After spending over a year scrambling to put every extra dollar I could find into my student loans, I’ve paid them all off almost five years ahead of schedule. I’m now in the enviable position of having a big chunk of extra money every month. It literally feels like I just got a massive raise. So what do I do with it?
Building a Scrooge McDuckian money vault is far too gauche. And besides, I want to use this money to improve my financial position in the fastest, most badass way possible (with badass defined as “most profitable in the long-term”). There’s no shortage of options.
Option 1: Pay off my car loan
When the old clunker I paid cash for finally killed itself, I had to borrow some money to buy a new car. And I was determined that this shiny new vehicle—one year old with 20,000 miles on it—would last me 12 years at least. So I made a decent down payment and borrowed another chunk’o’cash to pay for the certainty that this baby won’t die on me any time soon.
Of course this means I now have a car payment… with interest. If you haven’t figured it out yet, I have an almost militant aversion to paying more interest than I absolutely have to.
I could take the Student Loan $1k (SL1K) and put it to use paying off my car loan. That way, I could shrink the term of the loan from four years to a little over one year, and get the satisfaction of weaseling my way out of all that interest. Plus, I’d have the comfort of knowing that I own every pound of that one ton pile of metal and fossil fuels as I use it to hurtle down the road at lethal speeds.
More on my aversion to cars:
- The Joys of Getting Around Without a Damn Car
- Understand the Hidden Costs of Travel and Avoid Them Like the Plague
Option 2: Double the principle payments on my mortgage
But then, the interest on my car loan is adorably, pathetically small compared to the interest on my mortgage. The two aren’t even in the same league. It’s like comparing the relative evil of a leaky oil pan to the monumental disaster that was the BP Deepwater Horizon.
But the SL1K could still make a dent in that mortgage interest. I could double or even triple the monthly amount going to the principle on my mortgage payments. This would effectively take years off my mortgage. Fucking years. And for every year I don’t have to pay interest on my mortgage, that’s drastically reducing the total interest amount I have to pay. If I shave even two years off of my mortgage with the SL1K, the savings alone could buy an entire new car.
Option 3: Invest the shit out of it
Instead of spending the SL1K to avoid paying interest in the long term, I could spend it to earn interest in the long term. We’ve talked before about the eighth wonder of the world that is the power of compounding interest. So now that my student loans are safely out of the way, I could use the payments to start building my wealth in a real way.
Sure, it’ll take awhile to see the results. In the short term I might even watch the balance of my investments take a nose dive from quarter to quarter (which, for someone just starting the investing process, is fucking terrifying). But in the extreme long term, investing the SL1K could increase its value astronomically.
Option 4: Save it
Or, I could hoard it like a fucking dragon and wait for inspiration to strike me at some later date.
The disadvantage to sticking it in a savings account instead of investing it or using it to pay off debt of some kind is that I’ll permanently miss out on the opportunity to either avoid or earn some interest with the SL1K.
The advantage, meanwhile, is that I’ll have liquid cash on hand to use on a large home improvement project like finishing the basement, which will increase the value of my home. And if—heaven forfend!—my new car self-destructs, I won’t have to go into debt to buy a new one again.
There’s also nothing stopping me from doing some combination of all of the above. For while it’ll lessen the impact of the SL1K on any one option, it will make a small impact on all of my options. Which in the long term has the potential to be both lucrative and cautious.
But what I definitely won’t be doing with the extra money is ignoring it and just letting it sit around with no plan attached. I’ve built up rippling, veiny financial muscles in the process of paying down my student loans, and it would be completely absurd and irresponsible to let those good habits go to waste now.
… Fuck it. I’m buying a boat.