Pay Off Car & Reduce Emergency Fund?

**kork13** · 03-14-2013, 09:22 AM

Before we answer your question, I've got a few for you:
- What is the interest rate of your car loan?
- What interest rate is your EF earning in the bank?
- How much of a buffer (compared to your monthly expenses) does your $10k EF currently represent?
- Exactly how much are you talking about taking out from your EF?
- And most importantly, are you and your husband mentally & emotionally comfortable with the possibility of not having enough money available to you in the event of an emergency?

**bettersaver** · 03-14-2013, 09:31 AM

Here are my answers -

Interest rate is 4.85% on car loan
EF interest rate is 0.1% - yikes!
$10k is a little more than 2 months of expenses (including the extra car payments we've been saving for)
Would be taking out about $5500 from EF
Well that's a loaded question - of course not!

We've had the same amount sitting there for quite some time now and haven't had to touch it. I know that isn't predictive.. but it's reassuring that we could get that money built back quickly after getting our debts repaid.

**JoeP** · 03-14-2013, 10:22 AM

If it were me, I would not use my EF for this purpose. But then again, I am conservative in this area.

Rather, I'd set a payoff goal date (which you did) and then figure out how much extra I'd have to pay every month to pay off the car loan. Then I'd scale back my other expenses (temporarily, at least) to find the funding. For example, scale back or drop luxuries like cable/satellite, eating out, entertainment, vacation, netflix and other paid services, etc.

As a side effect, when the car has been paid off, re-evaluate how much you really miss some of those expenses.

**bjl584** · 03-14-2013, 11:55 AM

Originally posted by bettersaver View Post

My husband and I have committed to paying our car loan off by the end of 2013 (but are itching to do it sooner). We have about $9,980 left on the loan, which we normally would have another 2.5 years on since we've been paying extra on every month. Currently we've been putting down $400 per month (an extra $38 on top of the min payment) plus saving all our extra fun money each month to go towards it (about $350-$400 more). We have our tax return plus extra money that we've set aside to pay down on it which totals about $3350 total. We've figured out all the numbers and will be able to pay it off by December with no issues.

We also have an emergency fund with around $10,000 in, which we haven't touched (or added to) for a number of years.

My question is - if we have the money in our emergency fund to pay off the remainder of the loan right now, should we do it? Is there any real benefit of doing that if we would have to build the emergency fund back up over time?

Would love any advice!

Thanks!

I would not touch the EF and just pay off the loan by December. I'd hate to see you pay it off now and then have an emergency between today and December.

**Wino** · 03-14-2013, 12:05 PM

I assume you have credit cards. If you do not, stop reading now. This analysis assumes you have no credit card debt right now.

You have a guaranteed payment of 4.75% more than you are earning. You have a theoretical increase due to an emergency of XX % (I don't know your credit card interest rate).

That's what you're risking - possibly paying for an emergency with a higher-interest rate revolving line of credit (credit card) than you are guaranteed to pay on the car loan.

If your credit card is over 15%, I'd say don't use the EF. If the CC rate is below 10%, then I'd say go for it. If it is in-between, then it's a toss up.

If an emergency occurs and you incur the emergency CC debt, immediately begin looking for a zero-interest transfer card and pay it off according to your original schedule.

**Baby_nurse** · 03-14-2013, 02:11 PM

Assuming you have no credit card debt, just how long would it take you to rebuild your EF to its current level if you were to us it to pay off your car loan?

I'm a big believer in Murphy's law. Every single time I've used my EF for something other than an emergency, something inevitably happens. I view my EF as Murphy repellant.

**kork13** · 03-14-2013, 03:08 PM

Originally posted by bettersaver View Post

Interest rate is 4.85% on car loan
EF interest rate is 0.1% - yikes!
$10k is a little more than 2 months of expenses (including the extra car payments we've been saving for)
Would be taking out about $5500 from EF
Well that's a loaded question - of course not!

We've had the same amount sitting there for quite some time now and haven't had to touch it. I know that isn't predictive.. but it's reassuring that we could get that money built back quickly after getting our debts repaid.

That helps, thanks. I understand that you haven't touched your EF in years, but only holding 2 months' worth of expenses is a little scant for just about any family. With that in mind, I'd recommend just holding off and waiting to pay it off at the end of the year.

With that said..... Because you seem fairly confident that your situation is secure and that you will not need immediate use of your emergency fund anytime soon, if you DID choose to tap the EF to pay off your car loan (again--not recommended), it probably wouldn't be a crisis for you. If you took the $5500 from EF to pay off the loan, you'd end up with less than 1 month's expenses in EF but a paid off car. At that point, you would want to take that same $750/mo currently going toward the car loan and funnel all of that now back into your EF. It would take you 7 months (Oct/Nov) to get your EF back to its current state. But then, it's dreadfully low anyway, so you should then strongly consider continuing to save into your EF for an additional 22 months, in order to bring it up to where it probably should be (around $30k).

btw, this is why the loaded question -- sometimes people choose go against recommendations -- which is absolutely their right -- and (no offense) you seem quite willing to do so in this particular case. So I just wanted to understand your thoughts about your situation, and give you a clear picture of what you'd be looking at if you DO choose to pay off the car. But my apologies about the question feeling 'loaded'.

**bettersaver** · 03-14-2013, 05:11 PM

Thank you all for the responses so far! I definitely agree with what most of you are saying in that if I touch it now, likely some emergency would come up and I'd be less prepared than I'd like to be.

I'd rather hold off on paying it off early (and still pay it off by the end of the year) than find myself in a pickle without enough to cover expenses.

**Thrif-t** · 03-14-2013, 05:25 PM

It is a tempting thought isn't it. We were thinking of taking our emergency fund to pay our house off early. It's scheduled to be paid off in 3 years but I'd love to knock that sucker off now. But we decided against it too as we have a 6 mos emergency fund and it'd take us 2 years to get build it back up. Just too big of a chance to take.

Pay Off Car & Reduce Emergency Fund?