Friday, June 1, 2007

To pay off or not to pay off

In my post on why I hate Debt, I wrote about how my car payment is my second biggest expense every month, and how I want to pay it off rather than sell it. After that discussion, I got online and checked the payoff amount of the car.


That is a much smaller number than I expected. I mean I know that I’m two years into a three year loan, and I know that I’m paying a very low interest rate (1.9%), so most of my payments have been going toward principal, but somehow that number just startled me.

Now, it’s been a very good month. I just got a larger than normal check from my part time job, hubby got a small but noticeable raise in his stipend, we got a MUCH larger than normal tax refund check, my family sent me some checks for my birthday, and we’ve been doing a pretty good job saving. So, when I combine what’s in our checking account once our bills clear, a good chunk of our emergency savings, and some savings bonds I just found in the back of my closet, we have just about $6000.

I know that numerically it doesn’t make sense to pay off this debt instead of paying toward the bigger student loans, which have a much higher interest rate. It would, however, make it much easier to breathe and to figure out what I want to do if I didn’t have this payment anymore. But would that make me lazy? Would I start spending the extra $400 a month, instead of snowballing it into my next biggest debt?

Then there’s the biggest reason why I’m wary of dumping this much money on something right now. It’s summer. I’m a teacher. That’s the biggest chunk of our household income right now, and it’s gone for the next two months. I think I could find a way for us to break even, between my part time job, hubby’s raise, and various freelance work, but I can’t be sure. It’s a little scary to go into a summer without a big chunk of savings.

So what do I do? The payoff is within reach, and I’m itching, itching to grasp it.
What would you do?


Anonymous said...

Do not spend it. If you don't have 3-6 months emergency fund put it in a fund earning 5% where you won't spend it and keep it for emergencies. E-trade has a fund like that tied to your checking account. INGDirect has one that pays almost that much.

If you do have such a fund or don't trust yourself not to raid it unless it's a real emergency, then pay off the car. I know it makes financial sense to pay off higher interest loans but it feels really good to pay off something completely. And it inspires you. The other thing in favor of paying off the car is the small risk that if the car gets totaled you would have to pay off the loan AND buy a new car. This won't happen with the student loan.

Then I would keep making your car payment. But instead of making them to the bank (or whoever) make them to yourself - in a money market fund that pays 5% Keep the old car (and making the payments) for as long as you can. As the money accumulates including interest you can use that to buy a car for cash when you need a new one. Keep the cycle up and you'll never have to take a loan for a car ever again.

Matt said...

I would recommend keeping your Emergency Fund stocked at whatever it is. If it's not fully funded, then fully fund it. If it is, then roll that extra cash (minus the EF) into your School Loans and whatever other high intrest debts you have. Keep up the good work either way!