I want to pay off my car. Should I stop adding to savings?

Submitted by julianorts t3_10on8ym in personalfinance

I’m 28, have a stable job. I’m 3 1/2 years into working full time (went to grad school). I have no debt besides my car loan and my credit score is 800. My paycheck varies a bit from month to month, but with my current direct deposit breakdown, I end up depositing about $450-500 per month into my savings. This does not include the other ~10% of my paychecks I put into a roth (7%) and a 401k (3%). I have about $9k in my savings account right now. My car payment is $338 per month and I have a little over $14000 left on principal, with a 4.99% interest rate. My loan bank DOES allow payments on principal. I can afford to add maybe $100 or so extra per month, however I’m considering putting the money I’d normally save each month ($450-500) towards my car, and any additional if I’m able to each month. That way I’d finish paying off my car in the next maybe 16ish months.

Does this sound like a good idea? Or should I just pay however much extra I can (it will be less than $500 for sure) and keep saving? I live in an expensive city and have no desire to buy a house in the next year or so. I love the car. My only concern is having enough savings! I don’t always have enough in my checking to fly to see my family/go on any fun trips, which I like to do 3-4x per year. I’d LOVE to get rid of this car payment though.

EDIT: thank you all for your help! I’ve decided on my strategy and appreciate all the input.

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Gigmeister t1_j6fpu9b wrote

I was in a similar situation. I started to pay extra each month. I did that for a few years and when I had the loan down below 5 grand, I paid it off. That gave me a little leeway on savings and being comfortable with shoving extra towards the loan.

It was a fantastic feeling getting rid of it. It was my last debt before I retired. 😊

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julianorts OP t1_j6frcez wrote

how did you decide how much extra to pay each month? congrats on retiring!

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Gigmeister t1_j6funxs wrote

It just made the most sense for me in my situation. I had a little less in reachable savings than you and was putting 30% in my 401k. It sounds like you're on top of things. You'll make the right decision. Good luck!

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principalNinterest t1_j6fpp6m wrote

A risk-free 4.99% after-tax return is a pretty good return on money. Make sure you're continuing to get the full match on your 401k and then after that I'd say feel free to flex more of your savings into paying down the auto loan. But if you're worried about emergency fund/other savings it doesn't have to be all or nothing. Find that happy middle ground for your own personal preferences.

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julianorts OP t1_j6fr86e wrote

after seeing I paid over $800 in interest last year I was just grossed out 😭

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principalNinterest t1_j6fuy6w wrote

Being grossed out by interest costs is healthy. It'll help keep you from making a habit paying interest!

You're on the right track...keep up the investing, saving, and debt pay down.

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Jwing01 t1_j6fo8r1 wrote

Yes, beyond a very modest emergency fund. If you want it gone, you need focus. This is a simple question of priority and not doing every step at once.

Note: I expect some counter-arguments, especially on car loans, but you stated your goal. If this is about math, yes it is possible to outearn interest paid elsewhere. If this is about freeing yourself from a debt ASAP, its a simple shovel and dirt problem. Make your shovel bigger to move the dirt faster, and don't use part of it to dump dirt elsewhere.

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julianorts OP t1_j6frg0b wrote

I’m not sure I get your shovel metaphor!

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NickatinaGold t1_j6fvgf2 wrote

Let's say you want to dig a hole. A small shovel will dig it in 100 scoops. A big shovel can move more dirt so it will dig it in 50 scoops, so it will take half as long.

Let's say you want to pay off your $10,000 car loan. If you pay $100 a month, it will take 100 months. If you pay $200 a month, it will take 50 months, so it will take half as long.

Bigger shovel = more money towards your car loan

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Maximus15637 t1_j6ib1rh wrote

As an archaeologist with a lot of real shovel time this one bugs me. There are diminishing returns for shovel size, at least for shovels operated by hand. If your shovel gets much larger than a regular shovel then it becomes too heavy and unwieldy. I can’t just show up to site dragging a 50 pound 8 foot wide shovel monstrosity and expect to dig any faster! Unless of course it’s attached mechanical excavator, but now the metaphor is really dying.

