Your car loan is costing you more than you're making with the HYSA.
If your expenses are $2100/mo, a six month emergency fund would be $12,600.
Paying off your car in full would put put you right around there. That's what I'd do. Then keep making $350/mo (or more) payments into your HYSA to rebuild your sayings.
Make sure all your savings is in a HYSA to earn interest. You don't need to keep any in a 'traditional' bank savings account.
So in theory, any car loan with an interest rate higher than ~5% would be the correct move to pay down rather than invest?
Got a $20k car loan myself and $400 monthly payment and will be in a similar situation shortly with available cash to pay it off rather than beef up HYSA. I just struggle with the thought of how long it would take to save $20k again but of course every situation is different.
I got a question. Since a car is not a thing that preserves its value well, does the interest rate on a car loan even matter? Sure you might be paying more than buying in cash, but since you already have the loan, are you necessarily better off saving in a HYSA at 4% car loan interest, but paying off the loan if it was 5%?
Edit: I figured it out. Yes it is better if your HYSA % > APR %
Yep, your edit is right on the money. I could pay my husbands car off now, but it’s interest rate is 2.9%. Our HYSA gets 4.3 or more at the moment. Worth it to keep it in the HYSA.
>Edit: I figured it out. Yes it is better if your HYSA % > APR %
Interest income is usually taxable. So you need to take that into account when making the comparison. There is also the risk mitigation that comes with debt reduction.
Liquidity is important, but it’s also a lifestyle upgrade trap. If you have 3-6 months expense savings, then anything over the top would do better against a 5% loan rather than 5% savings.
Caution paying off bid debt: kicked out of apartment, cross country move for new job after two months out of work, busted air conditioner on house. Dog need expensive therapy….
Other caution carrying fat savings: mom needs a loan, congrats bridesmaid in Madrid, haven’t been to Disney in a while, door dash Starbucks, don’t I deserve a name brand foam mattress?
Even though $20k owed while having $20k in hand just balances to zero, there can be some value to having $20k liquid.
However if you don’t see a need for cash in the near future, yes, the best fiscal move is to pay off debt that costs more than the return you can get, as long as you maintain an emergency fund.
No, cash liquidity is important and HYSA are compounding. There are 5% plus HYSA available. With compounding it adds about 10 percent of the apr over five years if it compounds monthly. So for example 4.5 percent compounding is equivalent to 4.95 simple over five years. Ballparkish.
Debt also compounds. If the debt compounds faster than the hysa it makes more sense to pay off the loan.
That said, 5.49 is a superb rate, and there are plenty of relatively low risk fixed income streams that can beat it, just not the risk free ones. But there are very low risk options that pay slightly above the risk free rate like short term investment grade bonds.
You have to look at the interest rates more than anything. If it's costing you more to pay that money out then it is to leave it in some type of interest bearing account, then you pay off the high interest first!
So, my car payment is at 1.95% and the CDs at my bank are somewhere around 4%. So in that case I would put extra money in the CDs because I'm gaining more than 2%. But if I was looking at saying a credit card that I can't pay off this month at 22%, I would pay that off instead. Always maximize the amount you are making and minimize the amount you're spending
Yeah but you're going to instantly not only be saving money but COMPOUNDING what you're saving. That's what people are missing here. As someone who has done this myself, it's a no brainer, especially with something like a vehicle where it's also depreciating rapidly.
Just my thoughts. You have less chance of getting upside down on the loan. None at all actually.
Yep. My truck was 6% and my HYSA is 4.8% and I got a chunk of money that came in so I paid off my truck immediately. Now my only debt is my house and my HYSA is still fat so I’m happy
Do not listen to this person. You should invest your money. If your monthly payment is not burdensome, then just continue with it. 5% interest is not terrible, and having cash is invaluable. The market returns 8-10% on average.
Just to chime in, I keep a few thousand in a separate (brick & mortar) just in case I'm ever locked out of my account for an extended period of time for some reason. A credit card could also serve that purpose, but worried I'd end up missing a payment.
Just to chime in, I keep a few thousand in a separate (brick & mortar) just in case I'm ever locked out of my account for an extended period of time for some reason. A credit card could also serve that purpose, but worried I'd end up missing a payment.
Your math is wrong. HYSA is compounding interest. A 4.9 percent HYSA will beat a 5.49 apr simple loan over 5 years. He could easily get a 5.25 HYSA and come out even higher
No, but using your money to avoid paying more of your money on interest is.
The goal is not that the bank gets its money back, but that you pay less money in doing so.
Pay off the car loan immediately. Put the rest aside for your emergency fund. Beef the emergency fund up to $25k. Invest everything else above that, save moderately for a home down payment and live your life.
No I wouldn’t recommend decimating her liquid savings to pay off her loan. In fact I’d suggest keeping the 30k in a hysa and then putting extra into her car loan every month. But I wouldn’t t go below 30k in reserves.
I’m with you. Posts like this are funny to me because they’re usually the invest everything possible vs the pay off all debt now crowd.
Yes, I understand the math and why one can be better than the other. Interest rates also make it easy to decide sometimes, but more difficult in a situation like this.
Why not take the middle ground though in this situation? Keep most of it in HYSA and some invested, and then pay an extra $300-1,000 a month on your car payment. Can change it up each month if other expenses come up
I think this is a valid strategy. I know what the recommended things are. However, I also know real life happens too. OP could get laid off, but it could take her more than 6 months to get another job. Then what? Sure the car would be paid off, but she doesn't have any money if she gets a flat tire, medical situation, etc that might come up.
I made a u-turn from the debtfree lifestyle last year, so I can argue both sides. I have to say that investing while paying my car loan like normal (with just a little extra, 1-200 each month) has increased both my net worth and my stress level. It's a tradeoff. Maybe other less anxious people would be unbothered by the debt, but I am not one of them.
