paying off Student loan vs Car loan vs investment?

**fiscallyprudent** · 11-21-2010, 04:23 PM

i'd say always save for a rainy day. build your emergency fund (EF) first. set aside at least enough money to cover you for 6 months. Once you've got savings on top of the EF, you can start thinking about paying off other debts.

**littleroc02us** · 11-22-2010, 07:29 AM

Just set aside $1000 for the EF, the reason being is that if something does go wrong with your car or your furnace you can get it fixed or buy something cheap. Then replenish it back to $1000. Take the 24k that is left and pay off the car loan because that will $500 more in your pocket to put towards your school loans. Then pay the $700 towards the school loans and whatever you can come up with. I remember being in your positon and doing it within 4 years to pay off 50k. Believe me once you rid yourself of all this debt all you have to do with your income is build great wealth. I am able to max out my Roth's each year, take vacations and pay down my mortgage.

**jpg7n16** · 11-22-2010, 07:47 AM

Originally posted by navisavi View Post

Hello All,

Thank you in advance for providing feedback on the following situation...

I have 25k in student loans (4.5% interest), a car loan 25k (5% 6 year loan), and I have about 25k in savings.

You should only have 3-6 months of living expenses in cash. What is a typical month's expense for you? Are you married? Kids? Secure job?

I'm trying to see if you should fall on the low or high end of the 3-6 months.

Once you figure out where you are, keep that much in cash regardless of which debt you decide to pay down.

I am wondering if it makes sense to pay off one over the other (yes I know a car depreciates, but I pay 500 a month for a car payment, where I'd then be able to save 500 a month moving forward and pay towards other things while still having some equity)..

If paying down debt, pay down the car first.

Car - higher cash flow strain, low flexibility on payments, high penalties, higher interest, not deductible
Student loans - lower cash flow requirement, more flexibility on payments (hardship deferral), lower penalties, lower interest, interest is deductible (if income's not too high)

My student loan payment is 200 a month and I feel like everyone has student loans (my credit is 700+), would it make sense to pay off this or try and negotiate with my student loan lender and see if they'll take 20k or maybe even 15k??

They have no reason to negotiate. You aren't in danger of not paying them back.

Lastly, as opposed to paying off either because I can handle my bills just fine at the moment, would it make more sense to invest the 25k and continue to pay for a couple years my bills and tackle paying them off down the road (say a year or two for now)

Thanks for feedback!

In order to invest in a higher yielding investment, you would likely need a 5+ year time horizon. If you will need the money again in a year or two, you are taking too much risk for your timeframe. The best 1-2 year investment would be a short-term bond fund that would yield less than you're being charged in interest (and is taxable).

So the don't accelerate payment and invest instead only works if you will stick with it for 5+ years. Is that something you're willing to do?

If so, you should keep 3-6 months expenses in cash, and invest the rest in some stock mutual fund. See your financial advisor to get recommendations.

If not, then keep 3-6 months expenses in cash, and just pay down the debt. Starting with the car loan.

**navisavi** · 11-22-2010, 12:31 PM

thanks for all the repsonses

EXCELLENT feedback!!!

Just to answer some of the questions--No kids, getting married in april, currently make 6 figure income (sales, so stability varies based on who you ask, but currently doing very well in hitting back to back yearly quotas)

Currently building a home of which i'm putting 20% down, thus leaving me with about 35k (I already planned for 10k cushion which is where I came up with the 25k to use)

I have 15k in etrade account and max out my 401k yearly.

I make too much for roth IRA....

Thanks all!

**Drac** · 11-22-2010, 05:22 PM

Congratulations, keep saving and taking good care of your money, and you are on your way to a wealthy life. My advice will be to pay first the car loan, and then put the additional $500 a month to pay your student loan. Free of debt in no time.

**littleroc02us** · 11-23-2010, 05:16 AM

I would change my response completely now. Because your in sales am I to assume that your on commission and your yearly salary can change. Personally I would keep a years of expenses as an emergency fund due to the profession that you are in. Plus I didn't know you were building a house which so much debt sitting around. That makes everything different. Although I wouldn't have been building a house when I had 50k in debt, but you are past that, I would seriously get your EF up fast and then concentrate on paying off the debt. It's gonna be hard with so many things going on at once.

**krantcents** · 11-23-2010, 03:22 PM

How secure is your career? Emergency funds are important, but you can build that over time. Can you put the $25k to work and receive more than the interest earned? As you know car loans are not tax deductible, however your student interest is deductible. If you pay off your car loan, you immediately earned 5%. I have not had a car payment in 11 years! I personally like that choice, but it may not be right for you.

**navisavi** · 11-23-2010, 05:26 PM

more good advice, thanks for the feedback.

I will however, disagree with the person who said they would not have built a house with 50k of debt. I say this simply in that you cannot stop living your life and with the economy/house market at an all time low, one could argue now is a great time to buy (my loan is 200k, rate is 4.3%!!)...in my opinion it makes a lot more sense to put my monthly payments towards equity in a home (which also many would argue is the best for of investment).

So instead of paying 1300 a month rent, I will be paying 1650 and my money will be going somewhere..

unfortunately I make too much to write off my student loan interest...I do like the idea of paying off the car and using that money to go into investment/savings each month.

Again, thank you everyone for your thoughts

**jpg7n16** · 11-23-2010, 06:50 PM

Navi,

I think if your income is consistently 6 figures, that the 1650 house payment is still in an affordable range for you. For a 100k+ salary, a 200k mortgage is no big deal at all.

But you won't make your money by paying down the loan, you make your money by the house going up in value. Paying down the loan faster just keeps you from losing less to interest. (always a good thing)

And even with a variable job like yours, 6 months income should be good. No need for a year's expenses in cash. Once you get 6 months in cash, if you'd like more of a buffer - invest it in a short-medium term high grade bond fund, just not in cash. And you should consider muni bond funds for that too (if your income stays so high, you'd benefit from their tax free income)

Good luck with your new home! And use your fantastic income to clear out this debt!!!

**littleroc02us** · 11-24-2010, 05:09 AM

Originally posted by navisavi View Post

more good advice, thanks for the feedback.

I will however, disagree with the person who said they would not have built a house with 50k of debt. I say this simply in that you cannot stop living your life and with the economy/house market at an all time low, one could argue now is a great time to buy (my loan is 200k, rate is 4.3%!!)

I understand your thinking, but if you make so much money why do you have so much debt?

**navisavi** · 11-24-2010, 06:46 PM

I'm a few years out of college which is why I have the debt still unfortunately...As I continue to accumulate $$ I'm looking at trying to make the most out of it...I have no credit card debt, just the auto loan (bought a used car this past year for work, on the road a lot with my job) and I'm trying to tackle my student loans.

Thanks again everyone for all your thoughts and the advice

**snafu** · 11-25-2010, 09:02 AM

I don't think you have anything to lose by asking if you can get a deal for paying out your student loan. If not, I too think you should pay off the car loan and start working on an investment portfolio on paper at least. You didn't mention your level of investment risk/knowledge. December isn't a solid reflection of the stock market but a good time to research choices you would have made since September. Get a 5 year plan on paper and be ready for the challenges of the new year. That plan is a tangible commitment to build wealth. It is also a flexible road map to get you there.

paying off Student loan vs Car loan vs investment?