A recent episode of “The Ramsey Show” featured Doug from Connecticut, who called in to ask a question that many listeners might relate to: Should he use his savings to pay off a 0% interest car loan?
Doug shared that he’s single, 45 years old, and earns between $140,000 and $160,000 a year. He has $280,000 in retirement savings, $23,000 in a high-yield emergency fund earning 4% interest, no credit card debt, and a mortgage. But there’s one catch: he still owes $26,000 on a car loan.
Don't Miss:
- Forget Flipping Houses — This $36 Trillion Asset Class Lets You Invest Without Owning Property
- Jeff Bezos-Backed Arrived Homes Hits A Big Sale On Charlotte Property – Investors Earning A 34.7% Return
Caller Struggles With The Logic Of Paying Off A 0% Loan
Doug explained that he financed the car a year ago with a three-year loan at 0% interest. His monthly payment is $1,000, but his job gives him a $600 car allowance. “In my head, I’m thinking, yeah, $400 a month out of pocket. No sweat. It’s all good,” Doug said.
But since rediscovering Dave Ramsey's principles and using his budgeting app, Doug has been rethinking his decision. “I literally last month found an extra $140 of extra income, which I already put toward the car,” he said.
Despite the 0% interest, hosts Jade Warshaw and Ken Coleman urged him to take a broader view. “If you got fired tomorrow, you’d be on the hook for a car loan and you’d be on the hook for the whole $1,000,” Warshaw said. “Go the path of least beneficial risk.”
Coleman advised him to pay off the car and then build the emergency fund back up.
Trending: Backed by $300M+ in Assets and Microsoft's Climate Fund, Farmland LP Opens Vital Farmland III to Accredited Investors
Doug admitted he could find even more room in his budget if he tried. “I probably would have found more money, but I had two vacations last month,” he said. He noted he could likely find an extra $500 to $800 per month moving forward.
With that kind of income, the hosts told him he could rebuild his emergency fund quickly. “Stop the vacations, man. You’re living high on the hog, buddy,” Coleman said. “This should be an easy fix for you. Don’t overcomplicate it.”
In the end, Doug agreed: “I basically went from Baby Step one to three, back to two…”
Warshaw wrapped it up by advising Doug to invest the $600 monthly car allowance going forward. “I want you to look at the investment calculator and I want you to plug in if you take that $600 and you just drop it in your investments for the next 20 years, what that’s going to be, and your mind is going to be blown.”
Read Next:
- Have $100k+ to invest? Charlie Munger says that's the toughest milestone — don't stall now. Get matched with a fiduciary advisor and keep building
- Many are using retirement income calculators to check if they’re on pace — here’s a breakdown on what’s behind this formula.
Image: Shutterstock