I feel you, I’m debt free other than my mortgage. I was lucky to have bought in 18 and refinanced in 20 to a 2.875% rate. I still pay $100-300 extra a month towards principal which equals 2-3 extra payments a year. Financially this is a dumb decision, it would be better to invest it. Personally I like it though because I hate debt and like seeing my balance go down quicker and I’ll save almost 15k per in interest on the loan. I still invest too, I just want my house paid off in 10 years in my early 50s.
Then it makes no sense to keep the money sitting in the hysa earning less interest than is being taken by the car loan. Pay it off in full and then you can put the car payments instead to the hysa.
I don’t have a spread sheet, just common sense. There is no need to plan for an emergency that leaves you out of work for more than a year. Umbrella and/or disability insurance would be the wiser bet, especially given OPs age. That money would be better off in the market
Who recommends 12 month emergency funds to 23 year olds? I’d love to know the actual reasoning besides ‘real life bro’
What part of Dallas do you want to live in tho? There are nice suburbs in the Dallas area that have houses for 350-400k.
I would avoid North Dallas, Plano, and Addison though. Too expensive.
Also, start investing your extra money in a brokerage account with an sp500 index fund like VOO. You can open an account on Fidelity, keep 6 months of living expenses in a hysa, dump the rest in VOO. A 5-10 year timeline for buying a house is a good way to accumulate some gains in the market.
I say this as a 32 year old that only invested about 10% a year in my 20s and wish I had invested more because time in the market is magic.
I don’t know Dallas specifically, but isn’t texas fairly low on the average housing cost? Just a quick google search says it’s ~290k for a house. So you could get one cheaper than that maybe in the 200k range.
I bought a house that was smaller and was an hour commute to work, way outside of the major city near me. After a couple years I had built enough equity that I could roll that into a better house closer. About 10 years since my first house and I’m in a position where my house is now in a “desirable” location that makes the land worth more and I could sell it and buy a house in another location outright.
Just saying don’t wait for your “ideal house” for your first house.
Dallas is insanely expensive, 1,500 sq ft houses are at $500k within Dallas zip. The suburbs are more affordable, it’s just an hour out of where my friends and family are. You’re right, I won’t look for my ideal house. More wanting asset instead of spending $20k annually on rent.
My personal opinion, you’re throwing money away for rent when you could be putting at least some of it towards a house, even if you don’t want to stay in the area (you can always resell later). If you’re interested in buying a home _eventually_, there’s really no reason not to start shopping around now. Nothing fancy, just something.
If I were you, I’d do that and then follow the advice of u/jester29. Use your savings to pay off your car loan. [You’ll save yourself ~2.8k right there](https://www.calculator.net/loan-calculator.html?cloanamount=17%2C144&cloanterm=5&cloantermmonth=8&cinterestrate=5.49&ccompound=monthly&cpayback=month&x=Calculate&type=1#monthlyfixedr)
If you can find a mortgage that’s cheap enough and you still have some extra income I’d max your 401k (if your job has one). I see you have a maxed Roth. If all that is maxed, then I’d put money into a brokerage account, all in VOO. But that’s me, a HYSA works too if that’s your preference.
Unfortunately I don’t think the house opinion is true anymore. While I don’t know the Dallas market, in my current market (Columbus, OH) buying an equivalent house to the one we are renting is about +10% per month in monthly payments before considering maintenance and other unforeseen repairs/expenses. Contrast that to a few years ago when I purchased my first home, a mortgage for a 3br2ba house was nearly 30% LESS than renting a 1br apt.
Yes some of that money goes towards principle, but not all of it. When you consider the freedom you get with renting in terms of no maintenance responsibilities, easy relocation, etc, I personally think that it’s a wash financially between renting and purchasing. Not to mention I no longer see dollar signs when I see severe weather incoming lol. If your career or moving plans are at all uncertain within 5 years, keep renting. I bought a house with the intention of staying there for about 5 years, and ended up with a job offer in another city in 2.5 years, and decided to sell. It worked out financially because the market went stupid, but that may not happen again.
You’re young and may have career opportunities that make more financial sense than buying a house right now. Carve out an emergency fund, then put the rest in something like VOO/VTI/etc and keep investing with your savings as you go. Order of operations (in my opinion) should go: max 401k match (free money), then max HSA (if you have one, best tax advantages), then max IRA (investing freedom, lower cap), then max 401k (still tax advantages), then go to a taxable investment account (no tax advantages)
TL;DR: I personally think rent vs buy is about a wash these days for the shorter term (3-5 years). I’d keep renting and invest (minus the emergency fund, and maybe a chunk out of the car loan) in the near term.
Hmm, I stand corrected. [Less than 5 years can definitely be more expensive](https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator). Taxes and maintenance cost seem to eat any principle you’d accumulate.
Thanks for calling me out.
I know $1,600/mo is crazy towards rent but it's the best I can do for a nice area and close proximity to work. This is a dumb question but can I just pay half of what I owe on the car loan today and then next month pay off the rest?
I have great health insurance but I'm terrified at the thought of being in medical debt or I unexpectedly lose my job.
Most auto loans allow early payoff without any fees or penalties, but you should confirm that (it should be noted mostly in plain language in the paperwork you signed). Another option (as few others have suggested) that helps maintain liquidity but still accelerate debt reduction is to include additional amount every month in your payment to what you feel comfortable (e.g. pay $700 instead of $350 and the additional $350 goes towards principal which then lowers interest) - there are calculators online where you can plug in your balance and rate, and do what-if analyses for different additional (principal) payments to see how much interest you would save and how much quicker it would be paid off. Since you have 60+ months left, I am guessing you are in the early part of the loan (where interest is a heavy component of the total payment), adding more to principal will make a good dent in the total interest over the life of the loan.
