What would you do?

[930addict]

This might be a no brainer to some but I have a question regarding what to do with a sum of money I have in the bank.

I have a truck payment that is about $350. I have enough to pay the truck off but this would deplete my savings. The interest rate is really low – like 1.5%. This would obviously save me $350 per month.

Or I can put it towards my mortgage. Currently we are paying PMI (about $171/month) because we did not have a full 20% to put down. The amount I have in the bank is not enough to eliminate the PMI but it will get me half way there. Regardless I will still have PMI and the truck payment.

Or I can put it towards my mortgage and also sell my truck and put those proceeds towards my mortgage to get ¾ the way there. But I would need to buy a beater for commuting. This is an idea that I recently started toying with. The thing is the truck was a $60k truck – I bought it 3 years ago. I know it’s an expensive truck but I was hoping to keep it until the wheels fell off. However, I'm not using it as intended (to pull an RV). I wanted to get the truck paid off then by a camper or trailer but I don't see buying an RV anytime soon. Really on the fence on this. At any rate I would not have the truck payment or the truck but would still be paying PMI but I could probably eliminate it within two years.

Or just leave it in the bank for a rainy day and make the payments. I can comfortably afford to make the payments I just hate car payments and also puting money out for something I will never use (PMI).

Regarding the issue of depleting my savings, I’m in a pretty secure position but anything can happen. Also if I were to leave or lose my job my employer pays whatever I have in vacation banks and half of what I have in sick leave bank. This would give me about 4 months of reserve. However, this only works if I lose/leave my job.

What are your thoughts?

[Don Plumley]

Paying down debt is always good - but never deplete an emergency fund. You should have six or more months living expenses in cash (FDIC insured Bank savings) at all times.

[Aggie93]

It is usually recommended to have six months of expenses in an emergency fund.

Next would be to payoff the highest interest rate loans first. Your mortgage is higher than the truck loan and carries the PMI payment as well. I would suggest paying this off first.

The idea of selling the truck and buying a cheaper truck sounds good, but it would depend on how much you are really ahead after paying the loan and buying the other vehicle.

Without knowing your personal situation, are there other situations that could cause you to need liquidity. Some questions to consider:

What is your health care insurance?
Credit card balance, can always tap those in a real emergency.

There are probably some others, but that will give you an idea of how important it is to have an emergency fund. Maybe a middle of the road approach would be to keep 2 months in savings (gives you 6 months if you lose your job). I'm not sure about selling the truck, it might not give you as much of an advantage. If the math works out that it does, then that is a good idea.

Good luck.

[1990C4S]

If I had to choose I would sell the truck. I don't believe in financing vehicles (esp high end vehicles).

Some money in a rainy day fund is good, but if you never use it's wasted capital. I would be more inclined to put that cash toward the mortgage BUT ONLY IF you still have some immediate credit available to you in an emergency. (sounds like you do)

[Rick V]

You need a rainy day fund, trust me. I lost my job in late july and if it was not for the fact that I was disciplined in saving I would be looking for a paddle.
Paying off your debt is good but not at the expense of emptying your savings.
I am also fortunate in the fact that I only have a mortgage to really worry about so it made it a little easier for me.
There are advantages to both sides of your coin but I vote you keep your savings. That attitude saved my bacon

[targa911S]

paying off my house was like being freed from slavery. You gotta pay taxes still, but not having a house payment and knowing that you own it free and clear is very liberating. Keep an emergency fund for sure but pay off the house as soon as you can. Also keep an account just for taxes.

[jorian]

Never a simple answer to this as everyone is different.

If you are going to reduce debt, start with non-deductible debt.

In Canada, mortgage interest is not deductible so I would start there. In the US you have the luxury of deducting your mortgage interest so maybe look at CC balances and your truck payment.

If you use your vehicle for work you may be able to deduct the whole payment. If it is just sitting there as a single purpose vehicle, get rid of it and get something that makes more sense. My .02

[crownarch]

In this economy I would hold on to all the cash you can. Everyone is aware of how difficult it is to save these days so I would also cut way back on buying new toys until this economy bounces back, if ever and just keep saving the cash for more leverage. Cash talks much louder than anything else and definitely plan for future retirement. I know, as I am an old goat, retired and did my planning right and am now glad I did. Good luck to you.

[targa911S]

we old goats got it right.