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alwayslookingout t1_j6fzi91 wrote

If it was me, I’d cut down on the trips and vacations to build up at least 6 months of emergency fund then pay off the car ASAP. You live in an expensive city so presumably $9K wouldn’t go very far.

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julianorts OP t1_j6g0y86 wrote

I need to see my family at least twice a year, just a personal rule! I have not been able to travel much because I don’t want to always tap into savings to do so. I don’t feel like 6 months of savings is necessary for me. I’m in a stable, high demand job. I want my savings higher but they’re barely moving anyway 😭

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Kplow19 t1_j6g8h0j wrote

You should still at minimum have 3 months saved in an emergency fund. You never know what could happen, maybe you have a serious medical issue that leaves you with a large unexpected bill, maybe your car has a bad mechanical failure and it will cost a few grand to fix, etc

You should really budget flights money separate from emergency money too, either on the balance sheet or just have a 2nd savings account

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alwayslookingout t1_j6g1gcn wrote

You have to make some sacrifices if you want to get rid of this car payment early. Your savings aren’t going up because you’re spending as much as you bring home. So you have to bring in more money or spend less. It’s as simple as that.

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iwishiwereonabeach t1_j6gmmd1 wrote

One thing that helped me when I had a car loan was I forced myself to think about my routine purchases. $6 at Starbucks or an extra $6 towards my car? $10 for lunch out or $10 extra towards my car? At the grocery store $4 for Oreos or an extra $4 for my car? Every time I made the decision to not purchase something at pay extra towards my car, I transferred that money immediately to my savings account.

When my payment was due I would make my regular payment + whatever I transferred over extra that month from not buying something else. It usually wasn’t a small amount between $100-300 a month because I have a serious caffeine addiction. On the flip side my car got paid off faster, I cut my Starbucks habit, cut my going out to eat habit, started eating healthier and it made me much more aware of how much useless spending I was doing. It changed my whole mindset on how I spend my money and what truly is a need not a want.

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trsmith83 t1_j6fxlig wrote

It’s hard to know without enough information to figure out your amortization, but how much interest would you actually be saving by paying it down faster?

Remember that you pay more interest at the beginning of the loan and the amount goes down with each monthly payment. So depending on how much time is left in your loan, you might not be saving much.

Plus 4.99% is still a relatively low interest rate.

So you’re potentially losing the benefits of borrowing that money at a low rate, while not saving much money.

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julianorts OP t1_j6fz3ux wrote

I’m not sure but this past year I lost over $800 in interest. It’s a 5 year loan and I’m 2 years in

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ghalta t1_j6g9vn4 wrote

You didn't lose $800 in interest, you paid $800 to drive around a car you didn't own (all of, yet). Sure, lower is better, but you have think about interest in terms of what it gave you. At 4.99%, you made use of about $16,000 worth of something you didn't own.

Meanwhile, sure, your market investments probably aren't doing that well, but you're buying shares on sale that will pay off later. And the money you've kept as cash as an emergency fund isn't wasted, either, because you didn't know for sure that you wouldn't get laid off, just like you don't know for sure right now that you won't get laid off this year, so it has value as risk mitigation even just sitting in a HYSA. So when you spent $800 for the privilege of using a car you hadn't bought yet, it allowed you to put money into these other things that will help you as much or more than that $800 would have.

4.99% is right on the edge where paying off early for guaranteed return might make sense I think, so sure, make extra payments on it if you feel like it, because it's a safe-ish way to get a good return on a portion of your money, but don't think about the absolute dollar amount of interest as a waste without putting in context of what it bought you.

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meepsandpeeps t1_j6fznr1 wrote

Personally, I would decide what amount you would be comfortable with in savings. Once you hit that number, pay down the car loan. We have a certain amount we keep in savings at all times. If we use it for something like in your case flights, we would take the next however many pay periods to build it back to our number then go back to the other goals. Hopefully that makes sense.

