 taxable income. Tax on $8,200, filing single, is $823. Saver's Credit would be $400, so net Federal income tax would be $423 -- yep, that's negligible!

State income tax is usually (or always?) less than Federal tax, so it would also be negligible.

So the OP's budget would be $42,000 - $18,000 401k - $5,500 IRA - $423 Federal tax - $250*12 car payment - "$5-10K" taxable investments = $5,077 - $10,077.

Even $4000 (let alone $5,077 or $10,077!) seems like plenty of money to cover "gas, car insurance, girlfriend" to me. Note that per the OP, there is no significant "etc."

onlykelsey

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Re: Pay my only debt off or continue monthly payments?
« Reply #10 on: July 21, 2016, 08:36:40 AM »
IMO, you should easily be not only maxing your 401k ($18,000) and your IRA ($5,500), but you should also be putting $5-$10K in a taxable brokerage account (or saving for a down payment on investment real estate). I see no reason why your car expenses + "fun money" budget should be more than $9K/year (or less).

Also, If you want to sell the car in favor of a $5K or cheaper one, have at it! FYI, there are plenty of fun older sports cars (or whatever your preferred style of "car [you] always wanted before [you] have kids" is) to be had at that price.

You may have forgot taxes in there...

After car payment, with those savings numbers I'd get less than 4K for the year, including gas, car insurance, girlfriend, etc.

I didn't forget taxes; I ignored them because I assumed they were negligible. Let's do the math to find out:

$42,000 gross income - $18,000 401k - $5,500 IRA = $18,500 AGI. $18,500 - $6,300 standard deduction - $4,000 for 1 exemption = $8,200 taxable income. Tax on $8,200, filing single, is $823. Saver's Credit would be $400, so net Federal income tax would be $423 -- yep, that's negligible!

State income tax is usually (or always?) less than Federal tax, so it would also be negligible.

So the OP's budget would be $42,000 - $18,000 401k - $5,500 IRA - $423 Federal tax - $250*12 car payment - "$5-10K" taxable investments = $5,077 - $10,077.

Even $4000 (let alone $5,077 or $10,077!) seems like plenty of money to cover "gas, car insurance, girlfriend" to me. Note that per the OP, there is no significant "etc."

Yeah, even with a 21 year old, car insurance might be 1K a year, gas another 1K... how expensive would girlfriends be? 

dandarc

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Re: Pay my only debt off or continue monthly payments?
« Reply #11 on: July 21, 2016, 08:48:42 AM »
Minor point - for 2016, the 50% saver's tax credit is available at AGI = $18,500 for filing single, so federal tax bill is $0 in Jack's example (non-refundable credit) for 2016.

If anyone out there thinks they'll be close to that point, it would be wise to find out if you are eligible for an HSA, or look for some capital losses or other ways to reduce your AGI now.  You can fund HSA's (if eligible) and tIRAs up to your tax-filing deadline, but some other techniques have to be done by 12/31.  It would suck to have your AGI come in at $18,501 ($37,001 for MFJ) and not be able to get that $1 in above the line deductions to zero out your tax bill because of poor planning.

Jack

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Re: Pay my only debt off or continue monthly payments?
« Reply #12 on: July 21, 2016, 08:57:41 AM »
Minor point - for 2016, the 50% saver's tax credit is available at AGI = $18,500 for filing single, so federal tax bill is $0 in Jack's example (non-refundable credit) for 2016.

Good catch! I wasn't paying all that much attention and did the calculations using the 2015 numbers.