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No fewer bills is better. The long term house payment will not go away as quickly as the car payment which will free up more money.
haha, what exactly is the fewer bills better for? writing less checks? I pay my bills online and I don't pay extra for setting up additional payments. if we are talking about the best thing for maximizing net worth (which I believe is what we are trying to do here) then you pay down the debt with the highest interest rate first (that's if you are inclined to pay off debt).
No fewer bills is better. The long term house payment will not go away as quickly as the car payment which will free up more money.
define "better." I agree with CaptainNJ here. Paying the car off is not my first or even my 2nd or 3rd choice if I was facing the same decision. That money is so cheap that it is not hard to make a better financial decision (purely in terms of increasing net worth) that is a black and white "better" decision if you are using pure financial logic and not letting your gut-feel/fewer-bills-feel-good-logic cloud the decision.
haha, what exactly is the fewer bills better for? writing less checks? I pay my bills online and I don't pay extra for setting up additional payments. if we are talking about the best thing for maximizing net worth (which I believe is what we are trying to do here) then you pay down the debt with the highest interest rate first (that's if you are inclined to pay off debt).
Quote:
Originally Posted by jamiecta
define "better." I agree with CaptainNJ here. Paying the car off is not my first or even my 2nd or 3rd choice if I was facing the same decision. That money is so cheap that it is not hard to make a better financial decision (purely in terms of increasing net worth) that is a black and white "better" decision if you are using pure financial logic and not letting your gut-feel/fewer-bills-feel-good-logic cloud the decision.
The poster said her goal was to reduce debt.
I agree with you that mathematically both of you are correct. But it takes discipline to invest and stick to a budget so you don't get into debt to begin with.
There are studies that show that most people will come out ahead by paying off the car 1st. Mathematically it doesn't make sense, but people aren't math equations.
With the car paid off she will feel a sense of accomplishment and her cash flow will have increased as she no longer has a car payment and the bonus car payments - making her more likely to stay disciplined at reducing other debt, investing, and avoiding new debt. Most people come out ahead in this situation paying off the car to accomplish the goal of less debt.
With that said, she would build more net assets investing that cash or paying off the home first if she sticks to it.
I agree with you that mathematically both of you are correct. But it takes discipline to invest and stick to a budget so you don't get into debt to begin with.
There are studies that show that most people will come out ahead by paying off the car 1st. Mathematically it doesn't make sense, but people aren't math equations.
With the car paid off she will feel a sense of accomplishment and her cash flow will have increased as she no longer has a car payment and the bonus car payments - making her more likely to stay disciplined at reducing other debt, investing, and avoiding new debt. Most people come out ahead in this situation paying off the car to accomplish the goal of less debt.
With that said, she would build more net assets investing that cash or paying off the home first if she sticks to it.
she would be reducing debt faster if she puts money towards the mortgage.
the fact that there are multiple debt accounts doesn't impact the amount of the debt. maybe it would be helpful to sign up for mint.com. I use that and it helps me look at my finances more like a balance sheet. for example, I could pay down debt but the money to pay the debt comes out of my assets. so, to me, less assets means less growth and id rather keep the money there than use it to reduce my debt number.
Last edited by CaptainNJ; 12-30-2013 at 10:44 AM..
she would be reducing debt faster if she puts money towards the mortgage.
the fact that there are multiple debt accounts doesn't impact the amount of the debt. maybe it would be helpful to sign up for mint.com. I use that and it helps me look at my finances more like a balance sheet. for example, I could pay down debt but the money to pay the debt comes out of my assets. so, to me, less assets means less growth and id rather keep the money there than use it to reduce my debt number.
I don't disagree with what you said.
Just that studies show more people stay disciplined when they visually see that car payment go "poof" and vanish.
Do you have a rainy day fund aka emergency fund? I'd build up that before I'd put anything toward either debt.
If you have one, then I'd do an IRA or 401k toward retirement. If you are intent on paying down loans, the advantage of paying down the car is that you would free up that monthly payment very quickly. 5 years may become 3 years and you would lose that monthly payment. If you lose your job or something else happens, you would not have that burden anymore. If you pay it toward your house, while it is a higher interest rate, you will only shorten the term, it doesn't get you out of paying each month, so if something happens like job loss, you will still have both obligations for awhile.
Some people like to put the extra money in a fund earning interest and then when you have the money to pay off a loan in full, pay it off then. This way, it acts as extra liquid money if you should need it.
To get a better answer, though, you should give us more details - age, emergency fund, any other savings, etc.
I'd put any extra funds toward your credit cards. When those are paid off, put the extra into retirement accounts and emergency funds. You should have 12-18 months of liquid funds--savings accounts, mutual funds, at least. Then worry about paying off low interest mortgages....
Spouting off a Roth, or IRA to somebody who hasn't a clue of either is bad advice. Not everybody can stomach the market swings or has the diligence to invest and hold the funds in retirement and will pull the funds with fees at the lowest point of the market and completely lose their ass-never again investing.
The OP was asking for advice on paying down the car or mortgage not worthless blanket investment advice.
My advice would be to pay down the car first. It's an asset that loses value every mile and year while your home will go up in value over the years.
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