Video Mailbag Ep. 3: Should I pay off my car early?

Yo, back with a new video mailbag question – check it out!

 

 Hi Pete,

First I love your blog and your information! I’m really torn if I should pay off my car early. I signed a 60 month lease in 2012 with a 4.4% interest rate. I pay $250, which is more than the $200 required. It isn’t really tight for me, just annoying. I have a monthly budget that includes putting $250 into savings every month, and 15% of my salary into my 403(b). I HATE keeping a car payment, I have $2,750 left on it. I have about $10,000 in savings. I think at this point it would only saving me about $250 in interest to pay it off early. Is that worth it to take such a big hit from my savings account?

Other financial facts: I bought a car, a house, and started grad school(because yay for doing everything at once!), but the only loans I have are my house and car. I also pay extra on my house payment so I am paying equal interest and principal. I did not have much equity in the house when I bought it, so I am trying to build that up. Even though I only plan on having that house for less than 10 years (with potential to rent and keep it longer).

Any advice would be great! I try really hard to make good decisions with my money, including a strict budget, but sometimes it’s still hard to know if I’m doing it right!

Thank you!

Kelly

Hey Kelly, I don’t like using assets to pay off debt. Don’t take the $2,750 from your $10,000 of savings to pay off the car. You should use your income to pay off the car as soon as possible though. Let’s talk about your savings account for a minute. You have $10,000 saved and are putting away a further $250 a month. I want you to have 3 months of expenses saved, and I’m assuming, $10,000 covers you on that. It’s time to stop saving, and start focusing on paying off your debt. If you switch the $250 from monthly savings to your car payment, you can make a $500 a month car payment. Do this. This aggressive monthly payment will have your car paid off in just a few months. Then you’ll have $500 a month to put toward other financial goals.

Check out the rest of my video mailbag series here.

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