Case Study - Where to Direct Extra Funds

[ShrinkingViolent]

Hi all, I've been a blog reader and forum lurker for two or three years now - I guess it was about time I created an account and participated.  I'm looking for advice on how to divide my extra funds between savings and student loans.

Here are the numbers:

Net pay (after 401(k) contributions): ~$3500/month

Monthly expenditures:
Rent: $0 (live with parents)
Phone: $45
Car Insurance: $42
Car Payment: $277
Gas: $120 (killer commute, but good mpg)
Student Loans: $190 (minimums, see below)
HSA: $45
Spending/Other: $175

This leaves me with about $2600 left per month.

Areas of Focus:
1. Remaining undergraduate student loans (numbers slightly rounded):

• $7,500 at 3.17%
• $5,500 at 3.02%
• $17,500 at 2.97%

They're all sourced through one provider; monthly minimum is $190 as mentioned above.
(A note of pride: I graduated 3 years ago with about $60K of student loans; I've paid off half of that and paid for graduate school out of pocket to the tune of $12K; this was at a much lower income.)

2. Savings for future.  I do have an emergency fund of ~$1500, but I'm looking at saving up for a down payment on a condo or upfront rental costs (first/last/security), and furnishings.

So, my question is: what would you do with $2600, those loans, and a desire to move out?

Options I've considered:
1. Live at home for another year, save $300 a month, and kill the loans.  I could then move out with $3600 to cover the upfront rental costs.
2. Live at home for another year or so, pay minimums on the loans, and have enough to put 10% down on a 180K condo close to work and have some left over.
3. Some mix of saving and loan-killing (but what mix?)
4. Move out now.  My gas bill would go down to ~$40 per month and I would gain about 2.5 hours of my life back per day, but I would suddenly have rent, utilities, and food bills coming to about $1550/month.  (Rent is high near work - about $1200/month for a 1 bed apt.)  I would also then have about $1000 to divide between savings and loans.

Thanks in advance!

[YTProphet]

I would just stay at home and go all out, hair on fire until you pay off those loans. You're in a great spot and I think you could get that monkey off your back in a year. Your future self will thank you.

[cripzychiken]

30k loans but not an awful interest rate. So the total is deadly, but not as bad as a lot of people.  And congrats on getting rid of half of the loans already, that's impressive.

Don't buy a house/condo yet.  First you need 20% for a down payment (not 10), and you don't even know if you'll stay in the area for the 5-7 years needed to break even on a house purchase.

If it was me - I'd rank what is more important to you right now.  You're not in a "hat on fire" situation, but you do have a heavy anchor tying you down, so it just depends on what you value.

Your 3 main choices would be:
-full financial freedom (stay home until your loans are paid off ~ 1 year, then start to save up to move, so 1.5years away)
-more social freedom/free time (save for a few months then move closer to work, build up the e-fund to 3 months as well) I'd probably make the move at ~11-12k in savings (1st/last/deposit  =$3,600, 3 month e-fund = 6,000, cost to move/furnish = $1,000) once you move, everything extra goes to loans. This is about 6 months away
-middle ground - 1/2 goes to loans, 1/2 goes to saving for the move.  Once you move, everything extra goes to loans (moving would be probably 9-12 months away)

Also - if/when you chose to move out, look at possibly getting a roommate to split bills. $350/month for utilities and food seems low to me, so chances are that will be higher.

[Chesterfield]

How about find a house share close to work, sell the car, walk or bike to work. You are not looking for a one bedroom apartment on your own, you are looking for a room to sleep in and use of a kitchen so you can cook your own meals and pack your lunch. You save 2.5 hours of life a day, and when you pay off the loans you then save a bit for your 2 bedroom apartment that you split the costs with a like minded friend or colleague. One bedrooms are always more that the 2 bedroom split. It is good to live with people.
Your new house share will likely be a share with 3 or 4 people. Much cheaper. It gives you the "I don't live with my parents" ability to find an SO. It also gives you the "But I do live with roommates because I am frugal and paying off my school loans so I am an excellent potential life partner"  cred. If you are not interested in finding a potential life partner, live with your parents forever, you get free rent.

[ShrinkingViolent]

Don't buy a house/condo yet.  First you need 20% for a down payment (not 10), and you don't even know if you'll stay in the area for the 5-7 years needed to break even on a house purchase.

I know the standard down payment amount is 20%, but some first-time home buyer programs allow for less without PMI (would need to fully investigate these).  I'll be here for at least a few years, I think, and then I'd look to keep it as a rental property if I had to move on.

