Pay off car or credit card?

Discussion in 'Teacher Time Out' started by shoreline02, May 29, 2018.

  1. shoreline02

    shoreline02 Cohort

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    May 29, 2018

    School is about to come to a close. This year I took on a few extra responsibilities. With that extra money, would it be better to pay off my car (I'm down to the last few payments), pay down my credit card, or a little on each? Sorry if this is a silly question... I'm just trying to make better choices with my finances this year!
     
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  3. mathmagic

    mathmagic Enthusiast

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    May 29, 2018

    The financially best choice is to work on paying off the one with higher interest rate first. (Of course, while following minimum payments for each.)

    That being said, some prefer the "snowball" method, because it helps them feel more successful and thus might help motivate. That method is paying off the smallest amount first, then working your way to the others.

    Best of luck!
     
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  4. teacherintexas

    teacherintexas Maven

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    Not knowing the interest rates and balances, it’s hard to say. From the way this is written, it seems like the car has a smaller balance. If you paid that off, you could pay the car payment amount on your card balance plus what you’ve already been paying.
     
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  5. mathmagic

    mathmagic Enthusiast

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    This is the snowball method. In the end, regardless of the overall balance, you get the best "return" (technically savings, but one can consider it in that way) by putting the money towards the higher interest. $500 that doesn't accrue 10% interest ($50) is better than $500 that doesn't accrue 9% interest ($45).
     
  6. Been There

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    Glad to hear you're working on improving your financial affairs. As many financial experts recommend, after paying off your debts, you may want to consider making all future purchases only if you can afford to pay for them in full. This old-school approach involves zero interest payments and is the way I bought my cars and house. Admittedly, it does require serious financial discipline!
     
    Last edited: May 30, 2018
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  7. futuremathsprof

    futuremathsprof Phenom

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    This is one of my favorite things to talk about — money! Yay!

    Like mathmagic said, you should pay off the highest interest debts first because you will pay less money in the long run from the saved interest. However, sometimes people — myself included — like the psychological aspect of paying off the smaller debt first because it’s instant gratification. You get to a see a balance of zero and this motivates you to pay off the next debt faster, as you should.

    Case in point, I’ve been paying down my 2017 Honda Civic car note very aggressively even though it does not make sense mathematically to do so — I could be investing the money instead, but I don’t like the idea of a bank owning my car. It’s MINE. To clarify, I bought it in early June 2017 for $27,000 (has all the upgrades plus extended warrant and numerous services), I made a $10,000 down payment at the time of purchase, and financed the rest for $17,000 at 0.9% interest since my credit rating is near perfect. I kid you not, I will only save about $350 when all said and done because the interest rate is so good, but psychologically, it is worth it to me to see that loan balance hit zero. It gives me a supreme sense of accomplishment and always brings a smile to my face after each payoff.

    I did the same thing for my student loans (over 10 months) and paid them down at the time of $1,800/month (interest rates were 3.4% or less). To me, it makes no sense to have ANY debt at all because “borrower is slave to the lender,” as it is commonly said. If I can prevent it, then I am going to do my absolute best to pay everything off as quickly as possible. I have several friends, for example, who are up to their eyeballs in debt and they only make minimum payments. That is extremely stupid to me because 1) they can easily afford to pay more, and 2) they are going to pay several hundreds of thousands of dollars in accumulated interest over the maturity of their loans, the fools. Then there’s me, who has zero student loans, who is about to pay off their brand new car, who has tons of savings, who self-financed their Masters, and who can go shopping all the time because they are fiscally savvy and pay everything off as soon as the bill comes in.

    Case in point, I just prepaid my next month’s bills and now I can use my paychecks for fun for 30 days without a care in the world. My ultimate goal is to pay each year’s bills off at the start of the New Year so I can have fun throughout the year without repercussion. It’s a lofty goal, but I can do it. My mindset is if I can afford to pay more, and in most cases much more, then why shouldn’t I? To demonstrate, I just paid $1,750 toward my car loan today and I initially only planned to pay $1,000, but the balance is $6,300.33 and that zero balance is getting closer and closer, so why not attack it and diminish it to zero faster? (And now it’s only slightly above $4,500!) Sure, that’s $750 more out of my pocket, but that ever illustrious zero would be further out of reach and my payment plan lengthened if I paid the $1,000 instead. No thank you.

    Personally, I think you should pay off your car! Who likes paying a car payment every month. Yeah, no one. Then, I recommend that you pay off the other debt as vigorously as your budget can allow.
     
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  8. futuremathsprof

    futuremathsprof Phenom

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    Wow, you bought your house in cash?! Tell me how you did this? Did you invest and then use your investments to make the purchases?

    I only have $30,000 in savings (saved over the last two years)... It just seems next to impossible to buy a home cheaply. The lowest values in my area are in the $250,000+ range and the lower-end models are very modest. Sigh. It just feels like home ownership is for the wealthy these days. Sure, I’m basically debt free, but the vast majority of people can’t buy houses anymore with cash, let alone find a cheap NICE nice home. I’m 26 and project that I will be 28 before I have $100,000 in savings. That STILL isn’t enough to buy a decent home in California. It’s enough to buy a shack. That’s the one thing I hate about California — the stupidly expensive housing market.
     
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  9. futuremathsprof

    futuremathsprof Phenom

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    Aw, but if you don’t give it enough time to accrue interest then you still win. For example, if you pay it off in 1 year instead of 5 years, for example, then it balances out. That’s what I do and still pay the smaller balances first and then start making triple and quadruple payments or more on the next highest balance.
     
