# Extra money - invest or pay off car faster? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [October 22, 2014, 2:43pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151 "2014-10-22T14:43:45Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Slash1972](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slash1972/32/6461_2.png) [@Slash1972](https://boards.straightdope.com/u/Slash1972)\ **Post date:** [October 22, 2014, 2:43pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/1 "2014-10-22T14:43:45Z")
I’m finally in the position where I have some extra money every month. I currently have a car payment, say $350, a month and have about that much extra (after maximizing my 401K) every month. I’m trying to figure out if I would be better off investing the extra $350 in a personal IRA or mutual funds or whatever, or use it to make double payments on the car, but not sure how I would figure out which is financially better. My interest rate is 2.9%. Not looking for the calculations to be done for me, just wondering how to set the numbers up. Thanks! ---
**Author:** ![yellowjacketcoder](https://avatars.discourse-cdn.com/v4/letter/y/4bbf92/32.png) [@yellowjacketcoder](https://boards.straightdope.com/u/yellowjacketcoder)\ **Post date:** [October 22, 2014, 2:58pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/2 "2014-10-22T14:58:12Z")
The general advice is to put your money where you’ll get the most return. You say the interest rate on your car loan is 2.9%, so if you can find a fund that earns 3-4%, then putting your money in that fund will be better long term. If the best you can find to invest is a bond or something at 2%, then put your money into the loan. One issue here that is frequently elided is the issue of risk. Your car loan is going to be at 2.9% interest every month. A mutual fund or stock purchase might get your a long term 4% return, or the market could drop and you could lose 10% (or whatever). So factor your risk aversion into that decision also. Also, it’s good to have a rainy day fund in case something happens. Something like a savings account where it’s low interest but also easy to get your money out at the drop of a hat if you have an unexpected expense. I’d build up a cushion for 2-3 months in case you lose your job or something before I’d worry about investing in mutual funds. Me, personally? I don’t like having debt hanging over me, so I’d probably put it towards the car payment even if there was a low-risk investment with a better return. That’s not the mathematically best option, just the one I’m most comfortable with. ---
**Author:** ![Slash1972](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slash1972/32/6461_2.png) [@Slash1972](https://boards.straightdope.com/u/Slash1972)\ **Post date:** [October 22, 2014, 3:12pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/3 "2014-10-22T15:12:18Z")
> [@yellowjacketcoder](#): > > I’d build up a cushion for 2-3 months in case you lose your job or something before I’d worry about investing in mutual funds. I actually completely forgot about this option :smack: Looks like I’ll be building a cushion first - thanks! ---
**Author:** ![bob\_2](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bob_2/32/3341_2.png) [@bob\_2](https://boards.straightdope.com/u/bob_2)\ **Post date:** [October 22, 2014, 4:17pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/4 "2014-10-22T16:17:21Z")
Personally, I think I would swing both ways. Yes stuff that cushion first, then use part of the money to pay off the loan early and save the rest. This assumes that the loan agreement allows early repayment of course. It also assumes that you do not have any more expensive debt like a credit card or personal loan. ---
**Author:** ![Lukeinva](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lukeinva/32/17872_2.png) [@Lukeinva](https://boards.straightdope.com/u/Lukeinva)\ **Post date:** [October 22, 2014, 4:44pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/5 "2014-10-22T16:44:04Z")
Divvy up the $350… $50 bucks extra payment towards the car, $200 in the emergency fund, and $100 in your IRA. Money management always changes so when the car is paid off reallocate the $50. Same with the emergency fund. The key is to stay proactive. ---
