Use Savings to Pay Off Car Loan or Keep in Savings?

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mark2741
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Use Savings to Pay Off Car Loan or Keep in Savings?

Postby mark2741 » Sat Jun 30, 2012 1:55 pm

Some background:

I have no debt aside from:

1. A vehicle loan remaining balance of approximately $6700.
2. My home mortgage balance.

My work situation: I am employed full-time with the same company for ~12 years now. Have always gotten consistent raises and promotions, and the work/life balance is phenomenally good. This company is privately owned and, even with ~1100 employees now and growing daily, job security has never been a concern. BUT, my role may very well change later this year from my current manager title to a non-manager one.

I can't explain the details right now and I realize what I'm about to type probably won't make any sense but...recently the company announced that our current traditional departmental structures would be going away in favor of a new 'skill families' structure. Each skill family (think 'team') would have a 'team leader'. Every leader in the company, from managers to directors to vice presidents, are essentially losing their current role/work responsibilities. I know this sounds crazy but the system as proposed actually makes a lot of sense to me. Leaders will be required to basically 'apply' for these new 'team leader' type roles. And, although they're not saying it, I think odds are that there will be less 'team leader' roles than there are current leaders in the company. Many will be asked to go back to being non-management employees.

Based on my job performance and reputation in the organization being very strong, I am confident that I have a 50/50 chance of becoming a team leader. A few weeks ago it would have been 100% confidence. I was even told by my boss that he would nominate me for the role. But I just found out this week that my boss will also be in the same boat as me, and may have to apply just like me for possibly the same team leader role, so I think there is a good chance that he'll get the job over me. His reputation ain't all that strong, but I doubt he'd lose out over me if that's how it shakes out. There are other leader opportunities coming, I'm told, so in the end I may not be competing with him. But I'm concerned.

We were all assured that we will not be getting laid off and there are no plans to change salaries/compensation. I don't believe that for the long-term, but they've never lied in the past. I think my job is 'safe' in terms of income/stability, at least for a year. It's possible in a year or two I may be asked to take a pay cut or be asked to move into a role I don't like, but I think I'll be okay in terms of finances and job security. Not 100% certain like before, but I'm 85% certain...if it's possible to guess at such things. Regardless, we're supposed to know by end of this year how it all shakes out.

Sorry for the long background above, but I wanted to provide some preface for my real question:

I have approximately $11,000 in cash savings in an online bank account.
(I have close to $200k in a 401k, as I contribute 10% of my pay towards it, but of course that is untouchable really).

Question is: given my possible tenuous work situation, should I use $6700 of that savings and pay off the car loan I have? If I do then I'd have only one debt - my mortgage.

Or should I keep adding to the savings to buffer against the possible, though unlikely, loss of my job?

One last thing - I have some pretty desirable skills that will allow me to get full-time contract work, working for a contracting/staffing agency that specializes in my area of expertise, very quickly - certainly within a couple of weeks notice if necessary.

Thoughts? Advice?

boorpoy
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby boorpoy » Sat Jun 30, 2012 2:33 pm

Is 11k your 6 mo emergency fund? If not, pay it off. Otherwise, pay it off ASAP.

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Eagle
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby Eagle » Sat Jun 30, 2012 2:55 pm

Pay off the car loan asap unless it is 0% interest. Interest = throwing money away. Then rebuild your E-fund. ;)
~ Eagle
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catchingup
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby catchingup » Sat Jun 30, 2012 4:12 pm

If that's your emergency fund, keep it where it is. A lot of non-job-related emergencies can come up so you don't want to lose that buffer only to have a medical crisis the following month. If you're worried about having that payment when your job isn't quite so stable make an effort to pay it off before then using your income.

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby Bichon Frise » Sun Jul 01, 2012 9:30 am

why does paying of our "debt free" debts always have to be black and white?

what does your "Bare bones" 6 month, 9 month and 12 month budget look like?
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

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Eagle
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby Eagle » Sun Jul 01, 2012 10:41 am

I agree take a look at your fixed and variable expenses. What does your budget look like?

How much do you spend on entertainment? How about cutting that in half for 6-12 months?

How much do you spend on cable/satelite, cell phones, landline phone, internet? When was the last time you called for a better deal or protion? How about getting rid of unnecarry services all together (cable/satlite & landline phon for 6-12 months)?

How about taking food to work instead of buying it and spending $5-20 a meal?

How about cutting the eating out in half?

For more see this thread on ways to save money. If you see anything you like leave a comment! ;)
~ Eagle
www.eaglesoaringhigher.com

mark2741
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby mark2741 » Fri Jul 06, 2012 6:31 am

My apologies - I should have been more clear in my original query.

I'm not asking how to raise capital immediately (via cutting expenses, etc.) - I'm questioning the wisdom of paying off the vehicle loan using a bulk of our emergency fund/liquid savings vs keeping the cash on hand. In prior years I would have paid off the car loan, but there is a small chance that my job could be in jeopardy late this year/early next, hence my question.

I realize that cutting expenses would help alleviate the hit to the savings that the car note payoff would cause, but I think the balance we've struck between frugality and happiness is right where it needs to be given our current situation and I don't see a need to change that at this time. If I were to lose my job then there is enough cushion there, in terms of discretionary expenses, that we could reduce a fair amount.

