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Question for the Money Doctors

Question submitted on Oct 6, 2013.


I have bought a new van for about $43K in October 2012. I took a loan for 3.99% for 6 years. My monthly payment is $665. I started paying extra few months back. Now I have about $30K left on the loan. I have about $80K in my emergency fund. Should I pay off the Van? Or just keep paying $1,000 extra? Thanks for your time.


A general rule of thumb is to have 3-6 mos of living expenses in an emergency fund. With this economy, if your job is "at risk" I would consider stretching that to 9 or even 12 mos of living expense in an emergency fund. No, you will not earn much on that money in the form of interest, but that is not the primary purpose of the fund. Excess above this amount could be used to pay down the auto loan. Another alternative would be to use a home equity line of credit (HELOC) as your emergency fund. If your job is secure and you have excess cash flow on a monthly or quarterly basis, then you might want to consider using a HELOC as your emergency fund. If you used the HELOC as your emergency fund then you could use your cash to pay off the car loan.

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