Pay off car or save?

[anelson]

I've had a lot of unexpected medical bills lately and I'm seriously feeling the crunch.

I make a little under $2K a month and with about $32k is student loans at 4.5% interst. I'm currently spending more than I make and am looking to trim my expenses. My question is - should I pay off my $3k car loan at 6.99% interest? I have about $7k in savings right now. I'm just not sure if I should be keeping that money for an emergency or go ahead and pay off my car and immediately start working on increasing my savings with the money I'd save from my car payment.

I'm confused on this situation as putting up all that money is definitely nerve wracking. Any advice would be appreciated!

[littleroc02us]

Here is how I would answer that question. Since you aren't getting anywhere allowing the debt to hang around, the only way to tackle the issue is to keep $1000 of your savings for emergencies and use 3k to pay off the car. Next, see if you can put the school loans on hardship. I did myself for almost four years when I was out of college. Finally, I'm not sure how much your medical bills are, but use the other 3k to pay off as much as you can. The more debt you clear from your books the more income you open up. Good luck! I have been there myself.

[anonymous_saver]

(1) Are you also saving for retirement? If so, no matter what, at least put money in so you get your employer's match (if they have one).

(2) Pay off the car immediately. That will free up extra money each month (which by the way I highly suggest you should instead set up to go into savings each month - instead of just having extra spending money).

(3) I would not suggest putting your school loan in deferrment. I think you can do this on your income (especially without the car loan). Instead, I would keep paying your school loans as is... and build up your emergency fund (about 6 months of expenses or so). This way if you have medical issues in the future you have something to fall back on and will not feel the crunch as much.

(4) Then when you have a solid emergency fund, start prioritizing other goals:

• Increase retirement savings?
• Save for a house?
• Pay off school loan?
• Some other goal?

[snshijuptr]

First, how stable is your job? If you see any possibility of losing your job in the next year, I would try to hold onto 6 months of emergency savings (so all of your current savings).

If your job is stable, the next thing to do is to stabilize your cash flow. My first thought is that once you pay off your car, your current car payment should be redirected toward savings. You will eventually need a new car, and next time you should try to pay in cash. So paying off your car loan will only temporarily fix your cash flow problem. In this case then, I advocate that you take a week to work on your cash flow problem. You might need the savings to pay cancellation fees on unneeded services. If you post all of your expenses, people will give you ideas.

Once you have begun to fix your cash flow issue, then I would pay off the car. I would then immediately redirect your old car payment into savings.

One initial idea is to ask your student loan company for an income adjusted rate or even a forebearance while you try to earn more income.

[anelson]

My medical bills are a base of $250 a month and then additional incidentals, which have been anywhere from $100 to $250 a month. I thankfully didn't accrue any additional debt but the medical bills will be an on going thing for the foreseeable future.

My job is fairly stable, though nothing is 100% secure. I'm currently looking for a new job that pays more and trying to find a second part time job for additional funds. It's just a tough job market out there.

I recently put my schools loans into income based repayment, which dropped the payment from $230 to $130 a month. However, that is nearly all going to interest at this point. I did this to help offset the cost of that $250 a month in medical bills. However, when I made that initial commitment (for braces) I didn't anticipate immediately having additional medical issues. Well hindsight is perfect I suppose.

I was saving $300 a month previously but am currently saving about $150 a month. I have used some of this money to pay for unexpected bills as they pop up. However, I have already committed to a trip in April 2011 that I anticipate will cost between $700-$1,000. I had planned to use my savings but I estimate that if I save $150 a month from September through March I should have about $1000, which would cover this trip. That would leave about $4,000 in savings for an emergency fund.

I will be taking a hard look at my expenses. Posting them here for help is a great idea which I plan to do once I get everything written down.

Looks like, however, the general agreement is to pay off my auto debt and start immediately rebuilding my savings.

[anelson]

I have an additional question. If I pay off my car, should I drop my insurance from full comp and collision to liability? I own a 2007 Saturn Ion with about 65,000 miles on it. The blue book value is around $7k.

Was wondering what the best way to go on this was.