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby Panda » Fri Jul 06, 2012 6:43 am

I think people understand the question you're asking, we just don't have enough info to give advice.

Would paying off the loan leave you with 1 month emergency fund, 3 mo, 6 mo, etc? What is the car loan costing you (interest rate)?

You seem to definitely understand the trade-off at play and given your understanding of your work situation, my guess is that you already know whether or not you're comfortable with your savings being at $4300.

Bichon Frise
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby Bichon Frise » Fri Jul 06, 2012 7:58 am

Facts:

[*]"small" chance you may loose job
[*]you have harnessed your inner chi and achieved nirvana through balancing frugality and happiness (some of us get off on frugality, btw) with said job, which you may loose
[*]you have savings
[*]you have debt
[*]you have approached random people via the world wide webz to seek advice

anything else?

Personally, I would pay off the car, cut back in other areas and boost up the savings. I don't know how far $11k will get you if you lost your job, but you may want to look at reassessing where nirvana is, as finding yourself "between opportunities" seems to at least linger in the back of your mind. Certainly, it is making you question your financial plans.

good luck.
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."

avocado wrote:Good to see you back, I was starting to miss your incisive commentary!

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby peachy » Fri Jul 06, 2012 11:33 am

I would not feel comfortable having a paid off car and only 4300 dollars in an emergency fund. If you can comfortably pay for the car with the rate you have now, and continue to work and fund your retirement, I wouldn't risk it.

It seems that you should probably save more for your emergency fund though. I hope that's in the plans once the car is paid off, but it depends on you and your living situation, etc..Because you may be out of a job soon, I would work to bulk that up.

DoingHomework
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby DoingHomework » Sun Jul 08, 2012 4:28 pm

The cardinal rule is that when facing uncertainty, cash is king. You do not want to trade cash for reducing long term debt if you are facing uncertainty.

That said, I did not read your job situation as terribly uncertain. Even with the best job security, few people can truly know they'll be employed more than 1 year out these days and you seem to easily have that.

It sounds like you have a relatively normal fear of change but it also sounds like you will probably do alright.

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby kombat » Mon Jul 09, 2012 6:54 am

Let me reframe the situation and turn it around on you.

Let's say the car was paid off. Your only debt is your mortgage. You also have $4,300 in cash in your bank account.

Now say I come along and offer to lend you $6,700 at whatever interest rate your car loan was at (but not secured against the car - this is just a regular signature loan). That would bring your cash reserves up to $11,000. Would you take that deal?

Personally, I would not take that deal. And objectively, the deal I outlined above is a better deal than the one you're actually already in, because in my scenario, if you lose your job and times get tough, you can default on my loan with relatively little consequences (beyond the hit to your credit score), whereas in your current situation, if you default, they'll repossess the car.

Whether you pay your car off or not, your net worth is the same in both situations. The car loan is not contingent on your employment. They expect to be paid regardless of whether or not you're working, so your employment situation is moot when considering whether or not to pay off the car.

If it were me, I'd pay off the car today and put the (former) monthly payment toward building your emergency fund back up.

DoingHomework
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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby DoingHomework » Mon Jul 09, 2012 7:05 am

kombat wrote:Let me reframe the situation and turn it around on you.

Let's say the car was paid off. Your only debt is your mortgage. You also have $4,300 in cash in your bank account.

Now say I come along and offer to lend you $6,700 at whatever interest rate your car loan was at (but not secured against the car - this is just a regular signature loan). That would bring your cash reserves up to $11,000. Would you take that deal?

Personally, I would not take that deal. And objectively, the deal I outlined above is a better deal than the one you're actually already in, because in my scenario, if you lose your job and times get tough, you can default on my loan with relatively little consequences (beyond the hit to your credit score), whereas in your current situation, if you default, they'll repossess the car.

Whether you pay your car off or not, your net worth is the same in both situations. The car loan is not contingent on your employment. They expect to be paid regardless of whether or not you're working, so your employment situation is moot when considering whether or not to pay off the car.

If it were me, I'd pay off the car today and put the (former) monthly payment toward building your emergency fund back up.


For what it's worth, if I were facing uncertainty, I would take the deal you are offering. Liquidity and a strong cash position is always a good thing when facing uncertainty. You might call it a war chest. I understand your position, and it does come down to personal preference, but I don't think your reframing changes the decision. Cash is good when the road ahead is uncertain.

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby dpixel » Wed Jul 11, 2012 10:33 am

It really comes down to your comfort level. In the long run though, you'll end up with more money paying off the loan now.

Maybe factor how much you'll save over how much longer the loan is. You can always split it down the middle and pay off the loan in half the time.

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Re: Use Savings to Pay Off Car Loan or Keep in Savings?

Postby nelson » Sat Feb 23, 2013 4:44 pm

So, how long before you know what your situation will be? How much is the wait costing in interest? Are you willing to pay that cost for "insurance" purposes in case things head south? If not, pay off the car. If so, hold off a bit.

Of course you don't necessarily have to go 100% or 0%, you could pay off half the balance.


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