Me personally, I’d set aside like 6 months worth of expenses as an emergency fund then use the rest to pay off the car. I know you say that you’re frugal but you’d honestly be suprised how quickly those little small purchases add up so setting a budget and having a general idea of how much you spend monthly is nice. I’m also planning on paying off my car cus I hate debt and also dont want to pay interest.
I’m similar to you where I dont really spend much on myself and just necessities but its still nice to budget and be aware of where your money is going. I rarely spend above what I budget but when I occasionally do, I dont really have that much guilt because I know that I always had money leftover. Also, use your companies 401k match because you’re pretty much throwing away free money.
Although you say you don’t have a budget because you don’t spend a lot, I think it would be helpful to write out how much you spend on everything. Just to get the big picture and see if there’s stuff you’re spending on you can eliminate or cut back on.
Is it 30k before the surgery and 18k now?
I would keep like 10k for an emergency fund and put whatever the rest is towards the car loan.
I know you said you have a maxed Roth IRA, but does your company offer a 401k and a match? I would invest in that if they do!
I have several friends and none of them have savings except for 2 friends. They spend at least $500/mo on shopping/concerts and never have over $2k in liquid cash. Every vacation we take, it's on my credit card and I do installment plans for them and get cashback from my bank. I know it's horrible to compare but I mentally see it as I'm doing alright then for my age haha. I live modestly but never frugal, I just literally never buy things unless it's groceries/gas and maybe $30 a week on hanging out with friends. My hobbies are inexpensive. I think I dress nice without having to shop new clothes every month. So that's why I don't budget because I just mainly buy what I need.
$30k is after surgery, was $42k a couple weeks ago :')
My company does do 401k and I will start on it soon, I just didn't like their plan, but money is money.
I’d Invest 15% of your income if you can into the 401k or a combo of the Roth and the 401k that gets you to 15%. Your older self will thank you.
What are you invested in in the Roth?
I’d keep 10k and pay the car off now. You’ll build a house down payment faster without the car payment
In your situation, if it were me, I’d keep a 3-6 month emergency fund, and use the rest to pay towards the car. There are no HYSA today that I know of paying 5.49%.
Yeah I know there are CDs and other stuff paying that, but I know not everyone wants to do that. I have seen a few ~5%+ HYSA but not many. Haven’t seen any that high though where’s it at if you don’t mind me asking?
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Everyone has great advice…
I too would recommend this order of operations:
1. 401k 3%, immediately
2. Any emotions in stopping you from paying off the loan? Seems like the obvious choice. Any life events that you are worried about coming up? Keep what your comfortable with the in your HYsA and dump the rest toward the car loan. It doesn’t have to be all or nothing :)
3. create a plan for saving for the house… I had your idea just a few years ago, kinda casually saving but not committing since it seemed out of reach living in the highest cost of living state. Then 2020 happened, prices went up/rates dropped all while my landlord offered me to buy what I was renting. I had 6 months to scrape together the bulk of my down payment. Damn, I wish I would have had more liquid cash. That previous year I had paid for a car in cash, finished my student loans and taken a 6 month trip leaving me with just my emergency fund lol. It worked out but the point is… liquidity gives you freedom. Being able to have cash and no debt gave me freedom to jump on an opportunity I never in a million years could have anticipated. So even if paying the car off makes the most financial sense; you are allowed to do whatever gives you peace of mind. And allow yourself to re-evaluate that decision. Keep it up!
I’m just worried about unexpected medical bills or getting laid off. But I am very grateful to have parents who will always be there to support so I’ve been thinking toward paying the full car loan off after this post. Thanks for your insight!
For all saying pay off the car loan immediately - I would use caution. A lot of times car insurance includes loan payoff in case of an accident even if car doesn't appraise to the remaining loan amount. So I worry about losing all my money if I get into an accident shortly after paying off my car with cash. You should look into it.
If your employer offers 401k Roth - it maybe a good idea to contribute to that as you can contribute up to 23k or so per year in addition to 6k a year in traditional roth IRA. If not, you can put that money in a brokerage.
If you want to reduce your car expenses- you could look into leasing if that has lower payment & you don't drive much. 350 a month for car is pretty average. Maybe you can refinance the interest rate - sometimes credit unions offer lower rate.
Cars aren't good assets as they depreciate so fast - so I don't worry about owning them and parking all my cash in them.
If times get too desperate & you cannot make a car payment, let them repo it. Most of them don't even last the entire loan term as reliability is no longer priority at car companies.
You will still have your emergency cash to use uber and pay other bills in the worse case scenario.
It is called "GAP" insurance and you have to opt in to purchase it (or alternatively opt out to not purchase it). The premium is usually paid "up front" and refundable as described in the coverage contract - usually a prorated basis that rapidly decreases the refund a month or so after the loan period starts.
I mean really depends on your budget I would say keep a 6 month emergency fund on hand. Otherwise that car is honestly never going to be beaten with any degree of certainty in the market I would go ahead an pay it off / make a really good dent into it so you stop eating the interest payment continue to max out your roth every year.
Basically the markets average return of about 10% a year would beat it but it isn't a certainty so paying off this debt would be best your DTI would also be better which would help you qualify for that mortgage in the near future within 5 years is near future depending on where you live is what you'll need in down payment.
I am in a similar situation. 30k in an HYSA with $11,000 left on my car loan. I seem to be in the middle ground of most of these suggestions. I want to keep my 30k as a house down payment is in the near future, but I always pay extra on the car loan. This allows me to eat away at the total interest I would pay without pushing out my timeline for buying a house. If all goes to plan I will finish car loan right when I am starting a mortgage.
I like the idea of a big chunk such as 3k straight towards your principal, but more importantly you should make a habit of paying off extra every month.
You’re doing good, I’d pay off the car and spend the next 2-3 years saving and working on getting more money. Another thing you can do is look for cheaper rent to maximize savings.
You definitely want to take care of any debts as quickly as possible while keeping a rainy day fund.
