Financial question relating to tax return

[Russ Smith]

As mentioned in the other thread I wound up with a much larger return this year as I overpaid all year assuming I'd sell stock I never sold. I figure to come out with about $3800 after I've paid off my baja trip. I figured I'd put that into my Australia/New Zealand trip fund but now I'm wondering.

I pay roughly 400 a month in carpayment, and the payoff is roughly 5800.
With the 3800 from tax return I can now afford to add that to my existing trip fund, payoff my carloan, and have about 700 left over.

Is it smarter to pay off the loan in full now and then use the extra money to replenish the trip fund(which is also an emergency fund I guess). or to put it in my trip fund and let it grow(part in mutual fund the rest will go into a money market fund)?

Part of me really wants to get out from under that carloan but I'm not clear if that's really the smart way to go?

 

[82CardsGrad]

As mentioned in the other thread I wound up with a much larger return this year as I overpaid all year assuming I'd sell stock I never sold. I figure to come out with about $3800 after I've paid off my baja trip. I figured I'd put that into my Australia/New Zealand trip fund but now I'm wondering.

I pay roughly 400 a month in carpayment, and the payoff is roughly 5800.
With the 3800 from tax return I can now afford to add that to my existing trip fund, payoff my carloan, and have about 700 left over.

Is it smarter to pay off the loan in full now and then use the extra money to replenish the trip fund(which is also an emergency fund I guess). or to put it in my trip fund and let it grow(part in mutual fund the rest will go into a money market fund)?

Part of me really wants to get out from under that carloan but I'm not clear if that's really the smart way to go?

How long do you think your car will last if you paid it off today? If it will last more than another 2 years, I would pay the car off now and take full advantage of gaining an additional $400 per month!

 

[Russ Smith]

How long do you think your car will last if you paid it off today? If it will last more than another 2 years, I would pay the car off now and take full advantage of gaining an additional $400 per month!

It's 2003 Tahoe so yes much longer than 2 years.

That's what I'm thinking too. The 400 is after tax(since I pay it out of savings automatically every month). I also will get additional money in my paycheck since I changed my witholdings assuming with my stock so low I won't sell much if any this year. Not clear yet the impact on my paycheck from that somewhere between 250 and 300 a month I think.

So I'm pretty sure by next February, I'd have completely repaid myself.

My one concern,the money is for a trip, but it's also a nice insurance fund emergency fund, if I pay most of it off now and something happens, could regret it?

 

[Louis]

I'd pay off the car loan and use the additional savings to the trip fund.

I had a similar circumstance happen 2 years ago.

 

[82CardsGrad]

It's 2003 Tahoe so yes much longer than 2 years.

That's what I'm thinking too. The 400 is after tax(since I pay it out of savings automatically every month). I also will get additional money in my paycheck since I changed my witholdings assuming with my stock so low I won't sell much if any this year. Not clear yet the impact on my paycheck from that somewhere between 250 and 300 a month I think.

So I'm pretty sure by next February, I'd have completely repaid myself.

My one concern,the money is for a trip, but it's also a nice insurance fund emergency fund, if I pay most of it off now and something happens, could regret it?

One of the fundamental rules of those who understand wealth, is the difference between good debt and bad debt.... Car Loans are B.A.D. debt. Essentially, anything that is an "expense", and is not somehow generating revenue/income to you is bad. They have a very keen sense of what is an asset vs. a liability. Many people believe for instance that your house is an asset. Well, unless you are renting it out and receiving some income from it, it is actually a liability. Robert Kiyosaki in his Rich Dad Poor Dad series does a great job of ilustrating this theory...

 

[Gizmo Williams]

Russ,

What is the interest rate on your car loan? While paying off a car loan usually reduces a pretty big monthly expenditure...sometimes it is better to hold that loan and not pay it off. I have a 1.99% interest rate on my loan and it is actually better not to pay this one off. The key is you have to take the money you would have normally paid off the loan with and put it in a savings product like ING or HSBC savings where you get 5.05 or 5.25%. You will basically earn more in interest than what you are paying to carry the loan. While the actual dollar figures are really small....the key benefit is that you will remain liquid and if a huge expenditure pops up you can use that money rather than using higher costing debt like credit cards.



Also, as you receive raises the car payment becomes less and less a percentage of your income.

