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For anyone who has been keeping up with our net worth reports, you may have noticed we are working towards paying off our debt.
The good news is that we don’t have a lot of consumer debt from credit cards, even though the majority of our spending is done on credit.
We manage to pay off the balance on all our cards at the end of every month.
The truth is that we don’t live above our means by overspending on our cards.
Instead, we pay the majority of our expenses on credit to earn travel rewards.
We also don’t carry any student loan debt. I took out a few thousand dollars many years ago for some student loans … but that has been paid off for over a decade.
Our biggest debt comes from the 2 vehicles we drive (van & car) and our mortgage.
So when we made a plan to accelerate paying down our debt – the choice was between our mortgage or one of our cars.
Since our mortgage had a sizeable balance, we decided to tackle our smallest debt balance first … which was one of our auto loans.
Financing a Car … or Two
I’ve mentioned it several times here on the blog, but our family currently owns 2 vehicles.
Both were purchased new (don’t judge me … I know this is frowned upon in the FI community) at very low interest rates.
Our van (which is what we just paid off) had a very low interest rate at 1.56%.
The original auto loan on the van was for 75 months. We ended up paying it off in July (2019) after adding additional principal to our monthly payments.
We are also financing (well sort of) the car that I drive, which has an even lower interest rate – 0%!
Now that our van has been paid off, we will have to decide which debt to tackle next – our mortgage (at 4.375%) or my car (at 0%).
On paper, this looks like a simple solution (the mortgage) … but we are also trying to lower our transportation costs.
Speaking of our transportation expenses … I have provided a breakdown of these costs in detail below –
How Much Do We Pay in Transportation Costs per Year?
Over the past two years, we have paid an average of $12,500 annually on transportation.
Here is what we spent annually over the past two years (2017 & 2018) –
- 2017 – $12,604.12
- 2018 – $12,383.91
Our transportation expenses include the following categories –
- Car Loan #1 – Our Family Van (now paid off)
- Car Loan #2 – My Car
- Registration Fees
To give a snapshot of the current year (2019), I recently calculated our first 6 months of transportation expenses as well.
Overall, we spent $6,223.10 in transportation between January and June (2019).
Because we had already paid all of our registration fees for the year … our estimated annual spending on transportation would have been – $12,087.60. This was assuming our transportation expenses for the second half of the year were consistent with the first half.
Those costs are right in line with the past couple of years.
Overall that is around 22.3% of our annual spending … which is a number we are interested in lowering.
The good news is that since we paid off our Car Loan #1 in July, we will avoid 5 additional car payments the remainder of the year.
By paying off our van early, our new annual estimate for transportation expenses drops to $10,167.56 for 2019.
That is approximately 18.8% of our annual spending!
I like those numbers a lot better … but I can’t wait until next year.
It Gets Even Better Next Year
I do realize that as our van ages and we continue to put miles on it … our maintenance expenses will likely increase.
But for now, I’d like to assume we won’t spend much more next year (2020) on maintenance.
By eliminating our car payment for an entire year (and no major increase in maintenance) … we can estimate our transportation expenses next year to drop to $7,607.60 (in 2020).
This puts our transportation expenses at 14.0% of our annual spending.
That is a good start at lowering our liabilities while reducing our monthly expenses. Going from over 22% down to 14% (of our annual spending) gives us a lot more freedom with our income.
We will likely use those extra funds to buy assets that produce income … which should help to accelerate our financial independence journey.
They Psychology of Paying off a Vehicle
On paper, paying off a loan early, with an interest rate of 1.56% probably doesn’t make a ton of sense.
Heck … at the time of this writing, our high yield savings account (Ally Savings) was paying 1.90%. So there would have been the opportunity for an arbitrage play here.
Investing the extra dollars in the stock market likely would have provided a 6%+ return on our dollars.
So Why Did We Want to Pay Off Our Auto Loan Early?