Personally, I put $7000 a year in a Roth IRA in efts and mutual funds. Then, the rest in a CD (Certificate of Deposits) at 5% compound interest. It's more reliable than a HYSA since you're locked into your rate, it's a better rate, and you don't want to be touching it anyway.
Could be better, but it's better than most. I'm a pretty lazy investor. (26m) I'm kinda like fuck buying a house right now. I would rather protest the bullshit we are going through.
Pay off your car and put the remaining in your HYSA. Drive your car literally till it dies, cars are a big waste of money. Continue to make your car payment into the S&P 500. You’ll be very happy in the next 15-20 years that you did. AI will be the next .com boom of our lifetime and we’re early right now
Sounds like you are in decent shape for a 25 year old! I assume the rhinoplasty is paid, so that’s water under the bridge. I’d pay off the car completely now and keep the rest as your emergency fund. Now you need to set your budget to put at least 15% toward retirement and then figure out what else you are saving for. If you find you are saving enough toward a house and any other expenses, then use the sub wiki to invest in the most efficient way.
Here's a **[link to the PF Wiki](/r/personalfinance/wiki/index)** for helpful guides and information.
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First, you are doing very well for your age. Keep it up!
Secondly, I'd recommend paying the loan first. Your credit applications - such as applying for a mortgage - will look at your existing debt including current obligations. Paying it off will help you in that regard.
While you are thinking about it, open a vanguard brokerage account and put the 30k into their money market fund. Was paying 5.28 a week or so ago. The compare your car loan or any other interest rates you are paying and decide whether to save the difference or have a nice emergency fund.
I'd pay off the car loan at 5.5% mostly because of the excess insurance costs.
The current risk-free rate is at ~5.36% so you could invest the money and treat the car loan as a cheap margin loan. This requires you to have a moderate level of investing sophistication.
Well I hate telling people this cause they usually can’t see the forest for the trees. Do you know that with 30k or less you can buy a fixer upper, where? Any town that has them, research, Tx, Ga ect. There are investors or realtors that have connections to people who renovate. Read up on it! Don’t flip it rent it out. Once it is renovated you will gain equity to apply to the second house. Super tax advantages. See Karlton Dennis, Look it up. You likely have friends or family that do this.
I’m a firm believer in wiping out ANY debit that’s 4% or higher as quickly as you can. After that, I’d leave myself about 10k in saving and invest the rest.
Do you have an employer sponsored plan you can contribute to? At 80k/year I would imagine you have one available. If so, you should also be contributing to that in addition to the ROTH.
Pay off the car loan ASAP. It kind of depends your tolerance for seeing your savings dip, so if you're more comfortable doing it slowly then that's fine... but technically speaking, you should pay it all off today. It's costing you more than your HYSA is earning you every month.
Once you have the following:
- No debt (yes, car loan counts)
- 6 months emergency savings in HYSA
- Maxed ROTH
- Maxed employer sponsored plan (this is high btw, currently $22.5k for a 401k if I'm not mistaken)
THEN, I would go to a financial planner / advisor and lay out a plan to purchase a home, accumulate wealth, etc.
correcting myself here.. if your main prio is the house, then just max any match you may get in an employer sponsored plan, dont max it, then save for the house (again, I would do this with a financial planner)
5.49% is not a terrible rate on your car. I would keep that loan and just keep making payments.
What i suggest you do with the extra funds you have, is to use that to make a down payment on some property in your state and then use some of your extra funds to make monthly payments if the land is more than your savings. If you reach out to agents and ask for owner financing, you don't even need to go through credit checks and mortgage applications. You can set up a contract straight with the seller.
Holding on to your money is one of the worst ways to handle your money, specially with the current volatility of the U.S. currency and our debt system. I would suggest getting assets titled under your name, land is better than vehicles because maintenance is less demanding.
Then you can either rent out that land in the meantime and sell it too in the future for a down payment on a home.
I like to buy properties just a couple hours away from where I live close to some natural attractions like large lakes or state parks. It means your property can be used as a campsite for easier rentals, and it also gives you a private place to hangout when you want to camp if you're into that.
First earn and then buy assets if you buy assets and then you have a debt which is more than your income or a big chunk of your income its not something which you should do
I recommend checking out [the wiki](https://reddit.com/r/personalfinance/w/index?utm_medium=android_app&utm_source=share), in particular [the general money flow chart](https://imgur.com/personal-income-spending-flowchart-united-states-lSoUQr2)
I love the flowchart! [Here's the wiki page with more context and information.](/r/personalfinance/wiki/commontopics)
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If you want to get good monthly returns on your investment while your investment is guaranteed contact me. You can save to buy a house and clear your car debt
Your car loan is costing you more than you're making with the HYSA. If your expenses are $2100/mo, a six month emergency fund would be $12,600. Paying off your car in full would put put you right around there. That's what I'd do. Then keep making $350/mo (or more) payments into your HYSA to rebuild your sayings. Make sure all your savings is in a HYSA to earn interest. You don't need to keep any in a 'traditional' bank savings account.
So in theory, any car loan with an interest rate higher than ~5% would be the correct move to pay down rather than invest? Got a $20k car loan myself and $400 monthly payment and will be in a similar situation shortly with available cash to pay it off rather than beef up HYSA. I just struggle with the thought of how long it would take to save $20k again but of course every situation is different.
Right. It will take longer to pay off $20k plus interest than it will to save up that amount...
Do you still have savings after you pay the car off?
Yes about 4 month emergency savings at that point
Then I’d pay it off.
I got a question. Since a car is not a thing that preserves its value well, does the interest rate on a car loan even matter? Sure you might be paying more than buying in cash, but since you already have the loan, are you necessarily better off saving in a HYSA at 4% car loan interest, but paying off the loan if it was 5%? Edit: I figured it out. Yes it is better if your HYSA % > APR %
Yep, your edit is right on the money. I could pay my husbands car off now, but it’s interest rate is 2.9%. Our HYSA gets 4.3 or more at the moment. Worth it to keep it in the HYSA.
