I have a car loan that is pretty low interest at 3.49%. It has 3k left and I have enough to take it out and still have an emergency fund for rent, and the small student loans I still have. Each month I pay $450 on the car so it has 7 payments left on it. Since the emergency fund should secure all purchases you need for the next 3-6 months, and in the event of being out of work and needing the emergency fund I would have to continue paying the car payment (or sell it). Therefore should you use the emergency fund once the amount of time you're preparing for with the emergency fund is the same as a car loan?
2 Answers
In this case, it likely makes very little difference, assuming you have your emergency fund earning ~2% interest the difference between paying your car loan off now or monthly over 7 months is just a few dollars. Are you comfortable reducing your emergency fund by $3k now to save a bit of interest? If you lost your job tomorrow would that $3k reduction stress you out? I assume there's no early payment penalty on your car loan, but that would also impact your decision.
If you choose to pay now, I'd suggest rebuilding your emergency fund to the same level in anticipation of car repairs (unless you are already budgeting and saving separately for those). Similarly if you just keep making the monthly car payments don't reduce the amount in your emergency fund when the car is paid off.
3-6 months is a fine guideline for an emergency fund, but many people are more comfortable with 6-8 months. Just try to think through all the costs of unemployment and how long it might take you to find a comparable job to help decide how much emergency fund is right for you.
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Another solution would be to pay off the car from E-fund as soon as he loses his job. That way, the hit to his e-fund would be lower.– RonJohnNov 17, 2019 at 4:26
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2@RonJohn True, if it were me in this situation and I lost my job tomorrow I'd want as much flexibility as possible while drawing from the emergency fund, so I don't think I'd pay anything early unless the rate was significantly higher.– Hart CONov 17, 2019 at 4:42
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I agree, this is what I was leaning towards but was just checking to see if people felt strongly in the other direction. If it was a high interest expense like a credit card I'd probably just take it out, but with how low interest it is the flexibility is probably more beneficial. Nov 17, 2019 at 17:25
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@workThrowAway Exactly, and if it was a credit card then paying it off would not limit your flexibility too much since you could turn around in an emergency and use the credit card to pay for many expenses.– Hart CONov 17, 2019 at 21:41
I think you can safely pay it off. From your comment I see your emergency fund can cover 6 months of bills, and one of those bills is a car loan that you would no longer need to include in your emergency fund if you paid it off, so once you have 6 months or less remaining, then paying it off is mathematically correct if your interest rate is greater than 0%. To be exact you could wait one more month until you have 6 months remaining instead of 7, however, since emergency fund amounts are somewhat arbitrary anyway, if you're comfortable with it I'd just pay it off and be done with it. I calculate you'll save approximately $35 in interest if you pay it off now.
$450x7to your emergency fund do as to replenish it?