Saving / Investing while you still have debt?

[motivez]

So here's my question

I'm still paying off my car, but I try to save what I can. What I don't use for every day expenses (including bills) is split between my IRA and a regular savings account with ING

I remember someone talking in some thread awhile back about how they wouldn't bother with saving while you still have any debt, but maybe I remember that wrong..

The jist of it was something about unless the investments are making you more than the interest you're accruing on the debt, you're not actually doing yourself any favors?

Doesn't it make sense to be putting something in a retirement account on a regular basis even if you have some revolving debt?

[6SpeedTA95]

Everyone will have a different opinion on this and its not like they're all right or all wrong, a lot of it has to do with personal choices and thoughts on the issue. I personally think its smart to start investing as young as possible and maintain some level of investing regardless of whether or not you have debt. There would be exceptions to this, if for example you had a spending problem and were perpetually in debt, had a car, numerous credit cards, etc then I'd say get out of debt and never get back into debt THEN start saving.

But that assumes that the spender in question would control their spending in the future not get back into debt and could save rapidly to make up for lost time. More often than not they would just get back into debt and quit saving again which is why I recommend saving something, preferrably 10% of your income or more and then learning to live on less. It's always easy to spend all your money or more money than you have but if you're always saving and living on less than you make it sets a precedent that you'll continue to do it in the future and you'll be more financially aware of whats happening in your life.

Really you asking this question is a perfect example of how saving makes you pay attention to your inflow/outflow. I do not think you have some perpetual debt problem or some behavior issue that needs to be corrected by very rapidly paying down your debt and then starting an aggressive saving program. What I would do is say you're saving 100/mo 50 to the IRA and 50 to savings I would just keep doing that. Continue paying down your car and once you have your car paid down to 1500 bucks, maybe take the money from savings and just pay it off completely?

If you were saving 500/mo to savings and 300 into the IRA I'd say scale that back a bit and maybe pay double on your car? But at this stage in your life being in school, I would guess you are probably saving a couple hundred a month, in which case I'd continue to do exactly what you're doing. You may consider a debt snowball for any smaller outstanding debts and then eventually you'll snowball into your car and pay it off too

[WickedLou9]

Yeah I agree. Keep saving. If you had a load of high interest credit card debt than maybe that would be another story, but a car loan is probably what 6%? ( assuming decent credit ). Over the long term you should be able to average 8-12% on your investments, or so they say... Anyway, I think something alot of people overlook is that there is value in having the money at your disposal. It's a pool of resources you can call upon if needed in an emergency, which makes you less likely to go into debt in the future. It also increases your atttractiveness to lenders which makes it more likely that you can get better rates on a mortgage.
Lets say you don't save anything and you spend all your free income paying off debt.. what happens if you lose your job, or have some huge expense come up that you didn't forsee? You have no reserves, you have nothing to fall back on. In that case you end up in bigger trouble and you go right back into debt again, or worse: bankruptcy. It's better to have that money at your disposal if you need it than it is to get the added 1% or 2% return that you are getting ( maybe ) by paying off all debt instead.

Like I said, if it was high interest credit card debt, then yea you should pay that off, but yours is an auto loan which is backed by an asset which is worth something. It's sort of "good debt" and it's generally low interest debt at that. No biggie.

[Ardentfrost]

There are people out there (like Dave Ramsey) who cater to people that simply aren't good with analyzing their money situation (which is most people). And there is some REAL merit to what he suggests: live like a pauper and put all available cash into paying down debt and building a security fund, THEN worry about investing/saving.

It certainly works, and it's a really easy method. But just because it's easy to follow does not mean it'll maximize your money.

However, I will say that MOST car loans have a relatively high interest rate. Plus if your car loan is for 5 years or more, you actually spend the entire time upside down on your car (which means you owe more than the car is worth). This is usually only true for a small time on classic 3 year loans, but even then the interest rate is higher than you can realistically expect out of the market.

For this reason, unless you can get a good deal on a car loan (maybe through a credit union), it's best to start a car fund in some interest-bearing account, and treat it like a car payment. You put in $300 a month, and when that accrues up to the amount of car, you stop putting in and have it there for when you're ready to buy.

That's fairly unrealistic when you're young (like us ) unless you have well-to-do parents or some other influx of cash that isn't normal. Barring that, you really have no choice but to either get the loan (which you have done, and I had to do as well), or buy a junker and start your car fund. I hate dealing with junkers, so I see my loan as a young person tax, and will work to never do it again.

Anyhow, back to your current situation, given that you can't get from the market what you're paying currently in interest, you are netting a loss by putting money into investments (unless you can average better than the interest of the loan in the time of the loan, which is unlikely). Because of that, I would certainly scale back investments and put more down on the car every month. Even if you're 100% against pulling all investment contributions, if you can free up $100/month to put toward the car note, you're saving yourself money.

Now, that is for car loans. My house loan and student loans are all low enough so that I feel I can fairly reliably get a better return from the market than I am paying in interest. That means that if I put an extra $100 toward those loans, I have netted a loss (unless I do worse in the market with the $100 than my interest rate).

People like Dave Ramsey don't care about interest rates. He says that you just line up all your loans from smallest to largest, pay minimums on all except the current smallest and pay as much as you can on that. The idea there is so people who feel overwhelmed by the number of loans they have can stick to a simple plan with tangible results (tangible in that it's one less check they have to write every month). This does NOT maximize your inflow, but it does work to get rid of debt.

It all comes down to how much time you want to spend analyzing your situation, how much work you're willing to do to maximize your cash over the long term, what you're willing to do to maximize your cash (like eating "beans and rice" as Ramsey suggests, or moving from online band to online bank chasing the highest interest rates like Clark Howard does, etc...).

Without knowing your interest rates, I would blindly guess your car loan has higher interest than you're earning on investments, so would suggest you work to pay it off before doing anymore investing. But you should look at your rates since situations vary