A financial windfall in your 20s presents both a challenge and a powerful opportunity to build wealth early. Let’s say you’re 26, with no credit card debt, a $27,000 car loan at 8% interest, and minimal monthly expenses beyond rent and insurance. After taxes, you have $36,000 left over from the windfall to do what you want with.
The decisions you make now could shape your financial future. So, what should you do with the money?
Since you have $27,000 in car loan debt, paying off your $27,000 car loan might feel like the most obvious choice to make — especially since you have a fairly high interest rate at 8%.
It makes good financial sense. Eliminating the debt would earn you an immediate 8% return on your money with zero risk. That’s especially appealing since auto loan interest isn’t tax-deductible.
Let's say that you originally borrowed $32,000 on your car at 8% using a 48-month loan, and you have 40 months left to pay with a balance of $27,348.42. If you paid off your full balance next month, you'd save around $3,899.01 in interest. Getting the definite 8% ROI from avoiding auto loan interest is likely worthwhile.
You could then redirect your former monthly car payment into savings or investments.
Given how high the interest rate is on the auto loan, paying off the car loan might be the best decision, but you could choose to keep making payments on your vehicle and instead invest all $36,000 of the windfall.
Alternatively, you could pay off the car loan, and then invest the remaining $8,651. Either way, putting at least part of the windfall into the market can help your money grow.
Although the stock market isn’t risk-free, you can generally expect around a 10% average annual return over the long term by investing in an S&P 500 index fund.
Read more: Americans are ‘revenge saving’ to survive — but millions only get a measly 1% on their savings. Here’s how to quickly earn 280% more on your cash
Whether you choose to pay off the car or invest part of the money, there are other important financial considerations, too. For example:
