Pay off car loan or invest in taxable account? Help a dumb newbie!

[gettingthatmarshmallow]

Hello 'stachers!  This isn't quite a case study, and mostly a way for me to think out loud while thinking through a decision.  Hope I've posted it in the right place.

TL;DR:  I'm trying to figure out if it makes more sense for us to pay off our car or start investing in passively managed index funds, and just making the minimum payment on the car.   

More:
We have two autos, one 2013 compact SUV/kidmobile, and one 2013 oldmansedan.   Both were purchased used; cash for the kid-mobile (dealers look at you weird when you do this), and a small loan for the oldmansedan.   

One car is a necessity where we live (LCOL, mountain west), but the second is definitely a luxury, but probably one I can't talk the spouse out of right now.  Spouse works from home and I enjoy an eight-minute commute that I bike occasionally (but usually I'm doing daycare dropoff so I drive.)


Short Details:
Ages: 38/41. 
Dual income (~$120K gross); 401a & 401k maxed (14.2% employer contribution, 10% no match.)  Just opened Roth IRAs which we'll be able to fully fund this year and going forward.
We have an emergency fund ($60K)

Major expenses:
Mortgage: 15-year fixed, $118K @ 3.500%; refinanced to get rid of PMI earlier this year.  Payment: $900/month.
Taxes/insurance: $250/month
Daycare: $1200/month (two kiddos)
Groceries: $400/month
Car: $9879 @ 2.7%.  Minimum payment is $250; I've been putting $500 toward it because I really hate car loans.

Other relevant info:
Credit card debt: $0.
Student debt: $0.

We have good careers but are relatively late to saving for retirement and need to play catch up. 


I have enough extra cash on hand to a) pay off oldmansedan or b) invest in a taxable account.

I know standard advice is to pay off the car.  But it has a lower interest rate than my mortgage!  Should it still be a priority?  What would you do?

[Proud Foot]

With that rate I personally would first fully max out your 401k. Unless your 401k caps contributions at 10% you are not maxing it out. If it does cap it at 10% then you need to talk with HR and get that changed. Then I would suggest using a Traditional IRA rather than the Roth since it will save you on your taxes.

Re-evaluate your emergency fund. To me 60k is high. How many months of expenses is this?

After you decide on an emergency fund you are comfortable with and max out your retirement accounts then put the remaining amount into a taxable account. If you are able to contribute your whole paycheck to reach 18k in the 401k for 2017 then do this and use the cash in your EF to cover your expenses.

[GnomeErcy]

Unless it's keeping you up at night, I'd probably invest more

[gettingthatmarshmallow]

I'll have to check with the 401K; I know spouse maxed it out to 10% when signing up, but I'm not sure if it's possible to contribute more up to the contribution limit (is this the kind of thing an employer can limit?  his company just started offering a 401K and I'm not sure they know what they're doing.)

60K is about a year's expenses, maybe a little more?    I'd always heard that one should save up six-month's salary so that's why that number is where it is.   

[MDM]

I'll have to check with the 401K; I know spouse maxed it out to 10% when signing up, but I'm not sure if it's possible to contribute more up to the contribution limit (is this the kind of thing an employer can limit?

A company isn't required to offer a 401k at all, and may use tighter limits than the IRS's, but if there is a 401k it makes no sense for the company to have tighter limits (at least it shouldn't have them for non-Highly Compensated Employees).

60K is about a year's expenses, maybe a little more?    I'd always heard that one should save up six-month's salary so that's why that number is where it is.

There is no one correct answer - it's up to you and your comfort.

I know standard advice is to pay off the car.

Actually, the standard advice here would be to invest in taxable accounts after maximizing your tax-advantaged investments and before paying the car loan, given its interest rate.

[jgoody]

The mathematically correct answer would be to invest that money given how low your interest rate is for the car.  The psychologically correct answer depends on how you sit with debt.  Given your overall financial picture, this seems like a small amount of debt to sit on. 

[gettingthatmarshmallow]

Thanks, guys, this helps a lot. 

[/quote]
Actually, the standard advice here would be to invest in taxable accounts after maximizing your tax-advantaged investments and before paying the car loan, given its interest rate.
[/quote]

Ha, yes, thanks.  I did see that -- I just wasn't sure if it applied to all debts or just mortgages.  Basically, I didn't know whether it was crazy to treat oldmancar like a cheap mortgage, or if there was something I was missing.

The mathematically correct answer would be to invest that money given how low your interest rate is for the car.  The psychologically correct answer depends on how you sit with debt.  Given your overall financial picture, this seems like a small amount of debt to sit on. 

This is really helpful, thanks!  Math was telling me invest it; gut was saying 'isn't it dumb to invest when you still have debt?"; brain said, "MMM guys will provide a timely and appropriate facepunch if you really need to be paying off the car."