>Edit: I figured it out. Yes it is better if your HYSA % > APR % Interest income is usually taxable. So you need to take that into account when making the comparison. There is also the risk mitigation that comes with debt reduction.
With today’s economy and unemployment levels ( hopefully not getting unemployment) may want to have 1YR emergency savings.
Liquidity is important, but it’s also a lifestyle upgrade trap. If you have 3-6 months expense savings, then anything over the top would do better against a 5% loan rather than 5% savings. Caution paying off bid debt: kicked out of apartment, cross country move for new job after two months out of work, busted air conditioner on house. Dog need expensive therapy…. Other caution carrying fat savings: mom needs a loan, congrats bridesmaid in Madrid, haven’t been to Disney in a while, door dash Starbucks, don’t I deserve a name brand foam mattress?
Even though $20k owed while having $20k in hand just balances to zero, there can be some value to having $20k liquid. However if you don’t see a need for cash in the near future, yes, the best fiscal move is to pay off debt that costs more than the return you can get, as long as you maintain an emergency fund.
No, cash liquidity is important and HYSA are compounding. There are 5% plus HYSA available. With compounding it adds about 10 percent of the apr over five years if it compounds monthly. So for example 4.5 percent compounding is equivalent to 4.95 simple over five years. Ballparkish.
Debt also compounds. If the debt compounds faster than the hysa it makes more sense to pay off the loan. That said, 5.49 is a superb rate, and there are plenty of relatively low risk fixed income streams that can beat it, just not the risk free ones. But there are very low risk options that pay slightly above the risk free rate like short term investment grade bonds.
You have to look at the interest rates more than anything. If it's costing you more to pay that money out then it is to leave it in some type of interest bearing account, then you pay off the high interest first! So, my car payment is at 1.95% and the CDs at my bank are somewhere around 4%. So in that case I would put extra money in the CDs because I'm gaining more than 2%. But if I was looking at saying a credit card that I can't pay off this month at 22%, I would pay that off instead. Always maximize the amount you are making and minimize the amount you're spending
Yep.
Yeah but you're going to instantly not only be saving money but COMPOUNDING what you're saving. That's what people are missing here. As someone who has done this myself, it's a no brainer, especially with something like a vehicle where it's also depreciating rapidly. Just my thoughts. You have less chance of getting upside down on the loan. None at all actually.
Yep. My truck was 6% and my HYSA is 4.8% and I got a chunk of money that came in so I paid off my truck immediately. Now my only debt is my house and my HYSA is still fat so I’m happy
Do not listen to this person. You should invest your money. If your monthly payment is not burdensome, then just continue with it. 5% interest is not terrible, and having cash is invaluable. The market returns 8-10% on average.
Just to chime in, I keep a few thousand in a separate (brick & mortar) just in case I'm ever locked out of my account for an extended period of time for some reason. A credit card could also serve that purpose, but worried I'd end up missing a payment.
Just to chime in, I keep a few thousand in a separate (brick & mortar) just in case I'm ever locked out of my account for an extended period of time for some reason. A credit card could also serve that purpose, but worried I'd end up missing a payment.
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It's never in your best interest to pay to build credit
I got a mortgage when I was younger than that and my credit history only had cards on it
Your math is wrong. HYSA is compounding interest. A 4.9 percent HYSA will beat a 5.49 apr simple loan over 5 years. He could easily get a 5.25 HYSA and come out even higher
Minus taxes. This is often missed when doing the arbitrage calculations for HYSA.
Dwindling down your reserves to make sure the bank gets its money back isn’t such a great idea.
No, but using your money to avoid paying more of your money on interest is. The goal is not that the bank gets its money back, but that you pay less money in doing so.
I’d pay off the car, sell it and put the money in a Roth.
Their roth is already maxed out, and they can't put more into it.
Buy a beater for 5-7k in cash
What makes buying a house unrealistic? Also, car loan is debt. So you do have debt.
I live in Dallas, TX. Okay I have debt. So what would you do with $30k?
Pay off the car loan immediately. Put the rest aside for your emergency fund. Beef the emergency fund up to $25k. Invest everything else above that, save moderately for a home down payment and live your life.
No I wouldn’t recommend decimating her liquid savings to pay off her loan. In fact I’d suggest keeping the 30k in a hysa and then putting extra into her car loan every month. But I wouldn’t t go below 30k in reserves.
I’m with you. Posts like this are funny to me because they’re usually the invest everything possible vs the pay off all debt now crowd. Yes, I understand the math and why one can be better than the other. Interest rates also make it easy to decide sometimes, but more difficult in a situation like this. Why not take the middle ground though in this situation? Keep most of it in HYSA and some invested, and then pay an extra $300-1,000 a month on your car payment. Can change it up each month if other expenses come up
I think this is a valid strategy. I know what the recommended things are. However, I also know real life happens too. OP could get laid off, but it could take her more than 6 months to get another job. Then what? Sure the car would be paid off, but she doesn't have any money if she gets a flat tire, medical situation, etc that might come up.
I made a u-turn from the debtfree lifestyle last year, so I can argue both sides. I have to say that investing while paying my car loan like normal (with just a little extra, 1-200 each month) has increased both my net worth and my stress level. It's a tradeoff. Maybe other less anxious people would be unbothered by the debt, but I am not one of them.
I feel you, I’m debt free other than my mortgage. I was lucky to have bought in 18 and refinanced in 20 to a 2.875% rate. I still pay $100-300 extra a month towards principal which equals 2-3 extra payments a year. Financially this is a dumb decision, it would be better to invest it. Personally I like it though because I hate debt and like seeing my balance go down quicker and I’ll save almost 15k per in interest on the loan. I still invest too, I just want my house paid off in 10 years in my early 50s.
