‘If I pay it off now, I’ll have about $8000 left in my checking and savings’: Should I pay off the rest of my car loan? An emergency fund, retirement savings, or car loan payoff?

Hi Money Minder!

So, I’m 24 years old and making around $98,800 a year, which nets me about $5,114 per month after my 401k and health insurance deductions. My rent is $2,162 per month, but with utilities, it can creep up to around $2,282 on a bad month (like during the sweltering summer).

I currently have around $10,696 in my checking and savings combined, with a High-Yield Savings Account giving me a 4.15% yield. My upcoming credit card bill is looking to be about $2,987 – a bit higher than usual due to a vacation I took with my girlfriend in July. Typically, my bills are around $1,500-1,600.

I’m also paying $386 a month towards my car loan, with around $2,600 left to pay off by March 2025. Other than that, I’m debt-free from student loans.

If I pay off the car loan right now, I’ll have about $8,000 leftover in my accounts, factoring in upcoming bills and paychecks. I’d like to keep $400 as an emergency fund buffer and continue contributing to my High-Yield Savings Account, even though it won’t beat the 7% interest rate on my car loan. However, putting more towards retirement with an average 9% yield could be more beneficial in the long run.

What’s your take on this? I paid off my student loans early in March when they were supposed to be fully paid off by July, and I have no regrets. It was nice having that extra $700 in my pocket each month.

Thanks for your insight!

Seeking Advice

Response from THE MONEY MINDER:

Hello There,

Hello,

Firstly, congratulations on being proactive about your financial situation and seeking advice on how to best manage your resources. It seems like you have a good handle on your income and expenses, which is a great start to making informed financial decisions.

Given your current circumstances, my suggestion would be to prioritize paying off your credit card debt. While your interest rate on your car loan is relatively high, the immediate impact of reducing your credit card debt will be more beneficial. The interest you save by paying off your credit card debt will outweigh the potential interest you could earn from your HYSA or retirement savings in the short term.

By paying off your credit card debt, you will free up more of your monthly income that can then be redirected towards building up your emergency fund or increasing your retirement contributions. Having a healthy financial cushion is crucial for unexpected expenses or emergencies that may arise.

It’s understandable that you want to maintain a balance between paying off debt and saving for the future. In this case, I recommend focusing on eliminating high-interest debt first to pave the way for more financial stability and flexibility in the long run. Continuously reassess your financial goals and adjust your strategy as needed to stay on track.

All the best from THE MONEY MINDER.