**Author:** ![Schnitte](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/schnitte/32/9033_2.png) [@Schnitte](https://boards.straightdope.com/u/Schnitte)\ **Post date:** [October 22, 2014, 5:35pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/6 "2014-10-22T17:35:56Z")
> [@yellowjacketcoder](#): > > The general advice is to put your money where you’ll get the most return. You say the interest rate on your car loan is 2.9%, so if you can find a fund that earns 3-4%, then putting your money in that fund will be better long term. If the best you can find to invest is a bond or something at 2%, then put your money into the loan. > > One issue here that is frequently elided is the issue of risk. Your car loan is going to be at 2.9% interest every month. A mutual fund or stock purchase might get your a long term 4% return, or the market could drop and you could lose 10% (or whatever). So factor your risk aversion into that decision also. > > Also, it’s good to have a rainy day fund in case something happens. Something like a savings account where it’s low interest but also easy to get your money out at the drop of a hat if you have an unexpected expense. I’d build up a cushion for 2-3 months in case you lose your job or something before I’d worry about investing in mutual funds. > > Me, personally? I don’t like having debt hanging over me, so I’d probably put it towards the car payment even if there was a low-risk investment with a better return. That’s not the mathematically best option, just the one I’m most comfortable with. Another factor that you should consider, in addition to risk, is taxes. The 2.9% that the OP pays on the car loan is paid out of their net income, so it is after taxes. Profits on investments are typically taxable income, however. So if the OP’s personal marginal income tax rate is, say, 25%, then they need to generate at least a 3.9% return on the alternative investment for that to become a preferable alternative (the 3.9% return before taxes translates to 2.9% after taxes). To get that sort of return in the present interest rate environment, you do need to accept considerable risk, so I’d say paying off the loan is preferable. ---
**Author:** ![Slash1972](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slash1972/32/6461_2.png) [@Slash1972](https://boards.straightdope.com/u/Slash1972)\ **Post date:** [October 22, 2014, 6:16pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/7 "2014-10-22T18:16:04Z")
> [@Lukeinva](#): > > Divvy up the $350… $50 bucks extra payment towards the car, $200 in the emergency fund, and $100 in your IRA. > > Money management always changes so when the car is paid off reallocate the $50. Same with the emergency fund. The key is to stay proactive. Well this was sort of my question, am I better off paying $150 and $0 to IRA until car is paid off at which point i put $150 in IRA. Or do what you suggested. I’m trying to work out a spreadsheet, but having problems. Is it as simple as stated above “If your investment APR is greater than your car payment APR, it’s always better to put more into investment”? ---
**Author:** ![yellowjacketcoder](https://avatars.discourse-cdn.com/v4/letter/y/4bbf92/32.png) [@yellowjacketcoder](https://boards.straightdope.com/u/yellowjacketcoder)\ **Post date:** [October 22, 2014, 6:33pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/8 "2014-10-22T18:33:00Z")
> [@Slash1972](#): > > Well this was sort of my question, am I better off paying $150 and $0 to IRA until car is paid off at which point i put $150 in IRA. Or do what you suggested. I’m trying to work out a spreadsheet, but having problems. > > Is it as simple as stated above “If your investment APR is greater than your car payment APR, it’s always better to put more into investment”? THat’s not what was stated above though. You have to consider risk and taxes (thanks **Schnitte** ) as well. ---
**Author:** ![Beauregard\_Porkypine](https://avatars.discourse-cdn.com/v4/letter/b/e274bd/32.png) [@Beauregard\_Porkypine](https://boards.straightdope.com/u/Beauregard_Porkypine)\ **Post date:** [October 22, 2014, 6:36pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/9 "2014-10-22T18:36:34Z")
I too hate any debt hanging over my head. Some debt is necessary at times, such as livable housing or reliable transportation. However, reducing or eliminating that debt should always be a goal. Any money put on the car loan that is above the required payment should be earmarked “Towards Principal Only”. Here’s a calculator that will help you see the benefit of the extra payment to principle. > **[Auto loan: Accelerated payoff](http://www.calcxml.com/do/aut05)** > > By making a small additional monthly payment toward principal, you can greatly accelerate the term of your auto loan and, thereby, realize tremendous savings in interest payments. Use this calculator to help estimate the potential time and interest... ---
**Author:** ![Slash1972](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slash1972/32/6461_2.png) [@Slash1972](https://boards.straightdope.com/u/Slash1972)\ **Post date:** [October 22, 2014, 6:41pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/10 "2014-10-22T18:41:46Z")
> [@yellowjacketcoder](#): > > THat’s not what was stated above though. You have to consider risk and taxes (thanks **Schnitte** ) as well. You’re right, forgot to include that. ---
