General Question

Eggie's avatar

Is saving better than paying debt?

Asked by Eggie (5812points) 2 weeks ago

You have just bought a car and you have a car loan to pay. You play a local lottery and win $50000 dollars. Do you save or invest that money via credit union or other; or do you use that 50000 to reduce loan payment for your car?

Observing members: 0 Composing members: 0

24 Answers

stanleybmanly's avatar

It would depend on the interest rate you pay on the car loan vs. the interest you can earn elsewhere on $50,000.

elbanditoroso's avatar

Too many variables.

What is the interest rate you would be paid at the credit union?

What is the interest rate of the car loan?

What other debts do you have?

Without more information it is impossible to say,

Eggie's avatar

What if the interest rate on car loan is 3 percent. Credit Union is the same 3percent. No other debts except for maintence of car every month.

Inspired_2write's avatar

Save some and pay down the debt..win win.
Also if one has savings its a good indicator for more credit although I don’t recommend more debt.

elbanditoroso's avatar

@Eggie other questions go into consideration:

1) do you have personal savings – a couple of thousand dollars for emergencies or if something happened to your job? If Yes, then you can feel better about paying off the car. If no, you should take $5–10 thousand and bank it for unexpected emergencies.

2) it’s highly unlikely a credit union will pay you 3% for anything. You’ll be lucky if you can get a account with 1.5% interest. So you won’t be earning much on the balance in the first place.

3) you will have to pay taxes on the lottery winnings. And on the interest you earn. How bad it will be depends on your current tax bracket.

Back to what I said before – lots of variables.

Inspired_2write's avatar

@elbanditoroso
In Canada there is NO Taxes on winning the Lottery.

Darth_Algar's avatar

Pay off the car then take the money you were using for car payments and put that into savings.

elbanditoroso's avatar

@Inspired_2write – and where in the question does it mention Canada?

Inspired_2write's avatar

@elbanditoroso
Just giving information about not all countries tax winnings..

kritiper's avatar

Generally speaking, no. The interest rate you pay on debt will be higher that the interest you accrue on savings.

Brian1946's avatar

@Eggie

Do you have to pay any taxes on your lottery winnings?

SQUEEKY2's avatar

Personally I would pay off the debt, and put what you had already planned to put in payments, away into a high interest savings account.

JLeslie's avatar

Are you using up the whole $50K for the car? Is the loan on the car that big? Seems like a very expensive car for someone with no savings, but maybe you do have some savings, we don’t really have all of the details. You should have at least 6 months of expenses in the bank for rainy days. I don’t remember how old you are. If you are just out of school you might not have had time to save up a lot of money, which is understandable. Are you likely to invest the money or will it just sit in a money market savings account?

If you have zero in savings, I would put some of the money in savings and lower the loan if possible if there is no extra fee for lowering the loan payment. Basically, recast the loan. If it costs money to recast it, I would rather pay off the loan.

If you already have some money in savings, I would definitely pay off the car, and then whatever I had been paying every month for the car I would save. It’s amazing how fast your savings will add up when you no longer have the car payment.

RedDeerGuy1's avatar

I would split between the two. Half on debt and half on savings.

Nuggetmunch's avatar

I guess I would split the winnings. Have you thought about investmenting some amount too? It could expand your profit, that you could split again, repeat.

Sagacious's avatar

Pay off the car unless it’s financed at zero percent.

Eggie's avatar

I looked at it like this. If I am comfortable paying the loan, I could put the $50000 on shares or in a savings deposit so at the end of the loan payments I would have a big savings account which I could use for a better lifestyle. Is that a good idea? Saving money is one of the hardest things to do.

Tropical_Willie's avatar

@Eggie if you are paying interest on the balance of the car loan, you will be losing money ever month unless your savings deposit is paying crazy interest. Car loan interest where I am is 3.99%; the bank pays me 0.05% on saving accounts interest. The difference 3.94% means on a $5000 car loan over three years, you pay $235 in interest. I think that is right !

JLeslie's avatar

@Eggie You know your strengths and weaknesses best. If you are terrible at saving, but will leave your savings alone and not spend it, then because of your money personality you might be better putting the money into savings.

It’s unlikely your car loan is the same interest as a bank savings rate, so not paying the loan and putting the money in savings you are likely losing money, but if you won’t save money otherwise then you are just being realistic and that’s fine.

I have chosen to pay off loans, but I’m a very good saver, but I’m not a big risk taker when it comes to investing. People criticize me for keeping so much in savings, but I know my money personality is to not take a lot of risk.

Maybe you want to put $25k in a CD? If you are prone to spending. Lock up the money so you don’t touch it.

Do you have part of your paycheck for automatically to a savings or retirement account? Maybe you need that so you have automatic savings. $50 a week (I don’t know how often you are paid) is $2,600 at the end of the year plus interest.

I can’t stress enough how important it is to save money. Money is freedom. It has nothing to do with buying things, it has to do with not panicking if you lose your job, being able to afford an emergency that pops up, affording a vacation opportunity without going into your savings, retiring early and having fun.

Next car go cheaper. Sacrifice a little for the huge pay off later.

johnpowell's avatar

I would have a big savings account which I could use for a better lifestyle. Is that a good idea? Saving money is one of the hardest things to do.

Isn’t this just saying “I would blow the cash on stupid shit in a year and be left with a bunch of electronics and a pool and still be in the same situation?”

Because my mom is shit with money and was in a car crash 10 years ago. She got 10 grand for a broken arm and blew it in two months on stupid shit. Like a pottery kiln that had been used once and was later sold (at a loss) to pay her Comcast bill.

If you pay down the car (and if you are this borderline you need to rethink your auto situation) you might hit the point where you don’t have a huge auto loan payment each month. At least then you own the car and can then blow that cash on whatever.

JLeslie's avatar

^^Exactly what I worried about also. He would spend the savings.

Then he would have no savings. Some people don’t get that.

They also don’t understand how money multiplies. Money doubles at 5% every 15 years. Save $100k by age 50, and at age 65 you would have $200k if the money was earning 5% without having saved one more penny. That $200k even at just 2% would give $4k a year extra in retirement in interest. That pays for groceries. Free money.

Right now my FIL is 80 years old working for $14 an hour, and $4k a year in interest would have been a big deal to him, but he always wound up spending everything he earned, even when he was making $100k a year. He should be a millionaire right now (a million would be $20k a year free money at 2% interest and pay the majority of his bills) and instead he’s poor. It scares me for my own future.

johnpowell's avatar

My mom taught me how to be smart. Not because she is smart. More of a what not to do situation.

I still bought nice stuff. But I used retained earnings for that.

If I had not saved for a rainy day I would have been so fucked by a year of cancer. And I got off lucky since I have no cars, kids, mortgage.. And my sister let me move into her basement.

Cancer.. It just popped out of nowhere and I am 40. But my god.. If there were kids and normal people bills I don’t see how it would be possible.

Godspeed if you try working through three months of chemo.

JLeslie's avatar

@johnpowell Were you able to take a leave of absence from work and then go back?

johnpowell's avatar

I had clients.. And I helped them find replacements for me when I thought I was going to die. So yeah.. Kinda fucked now. But everything works out in the end.

Answer this question

Login

or

Join

to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
or
Knowledge Networking @ Fluther