When to stop saving and start investing/paying off debt?

Submitted by funghi2 t3_10pjuhg in personalfinance

Make about $70,000 my wife makes about 45,000 and have $27,000 saved (was well over 50,000 but we purchased a home a year ago). Mortgage is at 400,000 and car loan at 32,000.

Im considering forgoing saving moving forward and instead paying off the car loan. Do I have enough saved to do this?

Savings would theoretically cover us for 6 months if it was all we had to live off.

I also plan to get a line of credit to have available, just to give me an extra security blanket in a worst case scenario.

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Cum_cuddle t1_j6kuzru wrote

Not enough info. What’s the apr rate on your auto loan? How much are you currently saving monthly?

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funghi2 OP t1_j6kwggb wrote

3.4%. Minimum $800 saved, but usually $1000. Currently paying $466 a month on the loan just with the payments that are set up

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Cum_cuddle t1_j6kwos4 wrote

What’s your mortgage payment and APR?

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funghi2 OP t1_j6kx48p wrote

Mortgage is $1960 a month with taxes rolled in

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Cum_cuddle t1_j6kxm14 wrote

I would save to $70k before paying off loans faster than necessary. This replaces your primary earners wages for a full year in the event of a catastrophe.

I would also ensure your maxing out retirement contributions prior to paying off debt as you’re likely to getter a better return than you’re losing in interest on the vehicle.

Either way you’re doing fine.

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sonnyfab t1_j6kwgek wrote

I'd plus up the emergency fund a bit more considering how large your mortgage is relative to your incomes.

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funghi2 OP t1_j6kwn2t wrote

It’s about 3.5x income, is that a lot? What would you recommend we save up to?

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Knipfty t1_j6kx2jt wrote

Good plan. I would not recommend a line of credit for emergencies. Just compounds the problems.

Yes. Stop savings and attack the car debt. Pay other debts too if you have them.

Once the debts are gone, Crank up retirement savings to 15% of gross income plus any matching at work.

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funghi2 OP t1_j6kxaz7 wrote

Car and mortgage are the only debts either of us have. I’d plan too only have the line of credit available if I somehow hit really hard times and had no other options (which I don’t foresee) is there any negative to having the LOC and not touching it?

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Knipfty t1_j6kxngo wrote

It will show up on your credit report. That can be both good and bad. Many LOCs have application fees and time limits on when you can use them. Lastly, in 2008, many banks closed them when things went south. So not a good product to depend on.

So, yes. throw every spare dollar at that car loan and get it out of your life.

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paynetrain37 t1_j6kxrmz wrote

What is your retirement planning looking like?

If you have a 6 month emergency fund saved up, that’s great! And I get wanting to pay off the car, although that’s a pretty low interest rate. If you’re behind on saving for retirement, the stock market is pretty much guaranteed to average more than 3.4% over the long term.

But if your retirement is on track, you’ve got an emergency fund built up, and you don’t have any other savings goals at the moment (you already have a house, so the only other thing I might think of would be a 529 plan if you have kids and want to set aside money for college), then I would use your leftovers to pay down low-interest debt.

Love that you’re spending less than you make and saving each month, but saving should always have a purpose. If there isn’t a specific reason you’re saving the money, then I would pay down debt.

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funghi2 OP t1_j6kyota wrote

Funny you should mention that. I have a newborn and am actually looking at the educational savings plans now RESP here in Canada. Retirement plan is ok. I put about 5% in a year. Took some out to put down payment on house.

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paynetrain37 t1_j6kz6uv wrote

Then I would probably spend that extra money on investments (either retirement or educational savings plan) if I were in your shoes.

I’m not familiar with the cost of that stuff in Canada, so I don’t know how much you need, but the S&P 500 historically has averaged ~10% (7% after inflation), so mathematically it likely makes more sense to invest the money instead of paying the car off early.

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Bronco46 t1_j6m1orw wrote

You have enough saved for an emergency fund. Your car loan interest rate is pretty low as well. Paying it off early wouldn’t save you much other than piece of mind. I would refer to the sub’s wiki. You’re at the point to start saving for retirement. General rule of thumb is to save 20 to 25% of your gross income for retirement. The way you want to do it is save up to your employer’s match into a 401k, then max out an IRA ($6500/year), then save what you need to back into your 401k to total the 20 to 25%.

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FellowConspirator t1_j6mwfaa wrote

Investments and debts both grow. If your debts grow faster than investments, pay them quickly. If investments grow faster than debt, pay the debt slowly.

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