[FrugalDad123]

I don't know if it's the best way, but I would... Assuming you have no debts whose interest rate is greater than 6.99%, I would pay off the 3k now, and start saving. Assuming you have a 401k, I would take advantage of that match first. I just got in a fender bender with my 1995 Honda Accord (other guy's fault) and am glad I had full comp because I don't have the money to pay for even those repairs. If I didn't repair the vehicle, the shotgun door would have been loose and creaking and my right headlight would have been duct taped on. All I had to pay was the $500 deductible. Now my hoopty is less of a hoopty.

[Seeker]

I have an additional question. If I pay off my car, should I drop my insurance from full comp and collision to liability? I own a 2007 Saturn Ion with about 65,000 miles on it. The blue book value is around $7k.

Was wondering what the best way to go on this was.

Once the car is "owned" -- I would always recommend dropping insurance to the minimum amounts required by law in your state with the highest deductables you can afford if an accident does occur that forces you to pay for the repairs to your car. Most of us need transportation to get to/from work; and regardless of who is at fault, sometimes we end up paying for damages done to our cars when they are parked and nobody leaves a note.

So I'd always recommend to go with a deductable you can afford if something does happen... and to not exceed the legal minimums without just cause (sometimes people keep high premiums to protect themselves from losing other assets -- but usually these are people well able to afford said premiums). This is really a personal decision though.

[Seeker]

I've had a lot of unexpected medical bills lately and I'm seriously feeling the crunch.

I make a little under $2K a month and with about $32k is student loans at 4.5% interst. I'm currently spending more than I make and am looking to trim my expenses. My question is - should I pay off my $3k car loan at 6.99% interest? I have about $7k in savings right now. I'm just not sure if I should be keeping that money for an emergency or go ahead and pay off my car and immediately start working on increasing my savings with the money I'd save from my car payment.

I'm confused on this situation as putting up all that money is definitely nerve wracking. Any advice would be appreciated!

I too would recommend paying off the auto loan and reduce that 7% interest rate right off the bat. Since it's less than 50% of what you have saved, you still will have some $4k for emergencies. Depending on how much $'s that one car payment is, if you pay it off entirely, you will be able to save more or apply the payment to principal on your next highest interest rate loan: 4.5% on student loans is fairly decent, what's the interest rate on the medical?

The amounts usually recommended to save for an emergency fund is about 6 months of expenses. Without knowing your expenses, job situation, $4k savings may be enough or not. If you are already feeling the crunch, then you do need to list everything out so you are aware of where the money goes and it helps you to learn to better plan for a budget that does not exceed income. Granted your exceeding has come about because of medical events... but this can happen to any one of us at any time. Planning, and updating the budget goes hand-in-hand.

[jpg7n16]

I think paying off the car in this situation is trivially easy as it saves cashflow and is the highest interest debt you have out.

Plus, there isn't much difference between an EF with $7k and with $4k.

So 2 really good benefits, 1 non-impact downside.


I pay off the car and don't think twice about it.

Then, you need to get started looking for a job with an income that justifies the debt you took to earn your degree.

[personalbudgetstuff]

There's lots of theories out there about paying off debt before saving, but I think it's best to do both, even if you put a little aside each month. It sets up a habit and you are slowly building a nest egg with interest. If you just pay off your car, at the end of the term you have nothing to show for it but a depreciated car and you have to start your savings from scratch.

[Personal Finace Fleur]

Im not really good at advising but try to seek help online about managing your personal finances.

[jpg7n16]

Im not really good at advising but try to seek help online about managing your personal finances.

hmmm... now if only there was an online forum somewhere where they could go and post their question....

[littleroc02us]

There's lots of theories out there about paying off debt before saving, but I think it's best to do both, even if you put a little aside each month. It sets up a habit and you are slowly building a nest egg with interest. If you just pay off your car, at the end of the term you have nothing to show for it but a depreciated car and you have to start your savings from scratch.

My opinion is you try to pay off debt and save money at the same time, its kind of like trying to build 2 houses at once with the same amount of workers it would take to build one. Your spreading your resources to thin.

[bjl584]

Yes. Pay off the car. It makes sense in your situation.