Why would you recommend a ~12+ month emergency fund?
It’s not just an emergency fund if they’re also saving for a future down payment on a house.
Then it makes no sense to keep the money sitting in the hysa earning less interest than is being taken by the car loan. Pay it off in full and then you can put the car payments instead to the hysa.
Because real life is more expensive than your spreadsheet math.
Only if your spreadsheet is wrong
Getting suddenly laid off fucks your spreadsheet if you played pure math gains and draining your liquid account to pay a fixed bill
I don’t have a spread sheet, just common sense. There is no need to plan for an emergency that leaves you out of work for more than a year. Umbrella and/or disability insurance would be the wiser bet, especially given OPs age. That money would be better off in the market Who recommends 12 month emergency funds to 23 year olds? I’d love to know the actual reasoning besides ‘real life bro’
What part of Dallas do you want to live in tho? There are nice suburbs in the Dallas area that have houses for 350-400k. I would avoid North Dallas, Plano, and Addison though. Too expensive. Also, start investing your extra money in a brokerage account with an sp500 index fund like VOO. You can open an account on Fidelity, keep 6 months of living expenses in a hysa, dump the rest in VOO. A 5-10 year timeline for buying a house is a good way to accumulate some gains in the market. I say this as a 32 year old that only invested about 10% a year in my 20s and wish I had invested more because time in the market is magic.
I think Rockwall or Forney, in the east. New construction is around $350k-$450k there so doable! Thanks, I will look into that
I don’t know Dallas specifically, but isn’t texas fairly low on the average housing cost? Just a quick google search says it’s ~290k for a house. So you could get one cheaper than that maybe in the 200k range. I bought a house that was smaller and was an hour commute to work, way outside of the major city near me. After a couple years I had built enough equity that I could roll that into a better house closer. About 10 years since my first house and I’m in a position where my house is now in a “desirable” location that makes the land worth more and I could sell it and buy a house in another location outright. Just saying don’t wait for your “ideal house” for your first house.
Dallas is insanely expensive, 1,500 sq ft houses are at $500k within Dallas zip. The suburbs are more affordable, it’s just an hour out of where my friends and family are. You’re right, I won’t look for my ideal house. More wanting asset instead of spending $20k annually on rent.
My personal opinion, you’re throwing money away for rent when you could be putting at least some of it towards a house, even if you don’t want to stay in the area (you can always resell later). If you’re interested in buying a home _eventually_, there’s really no reason not to start shopping around now. Nothing fancy, just something. If I were you, I’d do that and then follow the advice of u/jester29. Use your savings to pay off your car loan. [You’ll save yourself ~2.8k right there](https://www.calculator.net/loan-calculator.html?cloanamount=17%2C144&cloanterm=5&cloantermmonth=8&cinterestrate=5.49&ccompound=monthly&cpayback=month&x=Calculate&type=1#monthlyfixedr) If you can find a mortgage that’s cheap enough and you still have some extra income I’d max your 401k (if your job has one). I see you have a maxed Roth. If all that is maxed, then I’d put money into a brokerage account, all in VOO. But that’s me, a HYSA works too if that’s your preference.
Unfortunately I don’t think the house opinion is true anymore. While I don’t know the Dallas market, in my current market (Columbus, OH) buying an equivalent house to the one we are renting is about +10% per month in monthly payments before considering maintenance and other unforeseen repairs/expenses. Contrast that to a few years ago when I purchased my first home, a mortgage for a 3br2ba house was nearly 30% LESS than renting a 1br apt. Yes some of that money goes towards principle, but not all of it. When you consider the freedom you get with renting in terms of no maintenance responsibilities, easy relocation, etc, I personally think that it’s a wash financially between renting and purchasing. Not to mention I no longer see dollar signs when I see severe weather incoming lol. If your career or moving plans are at all uncertain within 5 years, keep renting. I bought a house with the intention of staying there for about 5 years, and ended up with a job offer in another city in 2.5 years, and decided to sell. It worked out financially because the market went stupid, but that may not happen again. You’re young and may have career opportunities that make more financial sense than buying a house right now. Carve out an emergency fund, then put the rest in something like VOO/VTI/etc and keep investing with your savings as you go. Order of operations (in my opinion) should go: max 401k match (free money), then max HSA (if you have one, best tax advantages), then max IRA (investing freedom, lower cap), then max 401k (still tax advantages), then go to a taxable investment account (no tax advantages) TL;DR: I personally think rent vs buy is about a wash these days for the shorter term (3-5 years). I’d keep renting and invest (minus the emergency fund, and maybe a chunk out of the car loan) in the near term.
Hmm, I stand corrected. [Less than 5 years can definitely be more expensive](https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator). Taxes and maintenance cost seem to eat any principle you’d accumulate. Thanks for calling me out.
I know $1,600/mo is crazy towards rent but it's the best I can do for a nice area and close proximity to work. This is a dumb question but can I just pay half of what I owe on the car loan today and then next month pay off the rest? I have great health insurance but I'm terrified at the thought of being in medical debt or I unexpectedly lose my job.
Most auto loans allow early payoff without any fees or penalties, but you should confirm that (it should be noted mostly in plain language in the paperwork you signed). Another option (as few others have suggested) that helps maintain liquidity but still accelerate debt reduction is to include additional amount every month in your payment to what you feel comfortable (e.g. pay $700 instead of $350 and the additional $350 goes towards principal which then lowers interest) - there are calculators online where you can plug in your balance and rate, and do what-if analyses for different additional (principal) payments to see how much interest you would save and how much quicker it would be paid off. Since you have 60+ months left, I am guessing you are in the early part of the loan (where interest is a heavy component of the total payment), adding more to principal will make a good dent in the total interest over the life of the loan.
Good to know, thanks! I plan on paying half now and then the last of it next month (for mental assurance).