Your 3 main choices would be:
-full financial freedom (stay home until your loans are paid off ~ 1 year, then start to save up to move, so 1.5years away)
-more social freedom/free time (save for a few months then move closer to work, build up the e-fund to 3 months as well) I'd probably make the move at ~11-12k in savings (1st/last/deposit  =$3,600, 3 month e-fund = 6,000, cost to move/furnish = $1,000) once you move, everything extra goes to loans. This is about 6 months away
-middle ground - 1/2 goes to loans, 1/2 goes to saving for the move.  Once you move, everything extra goes to loans (moving would be probably 9-12 months away)

I've been leaning toward a semi-middle ground - if I throw the entire $2600 at the loans, I can pay off the two smaller ones in less than six months and then have just the $17K one with the sub-3% interest rate when I move out.

Also - if/when you chose to move out, look at possibly getting a roommate to split bills. $350/month for utilities and food seems low to me, so chances are that will be higher.

This I'm not willing to do - I will happily pay extra for my own place.  You're right, I may have underestimated my utilities and food (although most places include heat & hot water around here).

[ShrinkingViolent]

How about find a house share close to work, sell the car, walk or bike to work. You are not looking for a one bedroom apartment on your own, you are looking for a room to sleep in and use of a kitchen so you can cook your own meals and pack your lunch. You save 2.5 hours of life a day, and when you pay off the loans you then save a bit for your 2 bedroom apartment that you split the costs with a like minded friend or colleague. One bedrooms are always more that the 2 bedroom split. It is good to live with people.
Your new house share will likely be a share with 3 or 4 people. Much cheaper. It gives you the "I don't live with my parents" ability to find an SO. It also gives you the "But I do live with roommates because I am frugal and paying off my school loans so I am an excellent potential life partner"  cred. If you are not interested in finding a potential life partner, live with your parents forever, you get free rent.

I don't want to live with roommates; I'd much rather keep my family as "roommates" than live with strangers.  I particularly would not want to live with 3 or 4 other people - too many.  And the car stays.  While I appreciate MMM's advice, that's one area I don't choose to follow his path, and I'm just fine with that.

I have an SO, actually, who is well-aware that I live with my parents and is amazed by my dedication to pay off my loans and to having a solid financial future.  (SO graduated with no student debt but a bit of CC debt, and appreciates my imparting of financial wisdom.)  It does help that my SO lives alone, so we hang out there instead of my home.

[neo von retorch]

Knowing what I knew at your age, I paid off the student loans. Knowing what I know now, I'd dump as much money in tax-advantaged investments as possible and ignore loans with 4% or lower interest, particularly if you qualify for any student loan interest tax deduction. They'll get paid off eventually, but you'll gain a lot of tax breaks and investment return in that duration.

[meg_shannon]

Since you have an SO, with his/her own place, I would live at home until your loans are paid off. Does your SO live close to your family's home or your job? Maybe if he/she lives close to your job you could spend the night occasionally if you're at that stage in your relationship (or even sleep on the couch). If not, please ignore that advice, you don't want to rush a relationship to save a few bucks. If he/she lives near your family, you'll probably be driving a lot to him/her after you move close to your job.

Also, depending on how serious your relationship is, things could change by the time you're ready to move out - moving in together, marriage, etc.

[cripzychiken]

I have an SO, actually, who is well-aware that I live with my parents and is amazed by my dedication to pay off my loans and to having a solid financial future.  (SO graduated with no student debt but a bit of CC debt, and appreciates my imparting of financial wisdom.)  It does help that my SO lives alone, so we hang out there instead of my home.

Honestly, this changes a lot, since now you have another pull - so driving shorter to work, but longer to see SO.  So that too needs to be part of the plan (if you see this as a long term relationship).  If you just suddenly move 45min away, that will add a lot of strain to your relationship. So just add that into any plans before you move - and don't be afraid to involve the SO in the talks if you want the SO to stay around.

I wouldn't recommend moving in together unless you either have a ring or have been together for a year or two (just in case stuff goes bad as you get to know each other better).  Now moving into the same complex or a near-by complex, that would help see if a shorter distance apart would affect the relationship.

[ShrinkingViolent]

Since you have an SO, with his/her own place, I would live at home until your loans are paid off. Does your SO live close to your family's home or your job? Maybe if he/she lives close to your job you could spend the night occasionally if you're at that stage in your relationship (or even sleep on the couch).

Honestly, this changes a lot, since now you have another pull - so driving shorter to work, but longer to see SO.  So that too needs to be part of the plan (if you see this as a long term relationship).  If you just suddenly move 45min away, that will add a lot of strain to your relationship. So just add that into any plans before you move - and don't be afraid to involve the SO in the talks if you want the SO to stay around.

