Author Topic: Need Advice: Invest Savings/ Pay Off Car Loan  (Read 3098 times)

liz92

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Need Advice: Invest Savings/ Pay Off Car Loan
« on: September 04, 2015, 07:31:07 PM »
Hello everyone! I'm seeking advice on what I should do with the money in my regular savings account; I'm a little torn on what to do. I would ideally like to invest the money (preferably a portion of it somewhere where it could be easily accessed, if need be) in order to make some gains. However, the other option would possibly be to pay off my car loan outright. Any advice? If suggesting investing, what is the best bang for my buck? Thanks in advance for the help.

Info:
22 years old (Military)

Income (monthly):
$3,300 (take home after taxes)

Accounts:

Emergency Savings Account (6 months):
 - $12,000

Regular Savings Account:
-$30,000

Checking (Currently):
 - $1,548

Debt:
 - $22,405 (car payment)

Expenses (monthly):
 - $1,811 rent, cellphone, insurance, food, car payment etc. 

YoungInvestor

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #1 on: September 04, 2015, 07:50:09 PM »
What's the interest rate like on the car loan?

liz92

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #2 on: September 04, 2015, 08:32:54 PM »
It's 3.75%.

Radagast

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #3 on: September 04, 2015, 08:44:45 PM »
I think there is a strong case to be made for paying off the car loan at any likely interest rate. You probably are in the 6%-7% region at your age if you have a good credit rating, higher otherwise.  In fact that would be a good thing to do tomorrow. Seriously.

At this point there is virtually no investment that is likely to pay 6%-7% that doesn't involve a lot of sweat on your part (ie. starting your own business, replacing incandescent light bulbs, or earning a higher college education). Car loan hands down.

Now on to the "would I be better off selling my vehicle" question. If it gets less than 30 mpg selling would be wiser than keeping; in fact with $22,000 on the line a strong case could be made for selling in favor of an older used vehicle regardless of mpg.

Edit: you posted as I was replying. At 3.75 I'd still get it off my head; that is still good for a guaranteed rate.

liz92

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #4 on: September 05, 2015, 07:46:03 AM »
My car is averaging around 30 mpg. I could do a mix of both I suppose and put a chunk down on the car loan and refinance at high 1 % - low 2% interest, then still have a good chunk to invest.

I am very happy with the car... I have reg maintenance covered for the next 5 years, my car is covered under warranty for the next 10 years, I have pretty decent mpg, plus I plan on keeping it till it runs itself into the ground.

What would be an ideal next step in investing the remaining $20-25k?

GGNoob

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #5 on: September 05, 2015, 08:42:35 AM »
If I was you, I'd just pay off the car. That still leaves you with almost $8,000 to invest from your savings. Plus, it looks like you could save almost $1,500 a month, along with the extra money you'll have by not having a car payment.

Now, you need to figure out what you are investing for. Are you looking to retire early? If so, you'll want to save as much as possible and max out those retirement accounts. It looks like you could afford to max out the TSP at $1,500 a month (wouldn't max it this year, but next year it would), along with the max of $5,500 a year to a Roth IRA. Any additional money can be put into a taxable brokerage account.

So my advice:
  • Pay off the car loan
  • Create and max a Roth IRA at Vanguard (I'd suggest a simple Target Retirement Date Fund)
  • Create a taxable brokerage account at Vanguard and put the rest of your savings into that (could do the same TRD fund as above)
  • Up your TSP contributions to $1,500 a month
  • In 2016 and beyond, your investment order for extra money will be Roth IRA up to max, then brokerage account

liz92

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #6 on: September 05, 2015, 10:09:23 AM »
As for the EF, do you think it be better to put that money somewhere will it will be working more than my current savings account (a whopping .15%)?

GGNoob

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #7 on: September 05, 2015, 11:52:47 AM »
As for the EF, do you think it be better to put that money somewhere will it will be working more than my current savings account (a whopping .15%)?

Well there are much better options than your current savings account. Barclays bank gives 1% on savings accounts. There are a few other online savings accounts that are around 1% as well.

Otherwise, a conservative investment in one of these funds could be a good option: Vanguard Wellesley Income Fund or Vanguard LifeStrategy Income Fund

Nords

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #8 on: September 05, 2015, 06:33:04 PM »
Hello everyone! I'm seeking advice on what I should do with the money in my regular savings account; I'm a little torn on what to do. I would ideally like to invest the money (preferably a portion of it somewhere where it could be easily accessed, if need be) in order to make some gains. However, the other option would possibly be to pay off my car loan outright. Any advice? If suggesting investing, what is the best bang for my buck? Thanks in advance for the help.

Info:
22 years old (Military)

Income (monthly):
$3,300 (take home after taxes)

Accounts:

Emergency Savings Account (6 months):
 - $12,000

Regular Savings Account:
-$30,000

Checking (Currently):
 - $1,548

Debt:
 - $22,405 (car payment)

Expenses (monthly):
 - $1,811 rent, cellphone, insurance, food, car payment etc.
At your age and take-home pay I suspect that you're going to be in the military for another 3-4 years, so your emergency fund is big enough.  You might even get away with cutting it down to half that size because you can also withdraw your Roth IRA contributions for any reason at any time, tax-free and penalty-free.  Of course you'd only do that in an emergency.

You appear to have the ability to put aside at least $1200/month in the TSP, but you also have a relatively huge savings account.  After you make the decision about your car loan, and after you fund your 2015 and 2016 Roth IRAs, then the next step would be boosting your TSP contributions.  If you can put $1500/month in the Roth TSP then you'll maximize your contributions in the world's biggest passive index funds with the lowest expense ratios.  $1500 month may be more than your budget could support, but you could make up the expenses from your $30K savings account-- effectively siphoning that into the TSP.

The first step in your investment plan is picking an asset allocation.  The Bogleheads Wiki is a great start:  http://www.bogleheads.org/wiki/Asset_allocation

The TL;DR version of that is the TSP's L2050 fund, and the slightly more complex (aggressive) version is to split your TSP contribution among the C, S, and I funds.  You have a relatively steady paycheck so you can afford to take more risks with your investments, yet it's also important to sleep more comfortably at night.  Pick the choice that invests at least 80% in equities yet lets you feel comfortable while you're deployed for weeks without bandwidth.  If paying off the car loan helps you sleep better at night then do that instead.

Don't worry about access to your TSP funds.  You have your emergency fund and your Roth IRA contributions for that.  After you leave the service you'll probably have plenty of replacement income from a bridge career, so you won't need to worry about tapping the TSP for at least another decade.  When you eventually reach financial independence and stop working for a paycheck, the easiest way to access the Roth TSP is to roll it over to a Roth IRA and then tap it five tax years after the rollover.  It takes advance planning but it's well-known among personal finance forums and it's both tax-free and penalty-free.


liz92

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Re: Need Advice: Invest Savings/ Pay Off Car Loan
« Reply #9 on: September 07, 2015, 12:48:09 PM »
Thank you all for the advice! I'm really glad I found this forum; it's the kick in the butt that I needed.