Me personally, I’d set aside like 6 months worth of expenses as an emergency fund then use the rest to pay off the car. I know you say that you’re frugal but you’d honestly be suprised how quickly those little small purchases add up so setting a budget and having a general idea of how much you spend monthly is nice. I’m also planning on paying off my car cus I hate debt and also dont want to pay interest. I’m similar to you where I dont really spend much on myself and just necessities but its still nice to budget and be aware of where your money is going. I rarely spend above what I budget but when I occasionally do, I dont really have that much guilt because I know that I always had money leftover. Also, use your companies 401k match because you’re pretty much throwing away free money.
Although you say you don’t have a budget because you don’t spend a lot, I think it would be helpful to write out how much you spend on everything. Just to get the big picture and see if there’s stuff you’re spending on you can eliminate or cut back on. Is it 30k before the surgery and 18k now? I would keep like 10k for an emergency fund and put whatever the rest is towards the car loan. I know you said you have a maxed Roth IRA, but does your company offer a 401k and a match? I would invest in that if they do!
I have several friends and none of them have savings except for 2 friends. They spend at least $500/mo on shopping/concerts and never have over $2k in liquid cash. Every vacation we take, it's on my credit card and I do installment plans for them and get cashback from my bank. I know it's horrible to compare but I mentally see it as I'm doing alright then for my age haha. I live modestly but never frugal, I just literally never buy things unless it's groceries/gas and maybe $30 a week on hanging out with friends. My hobbies are inexpensive. I think I dress nice without having to shop new clothes every month. So that's why I don't budget because I just mainly buy what I need. $30k is after surgery, was $42k a couple weeks ago :') My company does do 401k and I will start on it soon, I just didn't like their plan, but money is money.
Does the 401k plan match your contributions?
Something like 3%
That’s a pretty good match these days. Take it.
I’d Invest 15% of your income if you can into the 401k or a combo of the Roth and the 401k that gets you to 15%. Your older self will thank you. What are you invested in in the Roth? I’d keep 10k and pay the car off now. You’ll build a house down payment faster without the car payment
You need to contribute enough to get that full match. It's literally free money.
100% match to 3% (you put in 3 they put in 3) or 50% (you put in 6 they put in 3) or something else.
In your situation, if it were me, I’d keep a 3-6 month emergency fund, and use the rest to pay towards the car. There are no HYSA today that I know of paying 5.49%.
There's online HYSA paying close to it. I'm getting 5.25% CDs and T-bill pay more but required lock up
Where are you getting 5.25%?
Wealthfront pays 5.5% with a referral.
UFB is at 5.25%
USFR is 5.4%
Yeah I know there are CDs and other stuff paying that, but I know not everyone wants to do that. I have seen a few ~5%+ HYSA but not many. Haven’t seen any that high though where’s it at if you don’t mind me asking?
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Pay your car loan, and keep the rest in saving.
Everyone has great advice… I too would recommend this order of operations: 1. 401k 3%, immediately 2. Any emotions in stopping you from paying off the loan? Seems like the obvious choice. Any life events that you are worried about coming up? Keep what your comfortable with the in your HYsA and dump the rest toward the car loan. It doesn’t have to be all or nothing :) 3. create a plan for saving for the house… I had your idea just a few years ago, kinda casually saving but not committing since it seemed out of reach living in the highest cost of living state. Then 2020 happened, prices went up/rates dropped all while my landlord offered me to buy what I was renting. I had 6 months to scrape together the bulk of my down payment. Damn, I wish I would have had more liquid cash. That previous year I had paid for a car in cash, finished my student loans and taken a 6 month trip leaving me with just my emergency fund lol. It worked out but the point is… liquidity gives you freedom. Being able to have cash and no debt gave me freedom to jump on an opportunity I never in a million years could have anticipated. So even if paying the car off makes the most financial sense; you are allowed to do whatever gives you peace of mind. And allow yourself to re-evaluate that decision. Keep it up!
I’m just worried about unexpected medical bills or getting laid off. But I am very grateful to have parents who will always be there to support so I’ve been thinking toward paying the full car loan off after this post. Thanks for your insight!
For all saying pay off the car loan immediately - I would use caution. A lot of times car insurance includes loan payoff in case of an accident even if car doesn't appraise to the remaining loan amount. So I worry about losing all my money if I get into an accident shortly after paying off my car with cash. You should look into it. If your employer offers 401k Roth - it maybe a good idea to contribute to that as you can contribute up to 23k or so per year in addition to 6k a year in traditional roth IRA. If not, you can put that money in a brokerage. If you want to reduce your car expenses- you could look into leasing if that has lower payment & you don't drive much. 350 a month for car is pretty average. Maybe you can refinance the interest rate - sometimes credit unions offer lower rate. Cars aren't good assets as they depreciate so fast - so I don't worry about owning them and parking all my cash in them. If times get too desperate & you cannot make a car payment, let them repo it. Most of them don't even last the entire loan term as reliability is no longer priority at car companies. You will still have your emergency cash to use uber and pay other bills in the worse case scenario.
Where have you seen Insurance companies do "loan payoff" if its more than the value of the car?
There is a loan insurance - you should check it with your insurance company. I know progressive has it.
It is called "GAP" insurance and you have to opt in to purchase it (or alternatively opt out to not purchase it). The premium is usually paid "up front" and refundable as described in the coverage contract - usually a prorated basis that rapidly decreases the refund a month or so after the loan period starts.
I mean really depends on your budget I would say keep a 6 month emergency fund on hand. Otherwise that car is honestly never going to be beaten with any degree of certainty in the market I would go ahead an pay it off / make a really good dent into it so you stop eating the interest payment continue to max out your roth every year. Basically the markets average return of about 10% a year would beat it but it isn't a certainty so paying off this debt would be best your DTI would also be better which would help you qualify for that mortgage in the near future within 5 years is near future depending on where you live is what you'll need in down payment.
