My wife and I financed my truck with a loan from my credit union. We chose not to put down more than a thousand so essentially financed $44,000 at 5% interest rate. Monthly payment is around $800 a month. I recently received a $12000 bonus and we are wondering how much of that should go toward paying off the truck. We have an emergency fund that we contribute to and we each have a 401k as well as college savings for the kids. Should we put a portion of my bonus into our emergency fund to continue to build to 6 months of salary or should we put a significant portion toward paying off the truck asap? We are leaning towards paying a large amount of the truck off.
How much of my bonus should go towards paying off truck?
byu/xATLxBEASTx inpersonalfinance
Posted by xATLxBEASTx
10 Comments
put half into emergency fund and half towards the debt
I’d be cutting high interest debt ASAP.
Congrats on the $12k bonus, but you need to separate your emotions from the math right now.
You are leaning towards the truck because seeing a smaller loan balance feels good emotionally. But locking your liquid cash into a depreciating piece of metal when you don’t even have a fully funded 6-month emergency fund is a systemic risk.
At 5%, that truck loan is slightly annoying, but it’s not a financial emergency. Not having a full 6-month cash buffer is an emergency waiting to happen. If you lose your job tomorrow, you cannot pay your mortgage or buy groceries with the equity in your truck.
Cash buys you options and breathing room. Top off that emergency fund to a complete 6 months first. Whatever is left over from the $12k after that concrete safety net is built, you can throw at the truck. Secure the foundation before you worry about the paint job.
How big is your emergency fund now? Sounds like you’re pretty comfortable with it if you’re leaning towards putting it into the truck.
I think you’ll be happier if you pay off all the debt sooner rather than later.
I’d pay off that truck debt. That’s a year’s worth of payments. Look at your last two statements. See how much interest you’re paying each month. (The two statements is so you can see how much it goes down and the principal share goes up).
Now calculate how much interest you’re not going to pay and see if you can beat that return.
Would you rather not be losing 5% to interest, or would you rather be able to endure longer emergencies? Have you done the interest calculation to see how much you would save by paying off ~x~ thousand dollars of the truck?
How have you thought critically about this situation?
If you remember your highschool algebra, now would be the time to use it.
Eliminate debt where possible. It’s a hill I will die on.
That said, set a little aside for a nice weekend away or a really nice night out for you and your wife. With a bonus like that I would say you earned it.
5% interest?
What’s your savings give you, probably 4% or so? I’d be tempted to sock the money in savings and keep paying on the loan since the interest hit isn’t really costing you much money
Emergency fund. Surprise bills are way more expensive than 5% interest.