Pay Off My Car or Put the Money in Savings?

Mike from Manitoba, Canada asks:

“I have been trying to live more simply, and would like to become debt free so that I will be more free to make changes that reflect my new goals in my life.

Last year I bought a new car. At the time I was already thinking about maybe giving up my old car and going without. Then my best friend bought a new car and I got caught up in the old “New Car Fever”. I have enough money in Savings to pay it off. The interest on the loan from the dealer is 2.9%. Should I put my savings into investments, or pay off the loan?

I really don’t want to be a slave to my job (which I am not really happy at) for five years just so I have money coming in to pay off the car. What do you think I should do? I could sell the car, but then I’d be losing 30% of my investment and that doesn’t make sense either. I would really appreciate your advice in this matter.”

Hi Mike. There are two ways to look at this. First if you have money in savings and it’s making more than 2.9% then it’s silly to pay off the car when you could be earning more money with it in savings or investments. Most savings accounts earn a minimum of 4% so you would actually be earning money by keeping the car payment and putting the money into savings instead.

But….. If you hate your job and want to quit and paying off the car would put you in a position to do that, then I would pay it off.

You’re looking at all wrong. Right now if you have the money in savings to pay it off you aren’t working to pay for the car but you are working to build up your investments. If you hate your job that much, save up enough for 3-6 months to pay for your bills and then you can look for another job.

Sounds like you are doing a wonderful job to me!

Tawra