I graduated last May and have around $9K in equity investments, and $16K in cash. I'm also set to receive $10k after-tax in a couple months as a bonus payment... so, I'll be sitting on $26K in cash and around $10K in my brokerage account in the next couple months.
I have a $13K car loan and I'm thinking I want to pay off the car loan in its entirety with my cash.
The monthly is around $370 and the interest rate on it is 2.9%. I've been paying $500 per month just to pay it off faster, but I'm debating whether I want to invest my funds or just continue to pay off my car within the next 2.5 years.
Should I keep my cash as is to use as an emergency fund? Should I pay off my car right now?
I eventually want to start investing in real estate in the next couple years, so I do want to keep a nice cash sum available.. but I also would love to free myself from a monthly $500 car payment.
- Zero school loans
- Excellent credit history
- Zero credit card debt
Paying Off Car Loan vs. Investing
Generally speaking, if your monthly interest rate is lower than the estimated monthly return on the market, it makes sense to invest your funds in a non-risky manner. The opportunity cost to paying off your loan is a potentially higher return in the stock market. However, if you are risk adverse you should spend your extra funds paying off your car loan or spending part of your funds to pay off part of your loan and then invest the remaining portion.
Our users shared their advice below.
2.9% is pretty damn low. I would just pay it off faster like you are doing, but still use the money to invest in stocks. I honestly think you will return more than 2.9% in the market over the next year or two. Since you have no cc or student loans, I would leverage that debt. Just don't be too aggressive.
Why would you use cash to pay off the loan at 2.9% rather than invest it with a decent chance of earning more than that? Ya, it's great to say you don't have a car payment, but there really is not much upside to it when the rate is that low. Also, you just graduated college. $16,000 is a lot for a rainy day fund. Keep about $5k of it and invest the other $11k, then when your $10k comes in put half in the rainy day fund and invest the other half. Just make higher payments towards the car at $700 if you want to cut some of the interest down.
Since your interest rate is that low, it's your call. However, you should keep some cash stashed away at a separate checking account for however long you think it'll take you to find another job.
Personally, I'm very fiscally bearish, and I plan to keep 5 years living exp (5 yrs @$50,000 =$250,000) in the bank. Is it a bit excessive? Perhaps, but the knowledge that I can quit at any time, go to Law School, or just chill for a while is extremely liberating.
What is Opportunity Cost?
Check out a video below explaining the concept of opportunity cost as referenced in this post.
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