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Put Money towards car or home loan

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Ncage1974
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Put Money towards car or home loan  Reply with quote  

Hi guys. I have 8,500 i need to put towards my home or car loan (that's going to be starting soon).

My car loan is 0% for 72 months.

I'm about 28 payments into my home loan at a 2.875%.

The big advantage with the car loan would be of course it would lower my car payment but at the same time, it would save me about $600 in taxes.

What would you suggest?

thanks...
Post Fri Oct 06, 2017 10:37 pm
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oldguy
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Depends on your goal - build wealth or prepay debt?

To build wealth you need to keep your capital and put it to work. Ie, if you spend your money on debt it won't be available for building wealth.

I would invest the $8500 so that it doubles about every 7 years. $17k in 7 yrs, $34k in 14 yrs, $68k in 21 yrs, and so on. (The rule of 72)

In my world, you never prepay 2.875% money, and never ever prepay 0% money
Post Sat Oct 07, 2017 2:36 am
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Ncage1974
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Thanks & it makes sense. What do you think would be a safe investment to do that? Maybe an S&P500 index fund?
Post Sat Oct 07, 2017 3:03 am
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oldguy
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Yes, the SP500 fund is what I use, it has a longterm average return of about 11% per yr
Post Sat Oct 07, 2017 2:52 pm
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christcorp
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Ncage. Oldguy is correct. There is a time to pay off debt; but don't get confused between Paying DOWN debt, and Paying OFF debt. 2 totally different things.

You want to pay OFF debt when the interest rate is higher than you can guarantee make through investing; and/or when you can take those payments and use that to pay towards paying OFF other debt of investing at a higher interest rate than you're paying on the existing debt.

Paying $8500 towards a mortgage may reduce your loan by about a year or so, but you're not really making or saving any money vs what you could have done with the money by investing.

Now, if you could Pay OFF your car lone, then that wouldn't be a bad idea. IF, you would use that money you WERE paying on the car to pay OFF other debt or to invest. (You say it's 0% interest, but the truth is, it's NOT). The money the car company DOESN'T MAKE on an interest loan, they made up for on the price of the car. If you had 100% cash to buy the car, you would have been able to get the price lower. If a person says they couldn't get the price down on a Cash purchase, it's because they didn't know how to negotiate and took the salesman's word for it. Point is, you paid MORE for the car because they financed it at 0%. But that point is moot because you already bought the vehicle.

But for those with similar questions, Any debt that charges interest, if you pay that off early, then that is guaranteed interest YOU ARE MAKING. Investments are not guaranteed. Yes, long term, the S&P has returned 10-11%. But that's LONG TERM. There's 10 year periods where it didn't make anywhere near that. I consider retirement funds to be long term, but I consider everything else, including mortgages, to be short term. Even a 30 year mortgage. Whether your mortgage is 2.9%, 4%, 6%, or more, paying it OFF Early is a Guaranteed interest rate you are earning. The key is; what do you do with the money (Monthly mortgage Payments) you not have freed up? Also, what would you have done with the money that you used to pay off the house mortgage early. Some people don't invest, and all their free money; savings, inheritance, sale of assets, etc. is sitting in a savings account. Some people have all their money in investments for the future. You have to have a balance.

1. Immediate savings; cash on hand; cash in the bank, gold/silver, for all the splurges or immediate financial needs that you want today. Or an economic temporary crash.
2. 6 months of Pay in an account that you can have IMMEDIATELY and penalty free access to. Cash, Gold/silver,. This is in case you lose your job, get unemployed, cover medical costs short term, etc. basically your day to day cost of living for a 6 month period until you get back on your feet again.
3. Short term savings ; can be CD's, bonds, Money Market, etc. for savings for vacations, new car, new heater, home appliances, home repairs.
4. Medium term saving; CD's Mutual Funds, bonds, etc. for a LONGER period time for things like child's education, preparation for retirement/relocating, retiring debt free, etc.(Non-401k/IRA type funds) 10-20 years out.
5. Long term savings; IRA, ROTH, Mutual Funds, 401K, etc. 20+ years out. These are the funds that will supplement any/all of your retirement funds such as social security, pensions, etc. This is how you'll live the remaining 20, 30, 40 years.

1,2, and 3 above can be combined, borrowed from one to the other, etc. As long as you have all 3 needs covered.

My point is, you shouldn't just take ALL extra, free, or new money and automatically put it into long term investments. I'm all for such investments like the S&P500 funds. I have such things. But NOT for #1-#3 above. Such funds are for my #5 and to a smaller extent #4 above. And even though I am a fan of the S&P500 type funds, I would never have all of my investments in that one type fund. Like I said, LONG TERM, it has performed 10-11%. But from 2000-2010 it returned an average of about 3%. It had some high double digit gains and some high double digit negative years. So I believe in diversity; and for these funds and other retirement funds to definitely be long term.
Post Mon Oct 09, 2017 7:09 pm
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