The Federal Reserve does an annual survey in which they ask people how they’d manage an unexpected expense of $400. A decent percentage (perhaps a third) of respondents would have trouble scraping together the money. So yes, a lot of people are very vulnerable.
And I in no way want to minimize that one on the major reasons people are unprepared for crises is the lack of a fair wage or sustainable income. You can’t squeeze blood from a turnip. But I do think once people do get their head above water, they don’t always have the resources or knowledge to know what to do next.
And as I mentioned upthread, coming from a working class background, I have to actively fight to think about money in terms of net assets vs debt or savings. That’s what my husband means when he says I have to think like a rich person.
Paying off debt IS investing.
If the bank had a GUARANTEED investment at 6.5%, there’d be a stampede of people trying to get in on it. Well, you’re being offered exactly that, up to $120,000.
But wouldn’t retirement savings, on average, yeild higher? Couldn’t we put the funds into higher yeild stocks? There’s always a risk it won’t pan out but if you invest conservatively, couldn’t that be a better place to put that money? For example my FIL has a stock he got a 25% return on. I know that’s not typical but he’s been smart enough he’s been turning a profit on almost all of his short term investments. And he’s willing to sit down and teach us how he does it.
You actually don’t want to invest TOO conservatively or you’ll lose out on a lot of potential returns. In fact, higher yield and conservative usually don’t happen together.
Those stock market returns also have to be weighed against the cost of the money. If you have a credit card at 15% interest, versus the stock market return, that’s a clear loser - the cc interest is higher than the average stock market returns especially if you have a bad year.
A car loan at 6% versus stock market return of 8% is less clearcut. A mortgage at 4% even less so. That’s also complicated (in the US) by tax law changes that make mortgage interest less of a good thing (this past year, TurboTax suggested we not itemize).
Now, do we practice what I preach? Er… We do save whatever we can (10% or so and I wish it was 20). We’ve got a somewhat more complex cash-flow situation than most, with supporting the in-laws and my special-needs daughter, and as a result our debt load, right now, is a bit higher than I like. But we also have recent and very, very compelling evidence of the folly of failing to save (see in-laws).
Best of luck finding a stock with a GUARANTEED rate of 6.5%. You won’t find that anywhere nowadays.
Paying off a 6.5% loan is a guaranteed return. These days 6.5% is a good return. Pay it off.
Sure, there are some features like side air bags I don’t have.
On the other hand I have VERY unhappy with some “improvements” I’ve seen in newer cars like touchscreens. WTF? Who thought that was a good idea? I can make adjustments in controls by feel with actual knobs and physically distinct buttons and levers. With touchscreens you have to take your eyes off the road - and that’s a safety hazard. That’s just one example of a feature I don’t like about new cars.
My old cars work for me, and it makes a lot of economic sense to maintain them rather than replace them at this point in time. Every time a major repair/replace comes up I re-consider this and so far the choice has always come up “keep”.
It may help to realise that it wasn’t ‘your’ money - it was borrowed from the credit company and they were charging you hefty interest.
Now you have removed that ‘ball and chain’, you actually will have more income!
Your thinking is way out of kilter! Not to mention, unkind to yourself.
You didn’t just spend that money. You spent it long ago. Having the funds in the bank was a fiction. You moved money so it is much more productively organized. That movement is itself an investment in your future!
Ya’ll are inspiring me to want to pay off more debt. I hate debt. I hate how it affects cash flow. No matter how many times people crunch the numbers on investments being better, I just feel so oppressed by all this debt. We may get a windfall from the business this year, and if that happens I think we’re going to pay off the car. And in the meantime I think we should pay extra on the car…
Lord knows you’ve inspired me often and in very personal ways, so I’m glad to have at least in some small way returned the favor 
I’m glad to hear things are looking up for you and very excited for your tenure. That is such a rare and precious thing.
As a quick side note: on our new car, most of the most urgent controls are either physical knobs / buttons on the dashboard, or are buttons on the steering wheel - no touchscreen involvement required at all. Yes, you can do more elaborate control using the touchscreen, but I can tweak the temperature or audio volume with nothing more than the barest glance to make sure my finger is headed in roughly the right direction.
Anything more elaborate, that REQUIRES use of the touchscreen, is a feature you wouldn’t have on an older car (built-in GPS, fancy audio controls).
Right. And a lot of them don’t work unless you’re in Park.
I was thinking more collision avoidance, though, not fancy calling and music features.
Good plan. Even if it’s just a few bucks a month, it’s a psychological boost.
We had to take a 6 year loan when we bought the new car last fall. Barring a major accident, we’re likely to keep it for many years so it’ll be paid off for a long time (our other car is 14 years old and its predecessor was 22 when we got rid of it) - that was part of our rationale for going new versus reliable used (plus I gather used cars aren’t the bargain they once were). .
