The "item" in this case has no investment value. It's value is guaranteed to go down each year.
I didn't mean the investment value of the car. I took your posts as choosing between two options:
- Pay it off now, and avoid the interest payment on a loan, but you also are losing out on the interest gained on investing the money over that time frame (ie, holding in savings, putting in some fund, etc)
- Pay it off later, incur the loan interest, and hope the interest gained on the short term investment of savings-funds outpaces the interest of the loan.
This is where others were mentioning 'paying it off' being 'worth it' over paying the loan interest. The key being which is higher, the interest you're paying on the loan or the interest you can gain by saving the money and investing it. If the loan is at 5% and your savings option is earning you 2%, you would lose money overall by going with the loan, you'd want to pay in full up front. If the loan is as 2%, and you could earn 5% by investing (mythical mutual fund or equivalent), you would want to choose to invest and make payments on a loan at 2%, you would in theory be netting a gain of 3% on the money over that time.
That's the basic math of the decision, but it gets a lot more complicated to really dial it in. What isn't accounted for is you are decreasing your savings gains everytime you pull out a bit to make the monthly payments (there's less in the fund to earn interest). Additionally, the gains on such an investment pay off usually over a longer time, you'd be OK comparing Annual Percentage Rate (APR) of the loan vs the Annual Percentage Yeild (APY) of the investment, you just need to ensure you're comparing apples to apples on rates, a question that confuses a lot of average Americans (it gets muddied in trying to figure out monthly interest of both options, or if they are given over longer terms than 'Year'). Biggest issue for average folks is it takes time and effort to have a good mechanism to put the money in and watch frequently you are getting the gains expected, and are making the payments on time to avoid additional penalties. ALL of this means a little bit of work and effort, something most folks don't care to do.
None of that brings the 'emotional' aspect into it, it's just straight...well, 'bent' math. If we bring the emotional aspect, the 'peace of mind' into it, probably the best way to gauge it is put yourself halfway into the loan from a mental state. Now, I hand you $100. Are you going to use that $100 to pay off the loan just that little bit earlier, or are you going to keep loan payments as-is and use that $100 to invest into your retirement or savings for the future? That right there helps you see which is more important to you at a gut level.
Personally, the view I take is I am in debt, I bring home $X every month. I cannot pay for things up front. I set my priorities somewhat in line with Dave Ramsey, but a little mixed up as I jumped on retirement early. My monthly money goes to:
Retirement = set $ that I never see and learn to live without, this is taken out before the budget planning
Debt = Mortgage, Car, Credit Cards; though I'm paying them off in the opposite order (see optional)
Savings = Emergency fund. Reached where I need it to be now, so it gets little love. Though, any withdrawal makes it a priority to get back up.
Discretionary = whatever is left is used for living (dinner out, kid activities, etc), or pushed back into rebuilding Emergency fund if needed OR paying down Debt faster.
Lately, I've been squeezing discretionary to a minimum and working that Debt (once Emergency was covered). Living expenses (dinner out, kids, etc) learn to live leaner knowing we'll live fatter when debt is gone.
My answer to your question is somewhat muddled in my personal example, because I'm saying I'm 'stuck' in debt but putting savings (retirement, emergency) as the priority for me personally. That is my emotional decision, because I'm used to having debt since my late teens, and I've structured my life to not count retirement (taken out before any brain activity begins) and have learned from 50y experience I HAVE to have some emergency fund available. I'll say debt is a priority, but my actions say savings is.
Keep chipping away at your debt TLB. You can get there!!!
Thanks. It's weird having my debt horizon (ignoring mortgage) be NOT 2y, LOL. It's like something is gonna blow up on me and karma will push that date back out again or something. I'll certainly celebrate with the wife when it does actually happen. Kicker is we refinanced the mortgage last year to a 10y and will pay it off earlier than that.