Should I pay down my car loan?

[mtricher]

I owe about 20K on a 2016 Jeep Wrangler. Probably should not have bought new but I did. I used a trade in and home equity line of credit to buy the Jeep (60K available, 3.5% interest). I've been paying $500 a month for about 9 months now. I really don't know if I will keep the Jeep long-term. I just haven't decided. More recently, I've been getting more and more into minimalism and am vaguely thinking about a used car for about 10-15K.

I have 16K in my saving account and I'm thinking about using some of that to pay down the debt. I don't know how much to use though. The interest is next to nothing on the savings account (just in the bank). In some ways, this money is my "emergency fund." But, I have 150K in mutual funds aimed for my retirement (in addition to 800K in my 401K). And, I have the home equity line of credit to draw on in case of emergency. On my current trajectory, I will have more than enough for retirement (currently 52, unmarried).

No other debts except mortgages on my home, a rental property, and a condo in Florida (paying extra on all of them). Home and rental paid off before 62. Condo might get sold but could used the rental income to pay that faster. I save about 40K a year toward retirement and make about 200K a year. I won't go into all of those payments and budgets though. That's another post . Yes, I could be more aggressive with my monthly payments for the Jeep and that's an option too but I'm itching to get rid of the debt. Input appreciated!

P.S. One other factor is that I might be promoted in the next 1-3 yrs (I hope!). That means I get a company car and could sell the Jeep, but it's not a given. Just makes the situation more complicated.

[Jluke]

I'll offer 2 suggestions.

1. Assuming the $500 per month includes some extra already I would continue to make that payment.

2. Take 6k and put it towards the principal. It's something but I'd probably lean towards 1

[greenskeeper]

pay down the jeep until you can break even by selling it. Then find a modest reliable car in the $5k range.

[Nutria]

I have 16K in my saving account and I'm thinking about using some of that to pay down the debt. I don't know how much to use though. The interest is next to nothing on the savings account (just in the bank).

Put it in an online savings account and CDs. At least you'll get 1% - 1.25%.

In some ways, this money is my "emergency fund."

Is it -- depending on your job stability and perceived ease of finding a new one -- between 3 and 9 months worth of minimalist expenses?

But, I have 150K in mutual funds aimed for my retirement

Right. That's not an EF.

On my current trajectory, I will have more than enough for retirement (currently 52, unmarried).

No other debts except mortgages on my home, a rental property, and a condo in Florida

Single with a home and condo. That's not minimalist.

Anyway...

You seem to be in a healthy financial position, and could have the Jeep paid down in a year anyway if you really wanted to.

I would not do it, since the $16k should be the core of your EF. (Unless you want to tap into your retirement mutual funds if you lose your job.)

[Nutria]

pay down the jeep until you can break even by selling it. Then find a modest reliable car in the $5k range.

He's got oodles and boodles of cash. Why is the world are you suggesting that he buy an old beater?

[mtricher]

Here's what I'm not sure about. Let's say I have an emergency that cost me $16,000. If that's the case, I take the money from the emergency fund and it's gone. I still have the $20,000 debt on the jeep.

Now let's imagine that I take the $16,000 and put it towards the jeep. I now have a $4000 debt on my home-equity line of credit. So here comes my $16,000 emergency. I pull $16,000 for my home-equity line of credit and the net result is that I am $20,000 in debt on my line of credit.

How are the scenarios different? Isn't it true that in either case I'm able to pay the emergency cost? The difference is if I pay the Jeep off now I'm saving interest. Aren't I?

[corn18]

Here's what I'm not sure about. Let's say I have an emergency that cost me $16,000. If that's the case, I take the money from the emergency fund and it's gone. I still have the $20,000 debt on the jeep.

Now let's imagine that I take the $16,000 and put it towards the jeep. I now have a $4000 debt on my home-equity line of credit. So here comes my $16,000 emergency. I pull $16,000 for my home-equity line of credit and the net result is that I am $20,000 in debt on my line of credit.

How are the scenarios different? Isn't it true that in either case I'm able to pay the emergency cost? The difference is if I pay the Jeep off now I'm saving interest. Aren't I?

That works fine as long as the emergency is not losing your job. Taking on more debt when out of work is a bad idea. And using investments as an EF is not a good idea either if you need it when the market has tanked.

An EF is just that and should be kept as cash or cash equivalent, IMHO.

Figure out how much EF you need, if there is anything left over, put it towards the Jeep.

Tom

[Nutria]

Here's what I'm not sure about. Let's say I have an emergency that cost me $16,000. If that's the case, I take the money from the emergency fund and it's gone. I still have the $20,000 debt on the jeep.