Something else we did recently to improve cash flow was refinance the mortgage. We have been in this house nearly 19 years and refinanced a number of times in the first decade, as interest rates were declining. With the net result that we still had over 20 years to go on the most recent mortgage. With the refi, we went to a 20 year mortgage - i.e. roughly the same payoff - but cut our total payment by about 800 a month, which will REALLY help with paying down other stuff / saving more for retirement.
We do not have the kind of cash cushion the OP mentioned (good for you!!) because of our unusual situation, but have always managed to put something aside into the retirement accounts. Windfalls (several inheritances) have largely been used to fund increased 401(k) contributions. That’s the only reason we’re not terrified at the finances of retirement lurking in a few years.
Another hint to reduce costs: don’t just let your auto (and if appropriate, homeowner’s) insurance just continue to renew without looking at it every couple of years. Our car insurance doubled when our son got his license - and never really went down. He’s turning 27 this summer. I finally started shopping around, and found I could save a ton (a lot more than that 15% the ads tout). So I called our insurer and asked them for a rate review. Net savings: 200 a month. Prior to that, our homeowners’ policy had nearly doubled in 6 years or so; a call got that slashed as well. Basically, the insurers will jack your rates, despite a clean history, as much as they think they can get away with until you complain.
We have a six year auto term, too. I have now arranged to pay $200 more than the monthly minimum, which should allow us to pay off the car 1 year and 7 months early. That’s if we add nothing else.
I feel constantly conflicted between retirement and debt, so we’re just doing a little of both right now.
And I was just checking out car insurance premiums as ours is going up… We pay what I think is a ridiculous amount, $4,000 this year.
OUCH!!! At its worst ours was never that high - even when we bought the new car last fall, though it wasn’t far short of that. Definitely worth getting quotes from other companies.
Yeah, and our cars are 2008 and 2015 Hondas, two adult drivers, no accidents or moving violations. I know Michigan insurance is expensive but it just seems like too much.
As mentioned upthread, paying down debt is a guaranteed return of whatever your interest rate is on the loan. So paying down your car loan is in a way saving for retirement, if you take some of the extra money when the loan is paid off and put it towards your retirement.
My mortgage is only 3.125%, but I put a bit extra into it each month as a form of diversification. I could be putting that money in the stock market, where it might return much more, or I might lose it completely. Paying down the debt I only get a small return, but it is guaranteed.
If I had another place to put the money that was guaranteed to pay more than 3.125%, then I wouldn’t pay down the mortgage at all. In that fantasy land, I’d increase my mortgage, and put the extra money into this magical investment vehicle.
My own rule of thumb is pay off debt in the order of highest interest rate to lowest . EXCEPT those having rates lower than you can get on savings accounts or bonds (if those are available to you). Ally is paying 0.50 percent, US series I-Bonds have a composite rate of 3.54%. Pay off everything with higher rates than that (which for you, sounds like everything).
See above. At 14.9%, this needs to get paid off ASAP, but you didn’t state your CC rate. If it’s higher, pay that first.
Don’t do it. Don’t buy the house.
- Financially, home ownership isn’t always the capital-building bonanza it’s made out to be. Particularly when you’re borrowing 80% of your loan. Save more for the down payment.
- Your credit isn’t great, and this will cost you on the loan. Repair your credit by retiring your high-interest debt.
- Real estate is an overheated seller’s market right now. You’re coming up on tenure, you are in no hurry to make a purchase before your income dries up. Keep your powder dry until this bubble pops.
The right reason to have a house is not because it will make you money. It probably won’t. The right reason to buy a house is that you want a home that you can modify exactly to your taste, or you found a property that fits you better than a rental ever could, and you’re quite stubborn on this score.
Stop. Don’t. I understand the urge, but this is a terrible reason to buy a house. This is a terrible time to buy a house. Plug the other holes in your financial boat. Once you’ve done that, you’ll be in a stronger bargaining position, and you’ll be ready to make a move when the market changes.
Sorry to be that guy, I understand the “buy a house fever” is strong, but if you want to become wealthier, that’s not what you should be doing right now.
Also:
A word about savings: The point of savings, apart from big capital purchases, is to have an emergency cushion in case of unforeseen expenses. You have a credit card for this purpose. Storing up $50,000 at >1% interest rate, while you’re setting money on fire with that auto loan, is an incredibly wasteful thing to do. Consider your credit card as your emergency cushion while you pay off the high-debt loans. Then put your savings toward retiring your high-interest debt. Only AFTER you have reduced the abusive debt should you start accumulating cash savings again.