Pay off the car?

[Taylor]

Hello my lovely Mushtachians!
I am seeking some advice, and I am still new to this whole FI things, so I admit I have a lot to learn. But I've been working hard to get my savings rate to an average of 50% (pretty badass considering I make about 26K/year after taxes).

 Anyway, back in May I bought a used Prius to downsize from a small SUV and LOVE IT! Saving so much already. I paid about half in cash for it, because I didn't want to totally wipe out my emergency fund, but now I could pay it off. Here's some other considerations:

1. I have in my mind that I'm saving to buy an investment property and I'm SO CLOSE if I keep on adding to the Savings account (about 6 months away)

2. I don't have a 401k, never got an employer match and won't get one (non-profit work...). Maybe I should throw some money into a 401k before the end of the year for the tax deduction? Tax bill this year might hurt because my sole-prop I started last year actually made money this year (yay!)

Current savings is just over 17k.

I owe 9k on the car at 1.9% 5-year loan.

Car payment is $178 per month.

I have student loan debt and a mortgage on my condo, but no other debt.

all opinions/advice is welcome! thanks in advance!

[AJ]

Mathematically, it would only make sense to pay it off if you would then reduce your insurance. In that case, it might save you a ton depending on how much insurance your lender requires vs. how much you would buy of your own accord.  You'll have to crunch those numbers. FWIW, we opted to drop comprehensive, but increase our liability coverage because we could cash-flow a replacement vehicle if we totaled ours, but want to make sure our assets are protected in the event of an accident. YMMV.

[Matt K]

I understand the appeal of not having a car payment - it's one less expense you have to make, and thus not having it gives more freedom. You don't sound like you need to cut that expense from a day-to-day making ends meet persepective, nor do you sound affraid of losing your job (which would cause you to have to cut reoccuring expenses in the future).

The counter option (this is assuming your $17k is currently sitting in a lessn-than-inflation savings account) would be to put the money into a 'safe' investment that is easily converted back to cash in the even that you are otherwise unable to make a car payment. I wouldn't do anything with the stockmarket because you want to be able to withdraw the money regardless of the stock market's daily value, but there are other options (I'll let an investment savvy mustachian chime in on those).

Simplified my thought it is:

• Paying off the car will give you a sense of satisfaction (no car loan!) and more freedom
• Keeping that money invested in a low return but highly liquid form will provide more net value, while still giving you the freedom to pay out the car if something happens and you need to cut expenses
• Paying off a higher interest debt will have a larger impact on your overall net worth, but will cost you the freedom of 'no car payments' and potential to payout the car if you suddenly need to cut expenses
• If all your debts are low interest, you could instead invest the money in something less liquid but higher returning (that investment property or putting it in your 401K will provide 'instant return on investment' in the form of reduced taxes). At your level of income, how much taxes are you really paying? Not knowing anything about your tax situation, I would assume it would be pretty minimal, even if your sole-pri is doing well (Congratulations! Breaking even is never something to complain about!).

How important is the want for the freedom of not having a car bill, versus the want for the investment property? Personally, I'd go the middle route of an easily cashed investment, but that is because I'm rather risk adverse. If I was feeling more adventurous, I'd go the invest-it route.

[Taylor]

Thanks for the reply Matt.

The freedom of not having a car bill is not that important to me, really. Once I got used to that extra payment every month (I never had a car payment before buying the Prius), I found it's not a big deal. When I adjust the payment to include my gas-savings, it's about $100/month.

I read MMM's post of paying off the car and it made me think 'should I be doing that?'  and wondering is ALL debt is a horrible, evil thing that is an emergency.

I'm much more excited by the idea of buying an investment property than having a paid-off car.

also, the difference between my old insurance bill and the new one is about $15/month, so not much savings there.

[mushroom]

Is there a particular reason that you are considering putting more money towards the car loan rather than the student debt or mortgage (which I'm assuming has a higher interest rate) other than getting rid of a recurring payment sooner? I think investing or putting more money into higher interest debt might make more sense.

If you're thinking about opening a retirement account, you may want to look into whether you qualify for the saver's credit (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Retirement-Savings-Contributions-Credit-(Saver's-Credit) is the IRS link). If your income is low enough and depending on your single/married/HOH situation, you can potentially get up to a $1000 tax credit - that's a credit, not a deduction - which is essentially a government "match" program perfect for low-income Mustachians.  This works even for Roth IRAs, which usually don't provide any tax benefits the year you contribute.

[Taylor]

Thanks for the tip about the Saver's Credit. I had no idea that even existed. I will look into that.

To answer your question about the car loan vs. mortgage and student loans, you are correct in that those two have higher interest rates. I am not throwing money at the student loan since I am on the income-base repayment plan and working at a non-profit, so the balance will be forgiven after 9 more years of working. I chould throw every spare penny at my enormous student loan and still have a big balance at the end of that 9 years, so I'm paying the least amount I can.


I'm not throwing money at the mortgage because it's at a relatively low rate (4.5% APR) and it's only $235 per month. I don't plan on living here my whole life, and plan on keeping it as a rental, so from the numbers I have run it doesn't make a lot of sense right now to attack the mortgage.

[Jamesqf]

I'm not throwing money at the mortgage because it's at a relatively low rate (4.5% APR) and it's only $235 per month.

But your car loan is at an even lower rate, so it doesn't make any sense to pay it off when you have higher return options.

My suggestion would be putting the $5K max into an IRA (since you don't have 401K match), which will reduce your taxable income.  Then put the rest into mutual funds, which are much more liquid than an investment property.   Unless & until you have a good emergency stash built up, you don't need to be in illiquid investments.