If the interest rate is higher than what you could earn on a demand deposit product...then pay off the debt. Either scenario you are not wrong in paying off the debt, but there are options to consider.

 

[Gizmo Williams]

One last thing...you do want to avoid being upside down in the loan. As long as you could sell the car and not have to pay cash out of your pocket to pay off the loan....then there are options to explore when making the pay off or not to pay off decision.

 

[Russ Smith]

Russ,

What is the interest rate on your car loan? While paying off a car loan usually reduces a pretty big monthly expenditure...sometimes it is better to hold that loan and not pay it off. I have a 1.99% interest rate on my loan and it is actually better not to pay this one off. The key is you have to take the money you would have normally paid off the loan with and put it in a savings product like ING or HSBC savings where you get 5.05 or 5.25%. You will basically earn more in interest than what you are paying to carry the loan. While the actual dollar figures are really small....the key benefit is that you will remain liquid and if a huge expenditure pops up you can use that money rather than using higher costing debt like credit cards.



Also, as you receive raises the car payment becomes less and less a percentage of your income.

If the interest rate is higher than what you could earn on a demand deposit product...then pay off the debt. Either scenario you are not wrong in paying off the debt, but there are options to consider.

APR is 4.99%. I've already paid just over $2400 in interest which is why I'm so strongly considering paying it off in full.

 

[Gizmo Williams]

APR is 4.99%. I've already paid just over $2400 in interest which is why I'm so strongly considering paying it off in full.

At that point you are really on the fence. Given that APR, I would probably go ahead and pay off the loan. As long as you have some other cash set aside to handle the unexpected.

Also, you should also always pay off your highest cost debt first. If you have credit cards at a higher rate....those should be where your next dollar goes to. There are some cash flow impacts, though, since the credit card debt amortizes over a longer time period...so the actual impact to your monthly outflows isn't as great. In the long run, though, you would benefit in savings on interest costs.

 

[Russ Smith]

At that point you are really on the fence. Given that APR, I would probably go ahead and pay off the loan. As long as you have some other cash set aside to handle the unexpected.

Also, you should also always pay off your highest cost debt first. If you have credit cards at a higher rate....those should be where your next dollar goes to. There are some cash flow impacts, though, since the credit card debt amortizes over a longer time period...so the actual impact to your monthly outflows isn't as great. In the long run, though, you would benefit in savings on interest costs.

Yeah I have no other debt, I detest paying interest so I pay my credit cards in full every month, always have.

What I don't have right now is much of an emergency fund, my trip fund is essentially also my emergency fund. I have a 401K and an IRA so longterm I'm doing all right but I don't really have much short term fallback. I don't expect to need it I've been told my job is secure.

Tough call.

 

[Gizmo Williams]

Yeah I have no other debt, I detest paying interest so I pay my credit cards in full every month, always have.

What I don't have right now is much of an emergency fund, my trip fund is essentially also my emergency fund. I have a 401K and an IRA so longterm I'm doing all right but I don't really have much short term fallback. I don't expect to need it I've been told my job is secure.

Tough call.

You are right about it being a tough call. Call the lender and see if you could refi to a shorter terms and put a portion of the cash in. You could possibly lower your payment, shorten the term and still maintain some cash to use as a safety net.

One strategy for free unemployment insurance is to open a HELOC, or since you are in the Bay Area and rent is to open an Secured or Unsecured Line of Credit with no annual fees. In a pinch you can use that as a safety net if something happens. Of course, cash is preferred as a safety net, but once again there are options.

 

[82CardsGrad]

Yeah I have no other debt, I detest paying interest so I pay my credit cards in full every month, always have.

What I don't have right now is much of an emergency fund, my trip fund is essentially also my emergency fund. I have a 401K and an IRA so longterm I'm doing all right but I don't really have much short term fallback. I don't expect to need it I've been told my job is secure.

Tough call.

Russ, I would imagine that gaining the benefit of the extra $400 a month, if you put it into a conservative mutual fund, will quickly grow into a nice little emergency fund... Yes, right away you might be taking a risk should some sort of catostrophic event take place right when you pay the loan off - but simply put aside your bungy-jumping weekend excursions for a while, take that $400 and save it each month, and in short order you will have more than enough set aside for emergencies...