It comes down to – psychology
The feeling that my wife and I got when we mailed in our last check to the bank to pay off our loan felt great.
Then when we got the Title for the vehicle back in the mail about a week later … we felt pure joy.
I know it sounds silly, but knowing that we paid off a debt (even as small as it was) felt great.
For the first time in over 5 years, we don’t have to make a monthly payment on this vehicle!
I really can’t explain it any other way but just feeling the satisfaction knowing we own that vehicle outright is really something else.
It is such an awesome feeling that we are even considering paying off my car early now … even though it is a 0% loan!
Crazy, I know.
3 Huge Impacts of Paying of Our Auto Debt
If we had decided to NOT pay off our auto loan early, we probably could have made an extra $100+ on interest … maybe.
On the other hand …
The psychological benefits of paying it off early feel a lot better than making an extra $100.
We no longer have that debt weighing us down each month … and it feels awesome.
Here are a few reasons why we feel so great about having our auto loan paid off.
1. We Can Invest an Extra $327.59 per Month into Assets
One of the best things about paying off our van is that we can use our old monthly payment now to buy assets.
So in August (and the months after), we can send our $327.59 payment to our M1 Finance brokerage account instead of the bank.
Even better … we could round up (cause I like round numbers) and send $350.00 a month to our brokerage account.
Over the course of a year, that is an extra $4,200 invested!
Even a conservative 6% return on those dollars is an extra $252 in potential earnings.
Buying assets that build wealth is so much more fun than buying liabilities that grow someone else’s wealth.
2. Our Liabilities Have Decreased
Speaking of liabilities … our net worth has slowly been going up in part because we have been paying off our debt.
If you have been following any of our net worth updates (or paid any attention to the stock market in the past couple of years), then you know how much our investments have grown.
There is no doubt that the stock market gains have fueled a lot of our net worth growth.
The cool thing is that at the same time (almost going unnoticed) is how we are increasing our net worth by reducing our liabilities.
In this case, that is in the form of paying off our debt … by making our mortgage and car payments every month.
We’ve been able to accelerate lowering our liabilities also by paying extra on our auto loan principal over the past couple of years.
Remember that dollar for dollar … lowering your liabilities grows your net worth just as much as increasing your assets.
3. Buying a 3rd Car
In a couple months, we will add a 3rd driver to our household.
Our oldest son will turn 16 before the end of the year … which means we need to start thinking about the possibility of buying another car.
The plan for now is to get by as long as we can with our 2 existing cars … but at some point we will probably need to add another vehicle.
Fortunately, we will have a few more options available … since we paid off one of our vehicles.
We will likely purchase a used car this time around (which we have never actually done … I know, I know).
And while we may pay cash for this 3rd vehicle, we won’t have the worry of 2 existing car payments hanging over our heads.
Maybe … we can even use that money we are now saving and investing (see item #1) to purchase this vehicle?
Eliminating debt can give you options in the future. Like having the cash available to make our next purchase and eliminating the need to finance yet another vehicle!
Not All Debt is Bad – But is Sure Feels Good When It’s Gone!
Some personal finance experts will tell you that not all debt is bad (i.e. mortgage).
Others believe that all debt is bad … even having a mortgage.
My wife and I fall somewhere in the middle of this. I would love to get our house paid off in the next couple of years … but I also feel our investments (currently) can grow faster than the 4.375% mortgage rate we are paying.
So why in the world would we even consider paying off an auto loan with a much lower interest rate (1.56%) early?
Because it feels damn good to pay it off and own our van outright.
I’m sure we’d get a much better feeling if we focused on paying off our mortgage early … which could be a possibility moving forward.
But for now … all I know is that paying off our van early was the right choice for our family – even if it was only for the ”psychological factor”.
So where do you fall on the paying debt off early (even if it is “good” debt)? Would you prefer to play the arbitrage game by investing the extra money? Or just pay off your debt (no matter what) for the psychological benefits?