Anita has a question. She says, "We have a car loan at 1.74% for 65 months. Since it's out of the 20/3/8 car buying rule
, should we consider it as high-interest debt and clear it out ASAP? We would need to reduce Roth IRA contributions. How should we manage it?"
Man, I should have put my little disclaimer. Guys, this is a spicy one. Why is the whole content team cracking up right now? They knew where this was going to. Alright, let me start. Can I start it? Yeah, here's what I... You got 1.74% for a 65-month loan. Before we talk about whether that is high-interest debt or low-interest debt, you are in a situation where you are outside the realm of affordability, right? Like you're outside the realm of what you should be doing. So immediately, one of the things that I would think through is I've got to figure out how do I get back to 3 years? How do I get back to 36 months? So I would refigure my math. If I know what my minimum payment is based on how long I financed, if it's 65 months, I'm guessing that means she did a 72-month loan. Probably going to be what she did. I've got to reconfigure how much payment would I need to pay to make it fall inside of 20/3/8
. And then I would reconfigure that to figure out what would my monthly payment be. Well, then I would think, "Holy cow, if I've got that monthly payment, does that now go over the 8% of monthly gross income that I could be paying on this car?" And if the answer to that is yes, I think you've got to make some really hard car decisions. Now, I'm hoping the answer is no, and you can reconfigure it, have it on the 238. And then you can make the assessment, does 1.7% fall into high-interest debt or does it fall into low-interest debt? But I think at the very minimum, you've got to get on the 36-month amortization, a 36-month amortization. Thank you for the time because it allowed me to clarify, and we're going to sync up so well. This is perfect.
Here's the first thing: reliable transportation is important. But if you tell me you already broke the 20/3/8 rule when you did a 72-month loan, I'll just go ahead and tell you, in financial priorities, the Roth IRA is way up there. I mean, it is tax-free growth. There's a reason the government restricts who can put money in and how much you can put in because they know, man, we are giving them one heck of a deal when we set up these Roth IRA accounts. So it is a priority, super high, numero uno. It's very important, especially in your situation.
So here's what I'm going to do. It's going to tie into what B is saying. I'm giving you a 12-month grace period with this 1.7%. Period where you're still going to be funding your Roth IRA, but I'm giving you 12 months to figure out how you're catching this thing back to the 36 months. Because that's what I have. I have clients all the time when we get into these strategies where they're higher income, or they have something where they're trying to figure out from a tax perspective, it's just so powerful, we can't walk away from either the tax deduction or the tax-free growth opportunity. So I say, "Let's squeeze the cash flow you have to get very serious so that by April 15th, we have this amount of money sitting in the account to cover it." I know it's a little different than her situation, but it is one of those things where do the Roth, but in the background, I want you to try to squeeze, pull other levers to figure out how do I get this accelerated payments on the car loan. And if you can't do it, it's back to, if you get to the end of 2023 and you go, "Man, there is just no way I can get this thing paid off within the 36 months," then I think you make a hard decision. I think you have to. You might need to get rid of the vehicle. I know you're probably thinking, "I have an arbitrage situation because interest rates on car loans are around 6%, and I have a 1.7%." But man, if you did this only because the salesman allowed you to take a, you could afford this size purchase, but you doubled it up by going out longer on the amortization, that's where the mistake was made.
I'm giving you this 12-month grace period because you might be in a situation where maybe you're going to have a pay raise coming up. Maybe there's a year-end bonus that's coming your way. There's a chance you're going to be able to dig yourself out. I just don't want you to walk away from that awesomeness of the tax-free, armageddon growth opportunity of Roth IRAs and health savings accounts. Make sure you respect that. It's a reason that, beyond the free money of your employer, the next stop on investments that we have in the financial order of operations
is step five, which is the Roth and savings accounts and all the tax-favored growth opportunities.