Advice for a 20-Something's Financial Situation?

[kylam8]

Hi MMM Readers,

I'm curious if someone could weigh in on my current financial situation. Although I feel like I'm on the right track, I'd greatly appreciate any insight others could give. Maybe there are things I could change to achieve financial freedom more quickly?

Here are the details:

- I am 26.5, netting approximately $34,000 per year.
- I have $41,500 in student loan debt (I've paid off about $13,500 in 5 years). I pay $500/month, which is more than the minimums.
- I contribute 10% to my 401k (approx. balance of $8,200), employer matches 3%.
- I contribute $100 per month to a Roth IRA (approx. balance of $4,600).
- I'm also building up an emergency fund (approx. balance $4,500) in a 0.99% interest savings account. My goal is to reach 6 months worth of living expenses (approx. $14,000).
- I have a few other smaller 0.75% savings accounts for more immediate goals (car repairs, travel).
- I don't keep high balances in my checking accounts (rarely more than $50).
- I use credit cards but only for the travel rewards (I don't carry balances).
- I live Los Angeles but keep my expenses relatively low since my boyfriend and I share one car (that I bought with cash in 2007) and we live with a roommate.

My main concern is if my goal of building up my emergency fund is the best use of that money. Should I possibly keep this fund around $5,000 for now and then start investing in stocks or an index fund? I want my money to work as hard as possible, but I also want to feel secure in having cash on hand in case of a true emergency.

Any thoughts/suggestions are welcome!

Thank you,

Kyla

[forummm]

What interest rate is your student loan? Is "netting" your pre- or after-tax income?

[Retired To Win]

I would at least keep a 3-month emergency fund ($7000?) net of the extra student loan payment and the additions to other savings.  I like to keep a larger fund, but that would be my minimum recommendation for you.

[aschmidt2930]

You need to figure out a way to get a higher salary.  You seem to be doing okay with what you have (Hard to tell w/o an expense breakdown), but 34k with 41k in debt just isn't going to get you to FI very quickly. 

[kylam8]

forumm: I have a bunch of separate loans that comprise the $41,500 total, the highest interest rate being 6.55% and the overall average being about 6.04%. And yes, the $34k is my post-tax (and post-401k deduction) income.

Retired to Win: I like the idea of keeping my emergency fund at only a few months worth of expenses, at least until I get rid of my student loans.

aschmidt2930: I agree. I'm expecting a raise within the next 6-9 months at my current job, specifically moving from hourly to salary, so I'm hoping to negotiate for an extra $7-$10k per year. I haven't ruled out finding another higher-paying position too.

[StockBeard]

Personally I'd reduce the emergency fund and with it, focus on getting rid of the loan... but I live dangerously I guess :)

[CashFlowDiaries]

The best way I learned to make more money from day jobs is look for other jobs.  You always get a pay increase when you hop jobs.  Just make sure you stay at each job for about 2 years or so.  So I would also recommend, find another job that pays more my friend.

[Chesterfield]

If you have good credit look at refinancing the student loan on SoFi, a 1.5 % drop in interest rates makes your loan payment go much further. ( faster payoff). At your current rates your hair is smoldering and in my opinion you should drop your emergency fund to $2000 and start really paying off your loans. Return on your money is 6.04% to 6.5%. If you get a lower rate, it might be worth it to save in the market, and take longer to pay off your loans.

We paid off all of my wife's high interest loans, current debt is at 1.75 % and 3.75%. At our low rates I would rather have our savings in the market. Additionally, wife is applying for a 2 yr loan repayment gig, has about an 80% chance of getting it and it will pay off 50% of her loans in 2 years for doing work she would be doing anyway. (Current loans are $62,000) I look at someone paying half her loans just the same as a huge salary increase. What is your current repayment schedule? 10 years or 20?

[themagicman]

Personally I'd reduce the emergency fund and with it, focus on getting rid of the loan... but I live dangerously I guess :)

This!

The best way I learned to make more money from day jobs is look for other jobs.  You always get a pay increase when you hop jobs.  Just make sure you stay at each job for about 2 years or so.  So I would also recommend, find another job that pays more my friend.

Definitely moving from job to job will increase your salary greatly. I have been doing it and almost doubled my salary ($42k to $75k) in three years at 3 different jobs. I don't think you need to even stay two years (I was about a year at each and have not experienced any backlash).

- I contribute $100 per month to a Roth IRA (approx. balance of $4,600).

I would change this to traditional IRA

[iwasjustwondering]

Good for you for paying down so much of your student loan already. 

