Should I save my money or pay off my loan?

[DebtFree&Broke]

I completely disagree. It's better to pay the higher rate because it's more expensive. In fact, a 3.7% expense is nearly 50% more expensive than a 2.49% one. And because SL payments are based on the balance owed, paying extra immediately reduces the cash flow requirement. You'd have to completely pay off the car before seeing any difference in your monthly cash flow.

But you shouldn't focus on cash flow anyways. You should focus on net worth and the overall financial situation.

I would build up a small cash buffer of 2-3 months expenses. Then start saving 10-15% for retirement. Only then would I consider paying extra on low interest rate loans.

I still say pay off the car first. When your budget is tight you have to focus on cash flow or you won't build your net worth.

[disneysteve]

That wasn't me who asked when to stop contributing to retirement.

No it wasn't. Not sure how that happened. I'll fix it.

[disneysteve]

I still say pay off the car first. When your budget is tight you have to focus on cash flow or you won't build your net worth.

jpg is right mathematically. DebtFree may be right from a practical standpoint. Paying the highest interest debt first will always save you the most money in the long run. The issue is if your situation allows you to plan that far ahead. If you are struggling or living paycheck to paycheck, it can make sense procedurally to knock out a small debt or two in order to improve cash flow and give you some breathing room in your budget. Yes, it has a long term cost in terms of total interest paid over the life of the loans, but it can make things much easier to deal with sooner rather than later. That can have an added emotional advantage which is tough to put a price on.

So neither answer is wrong. It just depends on the situation.

[Petunia 100]

Personally, I would not be prepaying the SLs or car note with a single cent unless I was putting at least 10% of my gross away into retirement account(s). If you aren't doing at least that much, then you don't have any extra money.

Since you are self-employed, look into a solo 401k or Simple IRA. Avoid expensive custodians as the fees will choke the life out of your money. Stick with Vanguard, Fidelity, or T Rowe Price. Also consider a Roth for some of your retirement money.

[Petunia 100]

jpg is right mathematically. DebtFree may be right from a practical standpoint. Paying the highest interest debt first will always save you the most money in the long run. The issue is if your situation allows you to plan that far ahead. If you are struggling or living paycheck to paycheck, it can make sense procedurally to knock out a small debt or two in order to improve cash flow and give you some breathing room in your budget. Yes, it has a long term cost in terms of total interest paid over the life of the loans, but it can make things much easier to deal with sooner rather than later. That can have an added emotional advantage which is tough to put a price on.

So neither answer is wrong. It just depends on the situation.

One point in favor of eliminating small debts first which I rarely see mentioned is late fees. When your money is tight and you are juggling bills and expenses trying to cover everything, missing the due date on a single account can cost you late fees you can't afford to pay. Having a few less things to juggle can make a big difference in both cash flow and stress.

I don't know that this little radish applies to the OP, but I think it does apply often. I know that back when I was in consumer debt hell, eliminating an obligation was a huge, huge deal to me.

[disneysteve]

Having a few less things to juggle can make a big difference in both cash flow and stress.

Exactly. It is the decreased stress and hassle-factor that is hard to put a value on but it most certainly has value.

[jpg7n16]

I still say pay off the car first. When your budget is tight you have to focus on cash flow or you won't build your net worth.

When your budget is tight, you don't have an extra $1,000/month to decide what to do with.

[jpg7n16]

you talked about 10-15% for retirement ... is that 10-15% of each months income? So it sounds like, my goal is to save for now, and only until I reach a specific point, should i start paying down the principal on my student loan ahead of schedule...correct? How many months of saving 10-15% for retirement do you suggest I put away before starting on the student loan extra payments?
Thank you!

Well i typically rec 15-20% for retirement. But as you have additional goals of buying a house, I'd reduce it. Keep it up til you retire.

I would much rather watch you build up long term investments earning 7-11% rather than pay down loans costing 2-3%.

[chase.woodland@yahoo.com]

Since the fixed rate on your loans is fairly low, over the long term, you would do better statistically by investing your money since the long term return of stocks is in the 10-12% range.

I know it isnt actually a stock investment --- but, what are your thoughts on a long term investment in an S&P 500 Index Fund?

[disneysteve]

I know it isnt actually a stock investment --- but, what are your thoughts on a long term investment in an S&P 500 Index Fund?

An S&P index fund is certainly a stock investment. Not a single stock but a large group of stocks. Over time, the expectation would be that it would provide a higher average annual return than 2 or 3%.

[chase.woodland@yahoo.com]

is an S&P 500 Index Fund something you would recomend...or would you suggest a different direction?

[disneysteve]

is an S&P 500 Index Fund something you would recomend...or would you suggest a different direction?

An S&P 500 fund is a perfectly good investment. I own it myself. But your investing needs to have some overall plan and an asset allocation. How much of your money do you want to have in stocks? How much in bonds? How much in cash? What is your timeline for this money? Do you need it in 5 years? 10 years? 25 years? You can't just pick one fund and say, "Is this one okay?"

[chase.woodland@yahoo.com]

Personally, I would not be prepaying the SLs or car note with a single cent unless I was putting at least 10% of my gross away into retirement account(s). If you aren't doing at least that much, then you don't have any extra money.

Since you are self-employed, look into a solo 401k or Simple IRA. Avoid expensive custodians as the fees will choke the life out of your money. Stick with Vanguard, Fidelity, or T Rowe Price. Also consider a Roth for some of your retirement money.

Are you saying I should start paying the SL and/or Car loan off quicker once I am putting 10% away? or do you still suggest paying the Min ammounts and using that money for other investments/savings/etc?
Thanks!