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julianorts OP t1_j6g1cv5 wrote

this sounds like a good idea. So say it’s $10k, if I’m above $10k I can put whatever extra towards the car. If I spend any on flights or emergencies, I should pay the minimum car payment and save until I’m back at $10k, before returning to paying extra on my car. Is that kinda what you’re saying?

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meepsandpeeps t1_j6g6evn wrote

Yep, that’s it!

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julianorts OP t1_j6g933s wrote

I’m gonna try this :) I only have about $700 to save to get back up there and then I’ll start doing extra on the car!

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joshisboomin t1_j6iphoh wrote

Depends what you have going on in life. Similar position to you: 32, no debt, renting, matching 401k, depositing in Roth/HSA. The good news is neither option is a bad one!

I was in a similar position once and decided to pay off my car in full 3 years ago because I hated the idea of debt. Similar rate to yours. Once the car was paid off, there was a sense of peace of mind, but the repairs still came, the tires still needed replacing, so on and so forth. All I did was contribute more to savings/investing. Sure it's always nice to see my net worth go up, but if you've got the fundamentals in place, it should always be going up anyways. It gave me more peace of mind, sure, but it didn't make me happier so to speak.

As long as you have your foundations in place, which it seems like you do, you have options, which is everything. I actually financed a car (my dream car), 6 months ago at an attractive rate with a monthly payment safely in my budget. I could pay it off tomorrow, but this time I will be taking a different approach and leveraging the low cost of debt and take my chance in the market.

If I were you, I'd boost that savings to at least 15k before changing anything you're doing. Account for your trips and save a portion monthly for them, then use the extra towards the car if you feel like it. Having a good rate doesn't mean much if you don't use it!

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Vast_Cricket t1_j6ga9vj wrote

Copnsidering higher interest rate on car payment I will accelerate paying off that debt.

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NoRegrets-518 t1_j6geo86 wrote

You sound financially safe. Therefore, I think you should keep the loan on the car and build up a bigger nest egg. Once you get 10k, put another 5k or so into individual stocks that are reasonably safe. Use your credit cards and pay off every month. Then, you will have free cash available if needed. I support you in making family a priority. Meanwhile, look at your monthly expenses. You might be able to trim 100 to 200 every month. That is after tax money.

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LordOfThe7Kingdoms t1_j6geybt wrote

Paying debt off early is rarely a bad idea.

Having been in a similar situation to you and having gone the route of dumping all my extra cash into paying off my car loan super early….I wish I had put much of it elsewhere such as building cash reserves, into investment accounts, towards retirement, or savings for future large cash expenses (vacations/wedding/etc)

If you’re comfortable where your cash reserves are at, have you considered opening a brokerage account? You could split that $500ish your saving between the brokerage account and extra car loan payments since that seems important to you.

That way you’re putting money into an investment account that’s more liquid than a Retirement account but earning more interest that a traditional savings all while still paying off the car early.

Ultimately, there’s no wrong decision here so go with whichever strategy mentioned in any of the comments feels right to you.

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Ronald-Recreated t1_j6hfyim wrote

Of that $9000, how much is for emergency? What else is it for? I ask because depending on how much is there and for what, I'd rather you continue as you are if everything is functioning well and you're living comfortably. Maybe you can adjust the numbers a bit. Like put 200-250/mo for savings and the rest for car loan. Of course it's good to pay of car loan as fast as possible. But also remember to still have a life

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PJleo48 t1_j6hw91o wrote

Noting better than a paid off vehicle. I'm going to drive mine as long as possible. 52k miles after 5 years of loan payments..

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ShankThatSnitch t1_j6i50o4 wrote

You have plenty of savings. Pay down the car.

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NeatFrequent5118 t1_j6l2yxx wrote

I would have at least 6 months of expenses in savings before you pay off the car. Always be prepared for unforeseen circumstances!

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redditenjoyer737 t1_j6ga09v wrote

If you owed $5k on your car, would you walk into a bank and take out a $9k loan at 5%?

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