**Author:** ![drachillix](https://avatars.discourse-cdn.com/v4/letter/d/48db29/32.png) [@drachillix](https://boards.straightdope.com/u/drachillix)\ **Post date:** [October 22, 2014, 6:51pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/11 "2014-10-22T18:51:05Z")
> [@yellowjacketcoder](#): > > Also, it’s good to have a rainy day fund in case something happens. Something like a savings account where it’s low interest but also easy to get your money out at the drop of a hat if you have an unexpected expense. I’d build up a cushion for 2-3 months in case you lose your job or something before I’d worry about investing in mutual funds. I managed to zero out a credit card with a $3500 limit as well as have $2000 in cash tucked away in my room. even though I do not make a huge amount of money, I feel tons more secure knowing I am not wondering if I can cover rent or buy groceries of my biz has a couple slow months. One other thing I kinda like to do, even though I know its basically a free loan to the biz in question. I tend to build up positive balances on bills like power bill and such That way if there is any hitch with that biller, it will soften any unanticipated increases like a run of hot days using more air conditioning. If at the end of the year there are still some positives I can always just pay off the remaining reduced balances and have extra cash for xmas presents and such. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [October 22, 2014, 7:31pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/12 "2014-10-22T19:31:26Z")
This is really more of an IMHO question, since it depends on your age, risk tolerance, debt aversion, and overall financial situation (particularly wrt taxes). In general, I would prioritize things like: emergency fund (you may consider 401(k) or home equity part of this if you want), high-interest debt (credit cards, etc), Roth IRA, 401(k), moderate-interest debt, other tax-preferred options (HSA for healthcare, 529 for education), low-interest debt, taxable savings (the priority of these last two also depend on personal considerations). I could be talked in to moving the HSA up in priority for someone in a higher tax bracket if it’s being used as another retirement account. Since I’m more debt-averse when it comes to things like cars where the interest isn’t deductible I’d probably do that before the Roth IRA, but YMMV. A Roth is still a really nice thing, and if you don’t use your limit any given year you never get that tax-preferred space back. Remember that what **Scnitte** said about taxes only applies to taxable investments (brokerage accounts). Roth IRA contributions are post-tax as well and the gains/dividends are not taxed. ---
**Author:** ![Broomstick](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/broomstick/32/246_2.png) [@Broomstick](https://boards.straightdope.com/u/Broomstick)\ **Post date:** [October 22, 2014, 8:07pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/13 "2014-10-22T20:07:50Z")
My personal take on the OP’s question: 1. Build up emergency fund to designated amount 2. Pay off any debt 3. Invest That’s the priorities, in order. However, I might put 3/4 of “extra” money towards the emergency fund while putting 1/4 towards debt, or otherwise divvying it up. It doesn’t have to be all or nothing. You could even rotate - one month make an extra car payment, the next month or two build the emergency fund, maybe a month for extra investing, then start the cycle over. In a sense, there’s no one “right” answer, just options and you choose which options suit you best. ---
**Author:** ![Colibri](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/colibri/32/1841_2.png) [@Colibri](https://boards.straightdope.com/u/Colibri)\ **Post date:** [October 22, 2014, 8:18pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/14 "2014-10-22T20:18:02Z")
Since the OP is looking for advice, let’s move this to IMHO. Colibri General Questions Moderator ---
**Author:** ![Slash1972](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/slash1972/32/6461_2.png) [@Slash1972](https://boards.straightdope.com/u/Slash1972)\ **Post date:** [October 22, 2014, 8:21pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/15 "2014-10-22T20:21:20Z")
> [@Broomstick](#): > > In a sense, there’s no one “right” answer, just options and you choose which options suit you best. My problem, and my original question is, I don’t know HOW to analyze my options in financial terms. I know “If you don’t want any debt, pay off the car” “Maximize your 401k” I’m not really looking for advice, more of how to analyze, say “If you pay off the car and THEN invest, you will have \_\_\_\_\_\_\_\_\_\_” vs “Half to car, and half to invest, you will have \_\_\_\_\_\_\_\_\_\_\_\_” so I can compare the \_\_\_\_\_\_\_\_\_\_\_\_\_. This may be a question I would actually have to pay someone to help me figure out, but I’m not really looking for financial advice, just HOW to calculate the numbers. I really appreciate everyone’s input so far, though! ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [October 22, 2014, 8:53pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/16 "2014-10-22T20:53:34Z")
