Mike from Manitoba, Canada writes:
“I have been trying to live more simply and want to become debt-free so I can make life changes that match my new priorities.
Last year I bought a new car. At the time I was already considering giving up my old car and going without one, but after my best friend bought a new car I got caught up in “new car fever.” I have enough money in savings to pay off the loan. The dealer’s interest rate is 2.9%. Should I invest my savings instead of paying the loan off?
I don’t want to feel tied to a job I’m unhappy with for five years just to cover the car payment. What would you do? I could sell the car, but I’d lose about 30% of what I paid, and that doesn’t seem sensible. I’d appreciate your advice.”
Hi Mike — this is a thoughtful question and it’s great that you’re re-examining your choices to align spending with your values. There are two straightforward ways to approach this:
1) Compare the guaranteed savings from paying off the loan to the potential return from keeping your money invested or in savings. A 2.9% loan means that if you can earn more than 2.9% with your cash—after taxes and fees—it often makes financial sense to keep the loan and invest the money instead. Many high-yield savings accounts or conservative investments can offer rates at or above that level today, so in pure math terms you might come out ahead by keeping the loan and earning on your savings.
2) Consider the non-financial factors. If having a monthly payment restricts your ability to leave a job you dislike or to make other life changes, eliminating that payment could be worth more than the few percentage points you’d gain by investing. Peace of mind, freedom to change careers, or the ability to take a break between jobs are real benefits that aren’t captured by a simple percentage comparison.
Here are some practical steps to help you decide:
- Calculate the after-tax return you can realistically get from your savings or investments, and compare it to the 2.9% interest on the loan. Don’t forget to factor in fees, taxes, and the risk that investment returns aren’t guaranteed.
- Estimate the value of the flexibility you’d gain by paying off the car. For example, could eliminating the payment let you take a lower-paying job you’d enjoy more, start a side business, or take a short break to find a better position?
- Keep an emergency fund. If paying off the car would leave you with little to no savings, that increases your risk. Ideally maintain 3–6 months of living expenses before committing all your cash to the loan.
- Consider selling only if the loss is acceptable in exchange for lowering ongoing costs. As you noted, selling now could mean realizing a substantial loss, so weigh that against how much monthly relief selling would provide.
If your top priority is financial optimization and you have a secure emergency fund, leaving the loan and investing the cash could be the smarter move. But if your main goal is to reduce obligations so you can change careers or stop working in a job that makes you unhappy, paying off the loan may be the better choice. In many cases a compromise works well: keep a healthy emergency fund, pay down part of the loan to reduce monthly obligations, and invest the remainder.
Overall, you’re doing the right thing by thinking about how your purchases fit your life priorities. Decide which outcome—higher long-term returns or greater personal freedom—matters more to you right now, and let that guide your choice.
Tawra
From: Dig Out Of Debt
photo by: kenwilcox