Would you rather? The Car Version

I have been listening to a lot of Dave Ramsey lately. Love him or hate him, he’s gotten a lot of people out of debt.

I’ve taken some of his advice: 1) I have a $1000 baby emergency fund. 2) I’m trying to pay down my debt FAST. 3) After I pay off my debt, I plan to build up my emergency fund to about 3-6 months expenses.

The biggest way I’ve gone against his advice is by not focusing on one goal at a time. While I’ve been paying off my debt, I’ve been doing several other things. I contribute to both my Roth IRA and my 401(k). I’m saving to buy my car. I’m saving for vacations. I care a lot about interest rates and I’m using my credit cards for everything (Don’t worry! No Credit Card debt here!)

As I’ve been listening to Mr. Ramsey, I’ve started to question the distribution of my money every month. Am I spreading the money too thin? Should I be contributing to all these accounts when my money could be more effective hitting one target at a time? It was time for a thorough examination.

My retirement savings quickly made it past my questioning. I’m getting excellent returns in both my accounts. I’d be losing money if I diverted my funds. This is a Keep.

Maintaining my travel savings contribution was also an easy money decision. I need to travel. The world is big and I need to see it. I don’t want to go into CC debt because of travel… so I save.

I am, however, struggling with my decision to save to buy out my car at the end of my lease. I’m buying out the lease, that’s not the issue. The money is. Doing what I’m doing, which is saving about $320/month in my Car fund, is not making the most financial sense. If I diverted some or all of this cash, I could be making greater progress on my student loans.

Let’s study the numbers. The Pros and the Cons.

1. Student Loans.
I have approx. $30,000 left in student loans. My interest rate is 6.55%. My student loan interest is tax deductible, making my effective interest rate ~5%.

2. Car Fund/Car Loan
With no down payment, buying out my car will cost approx. $13,000 + taxes and other add ons. I’m expecting the taxes and fees to be about $1,000. So $14,000-ish. To pay for this, I’m going to take out a car loan. (Yes Yes, I know. More debt. Sucks.) I expect my interest rate on the loan to be between 1.5% and 2.5%. I plan to buy my car in January.

My savings account, where I put my $320/month, has an interest rate of 0.75%. Right now, I have a roaring $1770 in my Car Fund. I have 5 more months to build this account. If I continue how I’m going, I will have $3370 when I buy the car.

3. My thoughts.
I’d like to have some money down for the car. I’m not sure if that even matters, but I’d feel better about myself having something. The interest rates are telling me to dump all the extra cash on my student loans because my savings account isn’t doing anything for me and the car loan rates don’t really hurt me.

Pending your reactions, my plan is to cut my car fund to $1500 (a respectable amount down) and divert the remaining $270 plus $320/month to my loans. The amount I could add to my loans over the next 5 months would be $1870. That feels like savings to me.

What would you do? Help.

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7 comments

  1. Personally I’d throw a good portion on your student loans because they’re a higher interest rate than what your anticipated car loan rate, and your interest on your savings account. That being said, the amount is up to you. Also, you know I am bad at doing what you are trying to do, so I am a bit of a hypocrite with suggesting this when I rarely follow this advice. So, do what works for you 🙂

    1. I may just dump it all on my loans. The math says student loans, no reason to fight it. Don’t worry about being a hypocrite. Identifying the “right thing” to do and actually executing it are completely different mental processes.

  2. And I agree too! Put as little down on the car as you feel comfortable doing, and send all the rest of it to your student loans. The interest rates mean that it makes so much sense, plus the psychological satisfaction of seeing those loans drop fast.

    (I worry about that spreading it too thin too — it’s hard to feel satisfied when five savings categories go up so slowly.)

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