Extra principle payments or add to savings?

[paysensmom]

We paid my husband's car off. We have an extra $478 per month now. We have a fairly new loan on my van with a 1.94 % interest rate.
We are debating paying $478 on the principle each month, paying half of that toward principle and the other bald build the savings or the third option is to put $478 in our savings each month.

Please give me suggestions and pros and cons of each of those choices.
Thanks so much!

 

[Karlzmom]

I think the "correct" answer is "it depends" [a very lawyer-like answer if there ever was one, eh?]

Do you currently have a healthy cushion in your savings account? I no, then I'd direct all of the *found money* into your savings until you feel you can weather an emergency. Not sure what that number means to you - Dave Ramsey advocates $1000 as a starter emergency fund. If you are under that number, I'd suggest the next 3 months of non-car payment go straight into your emergency fund.

After you get the amount of the safety net that makes you happy then I would likely split the payment between extra principle and savings. You do have a great rate on the note, but reducing the amount owed will give you flexibility should you need to get out of the current car and don't want to be upside down [which is rather common as the car depreciates faster than you can pay it off]

Best of luck to you!

 

[snarlingcoyote]

We are in the exact same position! We paid off DH's truck; my car note is 1.99% interest.

We're going to roll the amount we were paying on DH's truck into a separate savings account just for auto expenses. Hopefully, we won't need another vehicle for another 6 or so years, but when we do, we'll pay cash.

 

[DawnM]

Agreeing that you need a healthy savings account first.

What is your interest rate on your house?

Since you had two car payments and are now down to one, I would also look at saving that amount in an account for another car so that when the time comes, you can pay for a car with cash.

Dawn

 

[kuhltiffany]

Do you have a mortgage you can put the extra money onto? If so, that's what I'd be doing...

 

[paysensmom]

We do have a decent savings account built up. I did an online calculator (not sure how accurate) and if we paid $250 toward the principle each month we would pay the van off 1 year 11 months early.

 

[bumbershoot]

We do have a decent savings account built up. I did an online calculator (not sure how accurate) and if we paid $250 toward the principle each month we would pay the van off 1 year 11 months early.

And how early would you pay it off if you put the whole $478 towards it?

 

[mrodgers]

$300 into a car fund and never have a payment again. The remaining save or put on the van. With 2 car payments, I assume you have 2 cars that should last you at least 10 years unless you drive as much as my wife and I do. That gives you $36,000 at the end of those 2 car's life if not more if longer than 10 years.

There's no way I would ever have a car that cost more a month than my house...

 

[Colleen27]

How much do you have in savings? As objectively as possible, how secure is your and your husband's employment? Remember before paying any extra on fixed-payment loans like a car or mortgage that the finance company/bank will repossess or foreclose if you start missing payments no matter how much extra you've paid prior to that point. So you really need to be sure you have a healthy emergency fund, not the pathetic $1000 that Dave Ramsey recommends but enough to keep up with those payments through the most extended period of unemployment you can envision based on your particular work situation(s). We've seen a lot of friends seriously burned on that. Losing a home is bad enough; losing a home that you could have kept if you'd saved instead of putting extra on principle is adding insult to injury.

You may also want to set that money aside for car repairs/replacement, depending on how old and how many miles your DH's car has, so that you don't end up with another, similar sized car payment in the near future.

 

[Shelly F - Ohio]

Here is a good mortgage calc. I use and it is accurate within a dollar or two.
http://www.hsh.com/calc-amort.html


A year ago we started adding the unused car payment money to the principle of our MTG. and it has shaved off $44 a month off the interest. That's $44 not going in someone else's pocket. Would never get that with the money just sitting in the bank.

 

[crisi]

I agree with Colleen. It can take years to find a new job in this economy, and keeping your required cash flow low while having enough savings to weather it can be the difference between losing a house and having to give up eating out, cable TV, expensive data plans and Disney vacations until you get back on your feet.

 

[crisi]

Here is a good mortgage calc. I use and it is accurate within a dollar or two.
http://www.hsh.com/calc-amort.html


A year ago we started adding the unused car payment money to the principle of our MTG. and it has shaved off $33 a month off the interest. That's $33 not going in someone else's pocket. Would never get that with the money just sitting in the bank.

But you could turn that money into more money.

