J.D. wrote about the three stages of personal finance often. His definitions were:

  • The first stage of personal finance involves learning the basics: understanding compound interest, reducing debt, beginning to save.
  • The second stage is putting the basics into practice: choosing to live frugally, saving in earnest, and pursuing financial goals.
  • The third stage — the “what next?” stage — comes after we’ve mastered the fundamentals. It’s at this point that we begin to ask “why?” Why are we continuing to save? All of our debts are paid, so what’s the point? (There certainly is a point, but what is it?)

We thought of these stages when reader Sarah wrote in with her questions. Though she does still have a car loan, she is at that second stage. Here’s where she and her husband are in their financial journey.

My husband and I have worked hard over the past five years to crawl out of $36,000 of credit card debt into a much better financial position. We’ve cut spending and increased earnings and have made amazing progress. However, I would love some input on what to do next. The only debt we currently have is about $14,000 on a car loan. The car is currently worth more than the loan. We have no credit card debt, no student loan debt, and we rent our home (no mortgage). We do not have any children and do not plan on having any. We do not plan on purchasing a home anytime soon, due to the possibility of relocating for work in the next 12 to 18 months. Our main focus was paying off the credit card, then start saving. We now have about $25,000 in cash savings, which equates to about nine months of emergency funds. Neither one of us has anything put toward retirement. Our employment situation is stable for the foreseeable future. My question is: What should we be focused on now that our saving is in a reasonable place? Should we keep adding money to savings? Should we pay off the car loan? Should we start a retirement fund?

Sarah and her husband have a nice sum in cash savings, and we’d hate to see them lose their emergency fund to pay off the car. (Not knowing the interest rate on the car loan or the time left on the loan make it hard to know whether to pay this off ASAP or pay it on schedule. According to Experian, the current average new-car loan rate is 4.36 percent.) We’d suggest a two-pronged approach: get those retirement accounts going and get out of that car payment. It seems like they could afford to prioritize contributions to retirement accounts and increase their monthly car payment to significantly reduce the length of the car loan. Would you recommend this approach? What would your next step be if you were in this position?

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