Chaosplay

Yesterday, I talked about how I was going to save and invest most of my income. Some of my friends asked me why not pay off my car first. So I did some calculations. My car loan is at 7.69% interest. My savings APR is 3.49% at HSBCDirect. And I am expecting 8-10% return on my investments in long run.

Based on some rough estimates, I can payoff my auto loan in 10 months. I will save $1,400 in interest. I will have $5,000 less in my savings, $5,000 less in regular investments, and $5,000 less in IRA. My net worth wont change much with either option.

Based on interest and return rates, it is clear that I am better off by investing with expected return rate of 8%. However, I am not really saving money in my saving account. Then on the flip side, the security and peace of mind that liquid asset provides has a lot of value too.

After some thinking I have decided to cut savings by 96% and double my car payments each month. By doing so, I will save $1,000 in interest and payoff my loan in 20 months. I will have $8,000 less in my savings. So in order to recover lost savings I will have to save extra $400 for 20 months after I finish car payments.

*Please note that this is just my situation. Everyone’s situation will be different.