Well, to answer that literal question you have to have more information. First, your marginal tax rate. Second, your marginal tax rate when you’d withdraw the IRA (depending on the type you may have to pay capital gains then, or ordinary income tax). Finally, we need to know what amount of risk you are willing to accept on the investment (that directly leads to expected return). And related to that, when would you want to spend the money invested (30 years you can take a lot more risk than 5 years). Figuring out the situation with paying down the loan is pretty easy - that’s after tax money reducing interested on fixed debt. There’s lots of calculators for that part. The one linked above, for example. Figuring out the return on the investment part is a bit trickier. One simple way to do it is the FV() function in Excel. =FV(0.04/12, 12\*5, -350) will give you the future value of $350 a month for five years with a 4% real return - I get $23,281.99. That’s on a total of $21,000 in contributions for a gain of $2282. The “-350” term there is the amount of the contribution, and the 0.04 is the rate of return. You can play with those to get an idea for the effect of changing either one. Then you have to consider the tax implications both on the contributions (none if they are post tax, perhaps significant if it’s a tax-deductible traditional IRA) and the withdrawals (none in a Roth IRA, significant in a taxable account). At the end of the day, I really don’t think you’ll see very much of a difference either way, quite frankly. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [October 22, 2014, 9:00pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/17 "2014-10-22T21:00:37Z")
> [@Broomstick](#): > > My personal take on the OP’s question: > > 1. Build up emergency fund to designated amount > 2. Pay off any debt > 3. Invest > > That’s the priorities, in order. My only quibble with this is that I don’t really see much advantage in paying off any low-interest debt (which tends to include most mortgage debt these days considering the tax deduction) or even moderate-interest debt before taking advantage of tax protected accounts. Once you’ve maxed out IRAs, 401(k), and HSA then sure, wipe out that 2.9% car loan as fast as you can (assuming that’s your highest-rate non-deductible debt). That said, a car might be an exception for me. But that’s probably just a personal hang-up I have about car loans. I’d rather pay that sucker off, then save the extra money to buy my next car with cash. ---
**Author:** ![Bosda\_Di\_Chi\_of\_Tricor](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bosda_di_chi_of_tricor/32/16845_2.png) [@Bosda\_Di\_Chi\_of\_Tricor](https://boards.straightdope.com/u/Bosda_Di_Chi_of_Tricor)\ **Post date:** [October 22, 2014, 10:18pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/18 "2014-10-22T22:18:40Z")
Pay off debt. Worry about the rest later. ---
**Author:** ![Ruken](https://avatars.discourse-cdn.com/v4/letter/r/f475e1/32.png) [@Ruken](https://boards.straightdope.com/u/Ruken)\ **Post date:** [October 22, 2014, 11:14pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/19 "2014-10-22T23:14:45Z")
> [@Jas09](#): > > My only quibble with this is that I don’t really see much advantage in paying off any low-interest debt (which tends to include most mortgage debt these days considering the tax deduction) or even moderate-interest debt before taking advantage of tax protected accounts. I agree. Focusing on low interest debt over tax advantaged, long-term investments is a good way for many poor people stay poor. So many have this irrational aversion to using debt to push themselves ahead. Yes, we see people who screw up with debt, but the answer is not to swing to the opposite extreme. ---
**Author:** ![LSLGuy](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lslguy/32/5813_2.png) [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)\ **Post date:** [October 22, 2014, 11:41pm UTC](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151/20 "2014-10-22T23:41:31Z")
If you have debt at 20% and an IRA returning 3%, it’s a no-brainer to pay off the debt first. If you have debt at 3% and an IRA returning 20%, it’s a no-brainer to fund the IRA first. When one is 2.9% and the other is 3.2%, the difference between fully funding one vs. the other will add up to pennies over your lifetime. And funding both partially will result in an intermediate penny-sized difference. What matters in the case where the interest rates are similar is that you fund _something_. IOW, the way to screw up is to spend the money you ought to be applying to the IRA or the car loan or both. Every month you spend debating which to do is a wasted opportunity to do something. [Next page](https://boards.straightdope.com/t/extra-money-invest-or-pay-off-car-faster/702151.md?page=2)