I am looking for a method to calculate - or estimate - whether it would be better to pay off car debt or start value investing in stocks.
We are soon to get about 1900 USD/month in excess cash (due to new job and refinanced mortgage), and we are targeting to invest in real estate at some point. It takes a lot of saved cash to persuade the bank. In 1½-2 years from now, just saving the extra cash, we would definitely be able to start investing in real estate.
But - what to do in the meantime? In our bank, we have an account with a 5% loan partially for financing our house. Any excess cash saved on this account (until we have saved as much as we owe) will counterbalance the interest - i.e. if we owe 50,000 USD but have saved 30,000 USD, we'll only pay 5% interest rate for 20,000 USD. So that is in essence a guaranteed 5% return. However, if I started (value) investing in stocks, I might hit 10-15 % return. But if we need the cash in 1½-2 years from now, it seems to contradict the old advice of buying and holding for 10+ years.
Another approach I have considered is to pay off our car (3.95% interest rate). This can be done in 14 months and will release about 455 USD/month and increase our cash flow. Some would argue that it would make better sense to keep the debt and then invest instead. However, the car will only drop in value over time, whereas a house (for instance) should at least keep its value - and hopefully increase (so it's inflation resistant). Anyhow, this would have us wait another year to invest in real estate.
I know this question could invite to subjective opinions, but is there any definite way to calculate/estimate what would make the most sense - financially?
- Hereof car: 34,500 USD (3.95%)
- house/mortgage: 251,000 USD (1% adjustable) + 47,000 USD (5%)
Total debt is ~330,000 USD
I do not yet have "emergency fund", but we have a sort of insurance.
Also, 17% of my salary before tax (a little less for my spouse) goes to a pension fund - this is on top of our actual salaries.
There is a ceiling on the mortgage (approx. 1.75 %) that it cannot exceed for the next 6 years. There is 8 years left on the car loan, 10 years left on one of the loans in the house (the 5% one), and 30 years on the other (the 1% loan - but only the interest is paid the first 10 years).