Economics is a funny "science." You see, its first, and most basic assumption is that people act rationally. Perhaps more accurately, it assumes that on the whole, the masses act rationally. We certainly know that on an individual level, this is not the case, but I would just as readily doubt whether the masses are any more logical. If anything, I would argue they are even less logical.
So, what does this have to do with my overinflated ING savings balance? Well, what makes it overinflated? I have $56,901 there. Not bad, right? It's earning 3.8%. Yet, in my primary taxable brokerage account, I only have $20,429. Seems like a bit much in low yielding, liquid money. Then the coup d'etat. I have an auto loan with a balance of $17,500.95. I'm paying a rate of 5.64% on that. Now, there's clearly something wrong here. Why the heck would you have an outstanding auto loan at a higher rate than a taxable savings account. And you're right. I shouldn't. After my Net Worth Update, it was pointed out to me a couple of times that I was making a mistake.
Here's where my seemingly arcane economics talk at the beginning comes in. I talked about this in The Psychology Behind Income Tax Refunds. There is a behavioral finance concept called "mental accounting." This is where we mentally separate certain money for certain purposes. It is not rational, and thus flies in the face of classical economics. However, most of us do it. Just not usually on this scale. Mentally, I'm saying, "well, this is the money that I am saving for a downpayment on a house." However, it is very unlikely that I will be buying a house within a year. So, it's not rational. Well, how much is this irrationality costing me? I actually hadn't calculated it until now. Let's do it.
Don't Payoff the Loan
My plan is to pay off the loan in 18 months. That would mean a monthly payment of $1016.26.
Interest lost from taking the money from ING: Zero (the money would stay there)
Interest cost for Auto Loan: $791.73
Total cost of not paying off the loan: $791.73
Payoff the Loan
Take the $17,500.97 out of ING and send it to the kind folks at Honda.
Interest lost from taking money out of ING: $608.28.
(This is tax adjusted. I assumed a 40% tax bracket to be generous. I do live in California. The effective interest rate was 2.28%.)
Interest Cost for Auto Loan: Zero (it would be paid off)
And assuming the same $1016.26 were deposited to ING, interest earned would be $298.44
Total cost of paying off the loan: $309.84
Difference between the two plans = $481.89.
Well, now... That's more than I expected. So, I'm throwing away close to $500. Well, this give me something to think about. Well, okay, I'll pay it off. Is it weird that I still don't want to? I'll let you know what happens.