I recently made my first big payment towards my car loan. $500 in addition to my monthly payment. At first I was very happy with myself. However, a few nights ago as I was re-examining my spreadsheet (re-building, actually) I started to feel a twinge of remorse. $500? That’s a lot of money…

Particularly when I look at my emergency fund. I managed to get it back to $9k, and I thought I was happy that. But the more I think about the car fund vs. the efund….the more I wonder if I’m doing the right thing. Am I?

I’ve been going back and forth since then: am I better beefing up the E-fund some more? Or do I make a dent in my car loan while I have the income to do it?

In favor of the car loan:
-Right now I’m scheduled to pay $1,500 in interest over the life of my car loan. The more extra payments I make, and the earlier I make them, the more interest I will be chipping off that total. (The $500 payment will save me $100 in interest over the life of the loan.)
-By making extra payments I’ll be done paying my loan faster. Right now if all goes as scheduled I have 2 payments less to make!

In favor of the E-fund:
 -Stuff at work is getting worse. It wouldn’t be all that surprising if  I find myself out of work sometime in the near future. I’m going to need to use the Efund at that point.
-So let’s say I’m out of work….the fact that I only have 53 payments remaining versus 55 makes no difference to me at that point, right? I’m still on the hook for the next X number of payments that are due while I’d be looking for a new job.

A few additional points to consider:
– $9,000 is just under 4 months of my expenses (no retirement savings, but comfortable living). While under normal circumstances I think that 4 months would be fine, in my case the industry is practically at a standstill. Until the economy is back in full swing, it’d be really hard for me to find a job in this industry. I have no clue how long it would be before finding the next job, and I have no clue if I’m ready to change industries…
– I also have my down payment fund to “save” me. While I would hate to have to draw from it, I have to recognize it is there should I need it. If I use the DP fund as an emergency fund, I have enough to live comfortably for a year at the least. However if I use up that money I’d be starting over when I finally feel ready to buy property. A bit of a tradeoff.

What would you do if you were in my position?

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