Q: I recently got a job that will require me to move out of state, because we don’t know the area real well my wife and I have decided to rent a home for a year before deciding where we would like to buy a new home.
I have $25,000 from the sale of my old home. Should I save all of that money for the down payment on the new home next year or take $9,000 and pay off my car loan. The car loan’s interest is 6 percent and I pay $400 per month.
I’m just wondering what would be more financially sound.
A: The question you have to ask yourself is why would you put $25,000 in a savings account earning 1 percent interest when you’re paying 6 percent interest on a loan?
Not only are you losing 5 percent, you’re actually losing a little more because you have to pay federal and state income tax on the 1 percent you earn on your cash.
Here’s what financial planners have known for years: Every dollar you spend to prepay a debt (any kind of debt) actually earns you the interest rate the debt carries. So, if you spend $9,000 to pay off your car loan, you’ve earned 6 percent on that money. That’s a good deal.
To rebuild your savings, simply take the $400 per month that you would have spent, and keep tucking it away into your savings account.
Published: Mar 19, 2004