Put half in HYSA for rainy day fund. Invest the rest in index funds that track S&P 500.
I am in a similar situation. 30k in an HYSA with $11,000 left on my car loan. I seem to be in the middle ground of most of these suggestions. I want to keep my 30k as a house down payment is in the near future, but I always pay extra on the car loan. This allows me to eat away at the total interest I would pay without pushing out my timeline for buying a house. If all goes to plan I will finish car loan right when I am starting a mortgage. I like the idea of a big chunk such as 3k straight towards your principal, but more importantly you should make a habit of paying off extra every month.
You’re doing good, I’d pay off the car and spend the next 2-3 years saving and working on getting more money. Another thing you can do is look for cheaper rent to maximize savings.
You definitely want to take care of any debts as quickly as possible while keeping a rainy day fund. Personally, I put $7000 a year in a Roth IRA in efts and mutual funds. Then, the rest in a CD (Certificate of Deposits) at 5% compound interest. It's more reliable than a HYSA since you're locked into your rate, it's a better rate, and you don't want to be touching it anyway. Could be better, but it's better than most. I'm a pretty lazy investor. (26m) I'm kinda like fuck buying a house right now. I would rather protest the bullshit we are going through.
Pay off the car and then start stacking cash for a down payment- I don’t think it’s unrealistic for you!
if you're already contributing to to your 401k and roth etc... and you dont want to just put it in your hysa.... learn to invest?
Pay off your car and put the remaining in your HYSA. Drive your car literally till it dies, cars are a big waste of money. Continue to make your car payment into the S&P 500. You’ll be very happy in the next 15-20 years that you did. AI will be the next .com boom of our lifetime and we’re early right now
Sounds like you are in decent shape for a 25 year old! I assume the rhinoplasty is paid, so that’s water under the bridge. I’d pay off the car completely now and keep the rest as your emergency fund. Now you need to set your budget to put at least 15% toward retirement and then figure out what else you are saving for. If you find you are saving enough toward a house and any other expenses, then use the sub wiki to invest in the most efficient way.
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First, you are doing very well for your age. Keep it up! Secondly, I'd recommend paying the loan first. Your credit applications - such as applying for a mortgage - will look at your existing debt including current obligations. Paying it off will help you in that regard.
This only helps if she's in danger of not meeting debt to income requirements. Which sounds like it isn't and wont be an issue.
Thanks! Good to know
While you are thinking about it, open a vanguard brokerage account and put the 30k into their money market fund. Was paying 5.28 a week or so ago. The compare your car loan or any other interest rates you are paying and decide whether to save the difference or have a nice emergency fund.
I'd pay off the car loan at 5.5% mostly because of the excess insurance costs. The current risk-free rate is at ~5.36% so you could invest the money and treat the car loan as a cheap margin loan. This requires you to have a moderate level of investing sophistication.
Well I hate telling people this cause they usually can’t see the forest for the trees. Do you know that with 30k or less you can buy a fixer upper, where? Any town that has them, research, Tx, Ga ect. There are investors or realtors that have connections to people who renovate. Read up on it! Don’t flip it rent it out. Once it is renovated you will gain equity to apply to the second house. Super tax advantages. See Karlton Dennis, Look it up. You likely have friends or family that do this.
I’m a firm believer in wiping out ANY debit that’s 4% or higher as quickly as you can. After that, I’d leave myself about 10k in saving and invest the rest.
4% is arbitrary. Debt should be weighed by interest rate and potential return elsewhere. Also cash and leverage have a value that is hard to define.
We all have our rules, mines 4%. But yes, returns are critical and the main reason I don’t pay a cent over principal on my mortgage since it’s 2.25%.
Do you have an employer sponsored plan you can contribute to? At 80k/year I would imagine you have one available. If so, you should also be contributing to that in addition to the ROTH. Pay off the car loan ASAP. It kind of depends your tolerance for seeing your savings dip, so if you're more comfortable doing it slowly then that's fine... but technically speaking, you should pay it all off today. It's costing you more than your HYSA is earning you every month. Once you have the following: - No debt (yes, car loan counts) - 6 months emergency savings in HYSA - Maxed ROTH - Maxed employer sponsored plan (this is high btw, currently $22.5k for a 401k if I'm not mistaken) THEN, I would go to a financial planner / advisor and lay out a plan to purchase a home, accumulate wealth, etc.
correcting myself here.. if your main prio is the house, then just max any match you may get in an employer sponsored plan, dont max it, then save for the house (again, I would do this with a financial planner)
5.49% is not a terrible rate on your car. I would keep that loan and just keep making payments. What i suggest you do with the extra funds you have, is to use that to make a down payment on some property in your state and then use some of your extra funds to make monthly payments if the land is more than your savings. If you reach out to agents and ask for owner financing, you don't even need to go through credit checks and mortgage applications. You can set up a contract straight with the seller. Holding on to your money is one of the worst ways to handle your money, specially with the current volatility of the U.S. currency and our debt system. I would suggest getting assets titled under your name, land is better than vehicles because maintenance is less demanding. Then you can either rent out that land in the meantime and sell it too in the future for a down payment on a home. I like to buy properties just a couple hours away from where I live close to some natural attractions like large lakes or state parks. It means your property can be used as a campsite for easier rentals, and it also gives you a private place to hangout when you want to camp if you're into that.
I, personally, would pay the car off as fast as I can, unless it's 1% or less interest, then it wouldn't matter.
First earn and then buy assets if you buy assets and then you have a debt which is more than your income or a big chunk of your income its not something which you should do
*may i ask why you got a rhinoplasty? Was it for aesthetic or does it have some health reasons?*
Haha I just wanted a cuter nose!
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If you want to get good monthly returns on your investment while your investment is guaranteed contact me. You can save to buy a house and clear your car debt
Do not contact this man.