Better to pay down car loan or not?

[poet]

My car loan is OK--about 5.25% on about $10K--and I'm looking at about $5-6K in cash-flow wiggle room this year. I'm wondering whether I would be smart to pay this down as much as possible over the coming year. I'm of a mind to put the extra $ in my non-existent Orman-esque emergency fund because, God forbid, I could always turn in or sell the car if it came to that. Also, if I can refinance the car to lower the monthly payments, I'd love to try. Yes, the car is a necessity because we don't have public transportation and I don't live near my current job. I plan to change jobs next year, possibly returning to my old better-paying career. (Don't know whether or not that would require a move.) Thoughts?

[Cloudlb]

my personal opinion is to start funding that emergency fund right away, as long as you don't have a problem paying your car loan.  I cannot tell you what a great feeling it is to have that little extra money stashed away for a rainy day. Even if you don't have a huge fund, an initial goal of $1,000 is pretty doable for most people at first. 

or, split your extra cash, and put half of it to extra payments on the car loan, and half to building up that fund.  That's what I'm doing. 

[poet]

I'm tempted to split it, but think it also might be smart to just put it all in savings...

[Cloudlb]

well, your interest rate on the car loan is far higher than current savings rate, so when you pay it down, it's like you are getting a 5.5% (or whatever) return on your money. 

[Anonymous]

An emergencey fund is not something created by Suze, just something championed by her.

Too many people view their credit card lines/limits as their emergencey funds.

Do not split payments until you accumulate at least the equivalent of three all expenses being paid months of money.

At that point you can start to split the extra but please understand that you still need to accumulate to 6 months and preferably a year of expenses money. And note I mean ALL expenses inclusing rent/uts/car payment/insurance/food.

Paying your car payment early does NOTHING FOR YOU if you need the cash.

Paying you car off early DOES NOTHING FOR YOU if you suddenly need money...you would have to sell the car.

Paying your credit cards off early and not accumulating money for an emergencey does NOTHING FOR YOU as your limit could be cut at any time and your account terminated at any time.

This sounds extreme and impossible, its not. Its necessary. Its adult, and also mature thinking.

Outside of the US Military I know of no other employer that will keep paying you every week if you are suddenly laid up in the hospital for a week or three.

Outside of buying from your employer short term/long term disability I know of no way you can guarantee an income with most employers if you broke a leg, an arm, or fell and injured you back outside of work.

Your employer could go under, lock the doors, lay you off or fire you at any time. Unemployment is not a guarantee, and even then it only replaces a PORTION of your income.

In this economy, right now,  there is roughly 5 job seekers for every job opening and unless you are in a high demand profession like nursing (and I mean HIGH demand- realistic high demand) you could easily spend months looking for a job- driving to interviews, dry cleaning and buying cloths to interview in-or even needing to relocate to take a job/train for it.

I spent 7 Months(december 2010 until June 2011) more or less unemployed, I had friends ask me how I was supporting myself- my answer I had saved MONEY.

Any interest savings from paying your car off is destroyed in one instance if you are suddenly unemployed or sickened/injured and unable to make obligations for even one month.

Accumulate 3 months, work on accumulating to 12. Then do what you will.

[poet]

Thanks, folks. The object here is to save 8-12 months' worth of expenses in an emergency fund.

Cloudlb, you are quite right. I'd forgotten to look at it that way (in terms of saving 5.5%). Splitting might be good after I sock some away.

USMC, congratulations on your new job! I have treated my credit cards as emergency funds, and that's super-dangerous in the current climate. I refer to Suze because she most recently suggested 8 months instead of 6; while I agree that 12 months is better than 8, 2 years is better than one, and etc.... The idea is to have at least a year's bills put away for the pending job transition I know will be coming. (I do have a line on a previous job where *I* seem to be in demand, but I know that's never a guarantee until it's on paper.) A couple of years ago, I read somewhere that the definition of "independently wealthy" meant having a year's worth of expenses in the bank. If that's so, I'd be quite pleased--but I also wouldn't sit on my butt all year!

At any rate... I think I will be able to save 3 months' worth next month and 6 months' worth after the first of the year. My tax return and whatever I save in the interim should make up the other 3 months. That said, if I have a year's worth of expenses banked by next year, I should be OK.

We've cut everything except the lowest tier of cable TV (a luxury for me, but a concession to my SO) and I will be able to pick up extra work later this year, so this would be the time to save like mad.

Thanks again, all, for pointing out the options.

[Anonymous]

Thank you!!

[castlefox]

I completely agree with you USMC. 

The only thing I would add is that it is not a matter of if a rainy day will happen one day but WHEN. 

Congrats on finding a job.  (Im thinking about going back to school be a nurse)

[Cloudlb]

Don't forget to figure in your car payment in your expenses.  When you pay it off, your fixed monthly expenses will of course go down.