I paid off my mortgage. Then I took another one out. Its at 3.25%. I get 5% in dividends off AT&T and Verizon stock and about that in BP. Yeah, stock goes up and down, but its a five year ARM, over five years I should make enough money in the dividend differential (plus the tax write off) to make about $3000 a year in dividends. A thirty year mortgage with a five year ARM has me at about $350 a month in a mortgage payment, which is doable for us even in case of a job loss with our savings - as long as a job comes along in five years for one of us.

Now, this isn't a great idea if you can't afford some risk, but if you already have enough savings in non stock accounts to weather the unemployment scenario - which you should have before you start paying down your mortgage - the risk is minimized. The stock market does crash - but if you don't panic, it also goes back up.

 

[Happyjen27]

$300 into a car fund and never have a payment again. The remaining save or put on the van. With 2 car payments, I assume you have 2 cars that should last you at least 10 years unless you drive as much as my wife and I do. That gives you $36,000 at the end of those 2 car's life if not more if longer than 10 years.

There's no way I would ever have a car that cost more a month than my house...

Agree.

If you have 6 months living expenses in a cash account, then do this, both paying off the current car, and saving for the future one.

If you do not have 6 months living expenses; bank all that money until you do. The peace that comes with having that savings funded far outweighs the peace from having a car paid off.

 

[HM]

We usually pay off the car as soon as possible, even if the interest rate is really low. So, we'd be putting it toward the car. Then you'd be able to save both 'car payments' in your savings.

 

[JillyBean1899]

First thing is to make sure you have adequate savings. You should have 3-6 months of living expenses in a savings account ... more if you're in a vulnerable employment industry and might get laid off with little notice.

Do you have credit cards with higher interest rates than your car loan? If so, pay those off first. In general, it's best to pay off higher interest loans than lower interest ones, unless you can pay off the lower one in 1-2 months.

 

[ssawka]

We usually pay off the car as soon as possible, even if the interest rate is really low. So, we'd be putting it toward the car. Then you'd be able to save both 'car payments' in your savings.

Agree! The mortgage should be the last debt you pay off. It is the only debt (besides student loans) that has deductible interest.

 

[crisi]

First thing is to make sure you have adequate savings. You should have 3-6 months of living expenses in a savings account ... more if you're in a vulnerable employment industry and might get laid off with little notice.

Do you have credit cards with higher interest rates than your car loan? If so, pay those off first. In general, it's best to pay off higher interest loans than lower interest ones, unless you can pay off the lower one in 1-2 months.

In this economy, more than that. If your income is derived from a professional source, it will likely take three months from first interview to first paycheck - once you get an interview and if you get hired out of the gate.

There are some jobs where it can go a lot faster - for instance, if you are a software developer who will work contract you can get signed up with a contract house in a matter of days and, if they have assignments in queue, be working in a matter of a week or two.

 

[MrInfinity]

We paid my husband's car off. We have an extra $478 per month now. We have a fairly new loan on my van with a 1.94 % interest rate.
We are debating paying $478 on the principle each month, paying half of that toward principle and the other bald build the savings or the third option is to put $478 in our savings each month.

Please give me suggestions and pros and cons of each of those choices.
Thanks so much!

Generally speaking I'd say take all your savings right now and just pay off the car. Then your cash flow will be greatly improved, with not only the $478/mo but also the other car's payment too.

But in this case, your rate is sooo low (1.94%) I wouldn't. Aside from the fact that it simplifies things...

I'd go w a balanced approach...

If you have money in the bank, I'd put that in stocks. You should be able to make 5-10%, which exceeds what you're paying on the car. It depends how much savings you're talking about. If it's a few thousand, that'd be enough to buy 100 shares of many "safe" stocks like a GE type of thing. Earn a decent dividend, with reasonable growth and low risk.

Then also pay down your car faster, just not immediately. Pay such that you're doubling the principal and pay it off in 2 years instead of 4 or whatever your term is now.

The key is... if you have money, you are fortunate. Get it invested. Now. Time is your ally when it comes to savings and allowing your money to grow.

 

[crisi]

I wouldn't go with GE. It is actually fairly volatile. For a stable investment, look to utility or utility like (cell phone provider) companies. AT&T and Verizon each pay a 5% or so dividend. Energy companies like Duke or Centerpoint are around 4%, but less volatile since that market is stable. Oil companies, like Exxon or BP pay well, but their stocks are subject to high volatility if there is an oil spill. Pharmaceutical companies have pretty good dividends (I wish I'd put way more money into Merck when I did back when it was half the price it is now) - but again, more price volatility depending on what medications are in the pipeline or coming out of patent.