Now let's imagine that I take the $16,000 and put it towards the jeep. I now have a $4000 debt on my home-equity line of credit. So here comes my $16,000 emergency. I pull $16,000 for my home-equity line of credit and the net result is that I am $20,000 in debt on my line of credit.

How are the scenarios different? Isn't it true that in either case I'm able to pay the emergency cost? The difference is if I pay the Jeep off now I'm saving interest. Aren't I?

The Jeep debt is 3.5%, and is collateralized by the Jeep.

The HELOC is (currently around) 5% and is collateralized by your home.

Thus,

• you're definitely paying more interest, and
• your abode is at a (slightly) higher risk of being foreclosed on.

That doesn't make sense.

[Petunia 100]

Here's what I'm not sure about. Let's say I have an emergency that cost me $16,000. If that's the case, I take the money from the emergency fund and it's gone. I still have the $20,000 debt on the jeep.

Now let's imagine that I take the $16,000 and put it towards the jeep. I now have a $4000 debt on my home-equity line of credit. So here comes my $16,000 emergency. I pull $16,000 for my home-equity line of credit and the net result is that I am $20,000 in debt on my line of credit.

How are the scenarios different? Isn't it true that in either case I'm able to pay the emergency cost? The difference is if I pay the Jeep off now I'm saving interest. Aren't I?

Yes, you would be saving interest. However, your HELOC can be reduced or cancelled by the lender at any time. Cash in the bank is yours and cannot be cancelled.

You should decide if you want the Jeep or not. That will help you decide how quickly you want to pay it down.

For your income, your available cash seems very low.

You mentioned the 150 in mutual funds for retirement. Are these in actual retirement accounts, or taxable accounts you intend to use for retirement?

[greenskeeper]

He's got oodles and boodles of cash. Why is the world are you suggesting that he buy an old beater?

I've been getting more and more into minimalism

right around $5k is the sweet spot for finding a decent vehicle that you can still drive for 100k plus miles with minimal cost

but feel free to piss your money away on an automobile if you so choose.

[mtricher]

The $100k is in ordinary mutual funds (not IRA). I have $50k in a Roth (no longer qualified to contribute). That's where the vast majority of my extra cash goes. I contribute $1000 a month to that mutual fund. So technically, I could have a lot more cash on hand but I didn't want it to be sitting in the bank.

[Nutria]

The $100k is in ordinary mutual funds (not IRA). I have $50k in a Roth (no longer qualified to contribute). That's where the vast majority of my extra cash goes. I contribute $1000 a month to that mutual fund.

As mentioned earlier: without a sufficient EF in cash equivalents (savings accounts and CDs), if the market crashes which causes the company you work for to contract lay you off, then you must "sell low" your mutual funds in order to live.

Obviously, that's a Bad Thing.

So technically, I could have a lot more cash on hand but I didn't want it to be sitting in the bank.

No one wants their e-fund to earn 0.01%... That's why you ladder it in 12-24 month CDs paying 1.25% to 1.45%. (Not good, but safe, and not 0.01%)

[mtricher]

The general impression I'm getting is that people think I should not put money toward paying off the Jeep faster. I could certainly sell it and buy a cheaper car - always an option, but probably not going to happen in the near future. We'll see how I feel about it.

The other message I'm hearing is that people suggest that I put more in a non-mutual fund emergency fund - enough to cover six months of expenses. That would be a lot more than 16K (remember I have three properties).

A potential good strategy might be to divert the $1000 a month I'm currently putting into my retirement (to supplement my 401K) and put that into CDs until I get closer to a six month emergency fund. My minimum Jeep payment is $50 a month (even though I pay $500), so I could certainly divert some of that money into savings as well.

I don't want to overreact, but the message about an emergency fund seems to be a top priority.

[StormRichards]

My minimum Jeep payment is $50 a month (even though I pay $500), so I could certainly divert some of that money into savings as well.

Your actual car payment is just $50 a month? Or is that a typo?

At 3.5%, I would not be in a hurry to pay off the Jeep. What are your mortgage rates and balances? I am assuming those rates are relatively low as well.

Building up the emergency fund would definitely be my #1 priority.

[mtricher]

The minimum payment on the jeep is $50 because I paid for it with my HELOC. Regardless of my balance all I have to pay $50 a month minimum. Current interest-rate is 3.75% for the HELOC, which is what i'm paying on that $20,000 loan for the jeep.

My rental property has the highest interest at 5.75. The others are both below 4%. I don't want to get into all the balances and payments right now because my main question was about the jeep. But I only owe 80k on the rental property and expect to have it paid off in seven years. Forgot to mention that I get 25k a year from the rental property in addition to my 200k income. Once the rental is paid off I'll feel a major bump in monthly income without that mortgage payment