Are you allowed to contribute more than 10% of your salary to the 401K? If so, then why are you stopping there?  Take the $1200 you're putting into the Roth IRA and instead put it into the 401K, and get the 3% match on that money, too. 

[Retired To Win]

...
Retired to Win: I like the idea of keeping my emergency fund at only a few months worth of expenses, at least until I get rid of my student loans...

Well... (1) bear in mind that 3 months is not that much to hold in reserve, and (2) emergencies don't give you advance warning that they are coming (which is why they are called emergencies).

[jms493]

You are doing great but if you want to get rid of the student loan then stop doing 4 things at once.  I would reduce your 401K to the match, reduce the emergency fund a bit and throw everything at that student loan.  Kill it!

[mathlete]

Your plan sounds good.

I agree with building an emergency fund because the debt you would have to go into to cover an emergency will probably be a higher interest rate than your student loan. You'll probably be okay if you throw the money at your student loan instead to get out of debt faster but I say better safe than sorry.

I'm also cool with your contributing money to the 401k in lieu of throwing more money at the debt b/c in your tax bracket, you're getting a 25 cent tax break on every dollar you put into the 401k.

Ultimately it's up to you though. Weigh the intangibles too. If you find yourself with an extra $1K say, consider the impact on your peace of mind of having that money in the market, or under the mattress, or having it go towards being debt free.

[Guesl982374]

...My main concern is if my goal of building up my emergency fund is the best use of that money. Should I possibly keep this fund around $5,000 for now and then start investing in stocks or an index fund? I want my money to work as hard as possible, but I also want to feel secure in having cash on hand in case of a true emergency.

Kyla - You're main concern should be improving your skills & network to increase your income, not worrying about the best use of $5K is. At an income of $34K/yr there is great potential in doubling, tripling, 4x, etc your salary. Focus on income growth, maintain your personal expenditures, invest in index funds both in pre & post tax accounts, and save like mad. You don't know what the future will hold at this point in your life (health, family, etc), you'd be best served using most of your mental and physical energy increasing your income to super charge your savings so you can give your future self options.

Light reading:
http://www.financialsamurai.com/how-to-make-six-figures-income-at-almost-any-age/
http://www.mrmoneymustache.com/2013/07/25/50-jobs-over-50000-without-a-degree-part-1/
http://www.mrmoneymustache.com/2013/08/05/50-jobs-over-50000-without-a-degree-part-2/

[r3dt4rget]

My main concern is if my goal of building up my emergency fund is the best use of that money. Should I possibly keep this fund around $5,000 for now and then start investing in stocks or an index fund? I want my money to work as hard as possible, but I also want to feel secure in having cash on hand in case of a true emergency.

Any thoughts/suggestions are welcome!

Thank you,

Kyla

I'm in a very similar situation as you. I choose to not keep cash reserves and pay as aggressively as possible on the loans. I contribute enough to my 401k to get the match, everything else goes towards loans. The way I look at it: What causes you to lose more sleep at night, more debt than your annual salary, or not having a stash of cash to cover an unlikely financial emergency?

[mathlete]

To the "make more money" crowd, is there any case in which that isn't the answer?

[MEJG]

Kyla,

Personally I would try to refi those students loans to a much lower rate (SoFi, a family member that would loan you the pay off for a lower interest rate etc).  If you can get your interest rate below 5% consider then paying it off as per the new loan term.  If it is 5% or higher I would drop my 401k contributions to 3% to get the match, stop my Roth IRA contributions, cut my budget where ever I could and go at the SL with a vengeance.

5% interest is my line in the sand with debt. 

Once you've dealt with the SL I would contribute as much as you can to your 401k and after maxing it out would contribute to a traditional IRA to maximise your tax benefits.  http://www.madfientist.com/traditional-ira-vs-roth-ira/

I agree with the other posters that increasing your income will be key to making this ride quicker and smoother.

The above is basically what my husband and I are doing.  We refinanced my student loans to 4% over 25 years and 5% over 15 years.  Now that we are maxing the 401K available to us, and will be maxing our IRAs as well we will throw the extra every year at the 5% loan since it's our personal limit for tolerating interest. The 4% loan will ride for the full 25, as will our 30yr mortgage which is sitting at 3.75%

Good luck!

[TheFrugalFox]

I also kept very little in cash - maybe 1 months expenses - and preferred to have my money invested. I figured if I really have an emergency, credit cards could be used immediately, and it only takes 5 days for me to sell shares and have the cash in the bank.