Afternoon y'all,
I was just doing some mental thinking and had this realization, my wife and I now have enough in a HYSA paying 5% interest that we could pull the entire account and pay off her car which has a loan of ~7%.
We are fortunate enough for her to have a well paying job and we are diligent about living under our means, so we have been able to steadily save a decent chunk of change each month.
In my mind, the math makes sense to just pay her car off, as we would pay more money than make with the savings account, and we would then be able to continue saving at our current rate + the monthly loan payment of ~$350/month.
That being said, this would be our entire emergency fund as it currently stands. I have a few grand stashed away in a stock portfolio so we wouldn't be cash poor persay, but definitely a lot less cash in the bank account.
We also just bought a house and while it's a new build and everything with that, I don't love the idea of walking into owning a home with nothing in the bank for when something inevitably happens.
I'm confident we could save the amount in the savings account again in less than a year, but, is it worth it? Numerically, it definitely is, and would equate to a thousand or so in savings probably, but the stress of starting back at nothing isn't something to look forward to.
Other facts for folks to know before they say Max TSP and IRA, etc.
I am currently contributing probably a little less than what i reasonably could into my TSP and IRA, but we were saving for closing costs on the house which ended up getting covered by the builder. I plan on increasing those contributions in the coming months to get closer to the max.
Pay off car completely or continue building Emergency Fund?
byu/CRUNCHYpretzel20 inMilitaryFinance
Posted by CRUNCHYpretzel20
5 Comments
You’re going to put yourself in a difficult situation if an emergency arrives to save an extra $40month (7%-5%=2% of remaining loan).
I know it will be satisfying to get rid of it, but I was just in this situation and all of a sudden needed a new 20k roof. Had I paid off the car I would’ve had to take out an 11-13% personal loan to cover it.
Just pay it off as fast as you can while maintaining your emergency fund is my suggestion
Split the difference and overpay slightly on the car note and take a little longer to reach your emergency reserves goal? Just a suggestion.
No! Don’t touch your emergency fund. It’s there for a reason. Do you save more if you pay the car loan off early? Sure. But you open yourself up to a lot of risk. Almost every financial “guru” states having that emergency fund is one of the first steps. There is a reason
Pay off the loan.
Having increased discretionary income inherently means you need less in a emergency fund. On top of that, since you’re military the odds that you lose your job are close to 0%.
The real thing you lose by not paying off the loan now is that you can’t invest as aggressively for retirement because you don’t have the net positive cash flow every paycheck to do so. You mentioned that you’re cash-flow net positive every month, so if you paid off the loan and increased your Roth TSP or Roth IRA contributions by $350/mo, you’d be in a much better financial position with no ‘felt’ impact to your budget.
>We also just bought a house and while it’s a new build and everything with that, I don’t love the idea of walking into owning a home with nothing in the bank for when something inevitably happens.
It’s not ideal, but many contractors will offer low or no interest financing because they understand that people usually can’t produce $10-20k for big jobs like roof repairs or boiler repairs on the spot.
Plus you mentioned that you have decent positive cash flow before you even pay off the loan, so you’d build up your savings rather quickly.
The real issue you’re going to run into with your new house isn’t the unforeseen emergencies, but the money it takes to ‘make it yours’ – paint, flooring / carpets, draperies, furniture, etc.
buy spy or qqq on a regular account it will outpace your loan, buy and rent out a house if you are up to it, there’s a lot of things you can do with cash, not anymore once you pay off the loan (which is still sorta building equity in your car although it depreciates)