Dear Debt Adviser,
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I'm about to receive a $5,000 bonus, and I'm wondering what to do with it. Should I save my bonus or use it to pay off my car loan? I have less than $3,000 left on my loan and at least eight months' of living expenses saved. I also contribute $500 a month to my retirement plans. The extra bonus can be applied to any of these areas, but I was wondering: To reduce my debt, should I pay off the car loan?
Dear SY, What a rare ray of sunshine you are! You sound like you're doing all the right things to secure your financial future. Namely, you have an emergency savings fund, and you're routinely adding to your retirement investments. Given that you have all the rest of your financial ducks in a row, the main incentive for paying off your car loan early would be to save on the loan's interest. With $3,000 left to pay, any interest savings are likely to be small. So, let's look at some other uses that would make a bigger impact.
My recommendation would be to take a look at your other financial goals. If you don't have any, then develop some. Think of short-, mid- and long-term goals. For example, you might decide you want to travel this year, which would be a short-term goal.
Paying off your car loan early could be considered one of your goals but considerably less fun or rewarding. As a compromise, you could always use half of the bonus to pay down your car loan and use the other half for something fun. Once you have determined your goals, you will have a better idea of what you would most like to do with your $5,000 cash bonus.
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To help you establish a comprehensive financial plan that will help you reach all of your goals, I suggest that you check out financial planners in your area. You can start looking with Bankrate's search tool, or ask your boss or successful friends for a recommendation.
Developing a relationship with a financial professional is a great way to manage your finances and reduce any worries at the same time. Of course, what you plan for and what actually happens may be two totally different things. But a good financial plan will give you the flexibility and confidence to handle most curveballs that life will throw your way.
Copyright 2013, Bankrate Inc.