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Posted: 14 Jun 2013 06:29 AM PDT
Here's an email I recently received from a reader:
Is paying off low-interest debt always the best choice?
I am very fortunate in that I only have one source of debt: a car loan. No student loans, nothing on my credit cards, nada. My interest rate for my car is about 2.8% over 5 years (I'm 1.5 years into it).
My plan had been, once I got to July 2013, to switch my emergency fund savings to paying double on my car payment, to kill the debt faster. I thought that was a good idea, and everything I read seemed to suggest it was. But then I read an alternate view in a book sample I downloaded for my Kindle. That author suggested that if your interest rate is less than 3%, you are better off investing your extra money rather than putting it toward your debt. (I'm sorry I can't remember the book, the title had to do with finances in your 20s and 30s; I deleted the sample as I didn't find it very helpful, but the above idea stuck in my head.)
What do your readers think? Should I double up on my payments to destroy the car debt? Or should I funnel the money into my IRA? Right now I'm not quite yet at the point of making regular payments to my IRA: I am saving up for two more mutual funds (a bond fund and an international stock fund; right now everything is in domestic stocks, and I know I need to diversify). If I diverted that extra $220 to the IRA, I could reach my investment goals a lot faster, and I know time is money (as a reminder, I'm 26). But of course, debt is slavery, and I'd love to get rid of that car debt sooner, plus save on interest.
I'd love to hear your opinions!
What's your advice on this subject?
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