Author Topic: Correct ratio of 401k to student loan payoff?  (Read 2863 times)

James Sideburns

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Correct ratio of 401k to student loan payoff?
« on: May 27, 2012, 07:07:22 PM »
Hi!

I just finished reading the entire blog today. I feel like I've been heading a much more frugal direction for the past several years, but this is a whole other level of badassity to aspire to!

Here is my situation - I'm 30, unmarried with no kids. I make just shy of 30,000 a year in a retail back-of-house management position. I've been contributing 11% to my 401k (managed through Fidelity and with a 60% stock, 40% bond ratio) for the past several years (and recently upped that to 13%), and have accumulated 10k on that. There is NO employer matching. :( My take home pay, after taxes, health insurance co-pays and my 401k contribution, works out to $798 every two weeks.

I have a student loan for 23k with a 2.6% interest rate, through the federal government. My minimum payments on that are $135 a month.

I have a $1000 emergency fund.

I have no credit card or other debts. I am car free. Here are my living expenses:

Rent: $450 a month. (I share a big old 3 bedroom Victorian house in Oakland with three other roommates, one of whom is my partner. We split a few bills but otherwise keep our finances completely separate.)

Commute: $130 a month. (I wish I could bike it, but there is no bike access on the Bay Bridge! I ride my bike to the BART station, lock it up, and take a ten minute ride into SF.) Yes, I could work in Oakland and cut my commute costs to $0, but then I lose the fantastic medical reinbursement account required by San Francisco. This account covers every co-payment, lab bill, and over the counter medication you buy, IN FULL. It even paid for my crutches when I injured my foot last year! Savings: about $800 a year. So the commute cut would still be better in most years. If I see an equivalent or better paying job on this side of the Bay, I'll grab it.

Food: This was my worst vice at about 300 a month, but I've been working diligently to get that number lower. (The transition to a gluten-free diet three years ago was a little rocky and I bought a lot of expensive "bread substitutes" at first, but now I just eat rice and potatoes, instead!) I haven't bought lunch out at work for two weeks, and have been focusing on cooking food where at least half of the ingredients come from the garden. We make our own yogurt and granola, use lots of bulk bin beans and rice, and have been cutting back on meat.  My partner has a free Costco membership because his Dad works for them - we use our City Carshare membership (which he pays for and uses more) to go there and to get bulk gardening supplies. All other grocery shopping is done via bike.
 
Utility bill (which I pay in full): ranges from $50 - $150 a month, depending on whether we're using heat. Our house is drafty, and the central heat (which we no longer use) is abysmally inefficient. We turned it on for one month and the bill hit $300, and I promptly had a heart attack and suggested we all use space heaters and extra blankets, instead. That brought the bill down into the 100 - 150 range, and our "winter" only last a few months.

I'm on a family plan with my partner for our cell phones, and he pays that and our Netflix. That about balances out with my utility bill.

I currently have enough clothing to last me a good long while, as long as I don't switch to a job requiring fancier dress. (Jeans and t-shirts are my required "uniform.")

No gym membership - I lift heavy stuff all day at work, and then I bike a bunch. When that doesn't feel like enough, I have freeweights. If I ever score a close-to-free trampoline or weighted jumprope on craigslist, my fitness regimen will be complete. :)

Adding up the numbers above, I get this:

$300 a month going to 401k (before taxes)

Then I have $1598 a month to go. If I add up the high end of my expenses, I get 1165. If I can push the food bill down to $200 a month and the utility to $50 (which is doable in summer, especially since we can line dry all of our clothing), my expenses are $965.

Where should I be putting my extra cash? Should I keep my 401k savings rate where it is and aggressively pay down the student loan? With such a low interest rate, I worry that I'm paying it off more to feel better than to actually save cash.

And yes, I know that I need to get a job that pays at least 40k - and I'm determined to do so without adding any student loan debt. But even at my current levels, I can cut costs and enjoy the simple things in life! Advanced Mustachians, what do you recommend?

arebelspy

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Re: Correct ratio of 401k to student loan payoff?
« Reply #1 on: May 27, 2012, 10:16:37 PM »
A 2.6% rate, after the interest deduction, and inflation, is literally free money, likely a negative interest rate (I.e. they're paying you to take it).

I'd pay it off the slowest you can (minimum payments). 

If you're absolutely anti-debt, as some are, you can pay it off just for the peace of mind.  But mathematically it's better to not pay it off early.
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sachio

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Re: Correct ratio of 401k to student loan payoff?
« Reply #2 on: May 27, 2012, 10:34:08 PM »
Sounds similar to my situation, I'll be following your replies as well! Good luck pal! I hope someone is kind enough to provide some good math :)

FI@2022Jem

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Re: Correct ratio of 401k to student loan payoff?
« Reply #3 on: May 27, 2012, 10:41:05 PM »
I agree with arebelspy.  Also, I am wondering if you have considered using a ROTH IRA to save as opposed to or in addition to a 401k without a match. 
*My student loans are 6.8% so 2.6% seems amazing!
Best of luck!

James Sideburns

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Re: Correct ratio of 401k to student loan payoff?
« Reply #4 on: May 27, 2012, 11:42:09 PM »
Yes, arebelspy, as much as it would give me satisfaction to watch that loan disappear, I'd rather put my money to work where it can function best! Jennie, that's a great point about the Roth IRA versus the 401k. I'll definitely be looking into what my best option is for that. I'd rather pay taxes now than be hit with them later.