I’m a 29M. My take home pay is $4,882/month after taxes and 401k contributions. Here’s a quick breakdown of my monthly budget:
- Rent: $1,630
- Car payment: $470 (I’ve been paying $550 to pay it off faster)
- Electric Bill: $100
- Car insurance: $93
- Phone: $55
- Roth IRA: $625
After all that, I have about $1,800 left for everything else, like groceries and gas. I typically save about $600–$800 a month, which I put into a SoFi vault for a trip I have planned. I don’t have any other debt besides the car, no credit cards or student loans. I currently have $10k in a HYSA as my emergency fund, and I have $6,500 left on my car at 5.75%. Would it make sense to pay off the car using my emergency fund and then replenish it with the $550/month I was putting toward the car, or should I just keep making the payments as I am now?
Pay off car using emergency fund, or keep making payments?
byu/MrRobbieD inpersonalfinance
Posted by MrRobbieD
5 Comments
Is it an emergency that you need to pay off your car?
You only use an emergency fund for emergencies. This is not one of them. If you need to pay it off early, take money out of your trip fund, otherwise just make additional principal payments
Emergency funds should cover a minimum of 6 months of expenses. It’s not a savings fund, you should put it aside in case of an emergency, otherwise it’s not actually an emergency fund. If you pay your car off, you’d have 1 month of cash to cover the expenses you listed.
But other things to consider:
Is your current occupation recession proof in your area?
If I remember correctly, general advice is to have as much as your annual salary in your 401k by age 30, but it sounds like youre good there too.
5.75% isn’t too high. What’s your interest in your HYSA? simple check is to see which interest wins. I got my car in ’18 at 2.99% and just paid any extra money towards it after expenses and savings and got it paid off about a year early. No need to play it risky with a good rate.
If you had a 14% or a 29% interest car, like I’ve seen people do lots. Infact my kids mom has 14% on her car loan. I’d say yes use the money to pay the car off, then replenish that money with what you were paying the car payment with. But 5.5% isn’t very high at all. Infact you probably already paid the interest off n are now just paying the principal. Or is that just mortgage loans?
i wouldn’t wipe out the emergency fund for a 5.75% car loan.
it’s annoying debt, not an emergency. keep the $10k cushion, keep paying extra if you want, and throw your monthly surplus at the car instead of draining cash.
being debt-free a little faster is nice. being debt-free with no cushion is how one random bill turns back into stress.