Thursday, July 10, 2008

Why Not Pay It Off?

Over on the right sidebar of this blog, you'll see a little graph showing my progress toward a couple of financial goals. As of today, it looks like this:

Why not just pay it off?


The debt you see there is what's remaining on our 3.95% auto loan on our '06 Accord. My goal is to have that loan gone, and thus be debt free (except for the mortgage) again, by December of this year at the latest. If I can accomplish this, I will have paid off the five-year note in just under three years.

In reality, though, I'm shooting for a Debt-Free October. Or sooner.

I'm pretty sure I can make it happen — especially given the fact that we've not yet received our snail-mailed $1,500 economic stimulus check. I've already earmarked that check for auto-loan debt paydown. Much to the chagrin of Congressmen and -women ... and guys named George W., I'm sure.

But perhaps the question begs: We have more in liquid funds than we have in debt. So why not pay the debt off now?

There's Value in Comfort

Personal experience has taught me that I don't do well when my bank accounts are sparse. That's why I could conceivably wipe out our car loan tomorrow, if I wished.

But I don't.

The thing is, you see, that I'm a worrier. When I know there's not much in our savings, my mind runs with the "what-if" ideas full-tilt and 24-7. I wonder what emergency's about to crop up that will require the money I just spent on something else (debt payoff).

Alternator on my truck comes apart?

Major home-roof leak?

Laptop decides to power down ... for eternity?

All could happen. So in times like this, for my own personal sanity, I choose liquidity. But it will still allow me to reach my paydown goals. I'm basically paying a bit of interest (the difference between my car loan @ 3.95 percent, and our savings @ 3 percent) in return for a bit of mental peace.

It's a tradeoff I'll take, for sure.

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— Posted by Michael @ 9:34 AM








6 Comments:
 

I'm with you. We're rebuilding our emergency fund before we start attacking our (newfound) mortgage with a vengeance.

Even though we could (conceivably) get by with less of a cushion. It does have value, and I like it.

Anonymous Jesse
, at 1:08 PM, July 10, 2008  
 

I agree as well. We are working on our savings before super-fast tracking our 2nd mortgage. Our "disposable" income is split between the two until I am comfortable that we could get by for at least 3 months with no income (I am a SAHM, so we are pretty dependent on my husbands income!). I am hoping that by June of next year we will be able to breathe comfortably again.

Anonymous angie
, at 9:13 PM, July 10, 2008  
 

A really smart man once said this mindset is actually what keeps "us" from becoming wealthy. Planning for bad things to happen ensures bad things will happen. Or something to that effect.....

Note: I don't necessarily advocate the above idea but understand the basic notion.

Anonymous FHR
, at 8:31 AM, July 11, 2008  
 

We were working diligently on paying down our mortgage without an emergency fund for about 6 years. We always pay off the credit card every month. We are self employed together in the same business for the last 20 years. Last year we learned the value of an emergency fund. The last two years our income was roughly half of the previous 3-4 years and sporadic. Went 3-4 months without any income last year. At the same time, our 8 year old house needed a new well tank and a new blower for our septic system within three months to the tune of $2000. Repairs you can't postpone. The stress of wondering where and when I was going to pay bills was not fun.
I decided that as soon as possible I would establish a $20,000 emergency fund in a money market account. Business has been good up till now this year so that account is funded in full. Bad things are magnified when you can't afford them. Today those repairs would just be part of owning a home with nary a worry about how to get them done. Decisions are more rational, less emotional when the support is there.

Anonymous RichK
, at 7:56 AM, July 12, 2008  
 

@ FHR: I get the basic notion, too, but the reality is that bad things are going to happen whether you plan for them or not.

Might as well plan for them, I say.

@ RichK: Thanks for the great (reinforcing) comment! I love this: "Bad things are magnified when you can't afford them." That is so VERY true.

Blogger Michael
, at 10:04 AM, July 12, 2008  
 

Yay for getting within striking zone of getting the car loan paid. I wouldn't pay it, but it's good to know that it could be paid in full at this point.

My magic number seems to be $5000. If I could pay off the loan and still have $5000 left in savings, then I'd do it. So when the savings are up to $8000-something, and the car loan is down to $2000-something, I'd be wiping that critter off the budget.

(It was an oddly freeing day when I realized that I had more in my retirement account than I owed on my mortgage. There was zero temptation to pay off the mortgage by raiding the 401(k), but the knowledge that I could access that amount of money if I really wanted to was heady stuff.)

Anonymous Denise
, at 4:50 PM, July 12, 2008  
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