    Last edited: Jun 9, 2018
  10. TeacherWhoRuns

    TeacherWhoRuns Companion

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    Jun 8, 2018

    Earlier this year I had the same situation. I made the choice to pay off my car. Without the car payment, I was able to make higher payments on credit cards. That may be against sound economic advice when considering interest rates, but I'd do it again. It felt good to get that car off my monthly payment list.
     
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  11. rpan

    rpan Cohort

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    I’d pay off the car first. After all it is smaller, it’s psychologically satisfying to pay off a debt completely. Also, a car is something you own outright when you pay off and it feels so good to say you own it outright.
    I pay for all my cars outright because I hate paying interest. Unfortunately I can’t say the same for my mortgage. But I am ahead at least 6 months for all my bills. This is how I do it. For example I estimate a bill to be $1000 a year. I give a generous buffer and pretend the bill is $1200. So I pay $100 a month to an allocated bank account every month. When the bill comes at the end of the year, it’s sorted. I do this for everything from insurance, phone bills, car service, power bills and even the new car I will need to buy in 5 years etc. Over time, ive become ahead in all my bills.
     
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  12. futuremathsprof

    futuremathsprof Phenom

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    I also prepay my bills. Though, I’m not 6 months ahead in all my bills sadly, but only for some of them. For car insurance, I’m two months ahead currently and I will pay the 6-month premium up front once this term is up so I don’t have to pay every month. For rent, I’m two months ahead. For my car, I am 4 years ahead of schedule and will pay it off in a couple months (only owe $2,550 left on my 2017 Honda Civic from $27,000!!!).

    Eventually, I’m going to pay a year’s worth of rent up front to my landlord (before I buy a home, of course), pay the yearly premium for car insurance, the yearly bill for my cellphone, the yearly bill for internet, Netflix, etc; and then the yearly amount for retirement.

    My goal is to just have to pay for food each month and then have fun with the rest after savings.
     
    Last edited: Jun 9, 2018
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  13. Backroads

    Backroads Aficionado

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    I'd say the car. I'm not worrying about other details, but if you're done to a few payments, get it out of the way!

    Speaking of cars and finances... back in the era of the dinosaurs, I purchased a new (read: cheap and used) car after one of my students insulted my even older, junkier car (It was pure "out of the mouth of babes" moment as she spoke too truthfully). I think I did have a car payment, but that payment is also ancient history.

    Husband keeps asking me to think about what I want in a car, because apparently I need a new one. Come on, the crappy little car works fine and costs us gas and the usual upkeep.
     
  14. Backroads

    Backroads Aficionado

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    I'd also like to know how you went about in cash for a house! I love to hear those sorts of stories!

    For me and my area, I just don't know if it's realistic. Most mortgages outside of McMansions are cheaper than even crappy rentals so I don't know where I would get significant extra money to pay rent and save for a house... I suppose right now, I'm happy at least getting equity.
     
  15. futuremathsprof

    futuremathsprof Phenom

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    I have about $4,500 in disposable income every month, which is why I am able to do what I do. I private tutor a lot.
     
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  16. a2z

    a2z Virtuoso

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    It makes sense to pay the one you are paying the most interest on first. That doesn't necessarily mean the highest interest rate because a car loan can be structured so that the interest was front loaded so by the end of the loan almost all of the funds are going to principal rather than interest. So, even if the car loan had a higher interest rate than the CC, you wouldn't be saving as much money by paying the car off.

    If you do choose to pay off the car, take the car payment every month and put it towards the CC bill. Don't see it as having extra spending money until that CC bill is paid off.
     
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  17. futuremathsprof

    futuremathsprof Phenom

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    Exactly. I always take the extra I spent on a previous bill and allocate said funds to another one to pay it off faster.
     
  18. Been There

    Been There Habitué

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    Before the stock market crashed in the 80s, the dividends from our mutual funds would have been enough to retire on - ended up selling them all. I worked steadily for about 20 years, including most summers to save up for enough to buy our house (23 years ago) in northern California which was under $200,000 at the time (now they're closer to $300,000). Even now, I just have a flip phone (poor reception in my area) and don't own a flat-screen TV - it's amazing how fast one's savings adds up due to a frugal lifestyle (including a zero budget for work).

    Here's an example of my spending habits. I bought a Mac SE when it first came out in the late 80s, upgraded to a PowerMac in the 90s and bought a MacBook Pro just four years ago - slow but steady. Fortunately, I was provided with a school laptop to use for my last 15 years on the job.
     
    Last edited: Jun 9, 2018
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  19. Backroads

    Backroads Aficionado

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    I admire you, sir.
     
  20. Been There

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    I forgot to mention that I also had one of the original models of the Honda Insight that averaged 70 mpg and got up to 90 mpg on a good day - saved a ton of $$ during my daily 100 mile RT commute. The digital instrumentation also helped to break the monotony of the road, as I continuously strived to beat my gas consumption record. Having no kids helped a lot too.
     
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  21. shoreline02

    shoreline02 Cohort

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    WOW! That's a lot. I'm assuming you must earn a decent amount at your job also.
     
  22. futuremathsprof

    futuremathsprof Phenom

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    I will be a fifth-year teacher in CA, my contract was just renewed, and I will make $60,000 once my new contract goes into effect. I also run a highly successful private tutoring business and make about $30,000/year. This year, I made about $82,000 gross.

    The reason I have so much extra income is because my bills per month are like $1,500-$2,000 (I always find incredibly cheap housing on Craigslist) and so I have a ton of extra cash after all said and done.
     

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