I live about 30 miles north of my work; my SO lives about 30 miles south of my work.  We get together on the weekends; I head straight to my SO's apartment after work on Friday and head home Sunday night.  The only difference my moving out would make is that my SO might now drive to me instead of me always being the one commuting.

Also, depending on how serious your relationship is, things could change by the time you're ready to move out - moving in together, marriage, etc.

I wouldn't recommend moving in together unless you either have a ring or have been together for a year or two (just in case stuff goes bad as you get to know each other better).  Now moving into the same complex or a near-by complex, that would help see if a shorter distance apart would affect the relationship.

The relationship is pretty new, and at this point, I'm not sure how long-term it will be, so I'm planning as if it's not.  Plus, I really want to live in my own place before I move in with someone else - independence/self-discovery factor.

[ShrinkingViolent]

Knowing what I knew at your age, I paid off the student loans. Knowing what I know now, I'd dump as much money in tax-advantaged investments as possible and ignore loans with 4% or lower interest, particularly if you qualify for any student loan interest tax deduction. They'll get paid off eventually, but you'll gain a lot of tax breaks and investment return in that duration.

You know, that's the answer I was expecting from the forum, so I'm a tad surprised you're the first.  I currently don't invest (with the exception of my 401K, which does its thing without my help, really), but I understand from reading the blog that the standard ROI is 7%.  That would mean I'd be making more in interest than I'd be paying in interest on my loans.

The one query I have is this: how does one save for the near future (e.g., a down payment) and the more distant future (e.g., early retirement) simultaneously?  Or rather, what takes the majority/priority?

[neo von retorch]

That depends on your goals. If you want to be FIRE in 15 years, you need to figure out what you expect your expenses to be then and calculate from there how much you need to save. Then figure out your short-term savings goals (i.e. purchase house in 3 years) and also calculate what you need to hit them. Ideally, you have enough savings each month to meet each necessary amount.

You could also adjust either higher or lower, knowing that you may push one of them back in exchange for reaching the other sooner. What do you value more? If you value FIRE, you might have to save up for a house more slowly, and vice versa.

Personally, my FIRE goals are somewhat vague because they are still 6-12 years off. (See, vague?) But I know I want to buy a house with my S.O. within 15 months, so I'm saving more aggressively for that goal (while still maxing out my 401k and HSA contributions.) Once the house is purchased, all of my additional savings will go into taxable investment accounts (unless marriage opens up some room for IRA contributions on top of my 401k.)

[cripzychiken]

Knowing what I knew at your age, I paid off the student loans. Knowing what I know now, I'd dump as much money in tax-advantaged investments as possible and ignore loans with 4% or lower interest, particularly if you qualify for any student loan interest tax deduction. They'll get paid off eventually, but you'll gain a lot of tax breaks and investment return in that duration.

You know, that's the answer I was expecting from the forum, so I'm a tad surprised you're the first.  I currently don't invest (with the exception of my 401K, which does its thing without my help, really), but I understand from reading the blog that the standard ROI is 7%.  That would mean I'd be making more in interest than I'd be paying in interest on my loans.

The one query I have is this: how does one save for the near future (e.g., a down payment) and the more distant future (e.g., early retirement) simultaneously?  Or rather, what takes the majority/priority?

Making more investing than paying on loans - yes and no.  You make more, but you also still have the loans around.  Having everything paid off allows you a new level of freedom to pursue something different.  Right now you are required to have a job to make money to pay your loans off.  So again - math says invest, heart (might) say loans. 

Saving for now vs saving for later - It's that whole stupid choice/priorities thing again. Both are right, but which is 'more right' for you?  I personally do a percentage for each pot, and adjust that percentage as my life directs (started heavy with near tern, now switched to long term).  I was able to save for a non-MMM friendly wedding and honeymoon (paid cash, but paid a lot of cash), a 20% house down payment, and 2 newer cars in about 6 yrs by focusing my savings (probably close to 90k combined). Sure my long term savings didn't grow as much as I'd like (still saved, enough to get 401k match, but not enough to max even an IRA out), but now I'm pretty well set for the near term and am working on maxing out as much retirement stuff as I can.  Sure it set back FIRE by an additional 5 years, but it also made the path easier as savings was always a part of the picture, and now I have more assets to build with (cars I can maintain to improve the life on and keep car payments away, house I can DIY improve to increase value, wife who will bring in more $$ than me eventually). please don't tell my wife I just called her an asset :)

last note - as for the tax breaks for student loan interest, pay $2,500 in interest, get $625 back, that a fricken sweet return of -75%!  Interest tax credits are never a reason to keep debt.  Now getting them while you use your money in better ways, is acceptable.  But keeping them jut for the tax credit, awful idea.  Use the credit to help snowball your payments, not as a reason to keep them.