Financial Priorities Help

[justjenn]

Hi everyone,

I am 25, will be graduating with my masters soon, and just got a full time job. Right now I have many financial goals and I need help with deciding how to prioritize them. I would like to a) pay off student loans, b) save for retirement, c) save for a house, and d) build an emergency fund.

My net income in $2400. My expenses are as follows:

Gross Rent: 650
Groceries: 400
Cell: 100
Insurance: 100
Entertainment: 200-300

In November, my student loans will come and they will be $450. My student loans total about $40,000 at an average of 6% interest.

I guess the heart of my question is whether I should focus on aggressively paying off student loans, or if I should split up my savings budget more equitably.

[MakingSenseofCents]

Hello!

If it were me, I would try to build up an emergency fund at the same time. I would save for that while attacking student loans just in case anything happens.

After that, it really just depends on what you are comfortable with. For me, I was all about aggressively paying off my student loans so that I wouldn't have that monthly payment dangling over my head forever.

[pzxc]

Aggressively pay off student loans. 8-12% *possible return* in investments is not as good as 6% *guaranteed return* in paying off the debt, in my opinion.

Get a $1000 emergency fund, Dave Ramsey style, then put everything you got into paying off Sallie Mae.

[ShoulderThingThatGoesUp]

$400 on groceries for a single person? Cutting that down will help you with your goals tremendously.

[Future Lazy]

Current Expenses: $1550/mo
Current Surplus: $850/mo

Current ETA for Loan Payoff if entire surplus is used monthly: (40,000/850) = 47.05 months, or about 4 years.

There's a ton of room to cut back in your expenses. Assuming groceries is for one person, it should probably be more  like $150/mo to feed yourself. $250/mo saved.
Switch to something like Republic Wireless - $25/mo for more than you could need. Consult the guide, you can get even more savings than that. $70/mo saved.
Entertainment... Is pretty vague, but definitely luxury no matter how you slice it. Try cutting this by 2/3rds - ~$200/mo saved.
Total possible savings: $520/mo

Current Surplus + Possible Savings: $1370/mo
New ETA for Loan Payoff if entire surplus used monthly: (40,000/1370) = 29.20 months, or 2.4 years.

New Monthly Expenses: $650 Rent, $150 food, $30 cell, $100 insurance, $100 entertainment = $1030/mo

If you want to, and you probably want to, save an emergency fund up. $1,000 is a good suggestion by pzxc, but if you're not sure about your job security, I'd shoot for $7,000-$10,000, to cover you for 6-9 months of unemployment.

Good luck with your new job, by the way!

[Numbers Man]

I would suggest you save about $10k as your emergency fund first. You never know when you might be out of a job through no fault of your own. After that I would start saving with the company 401(k) plan so that this becomes a life long habit. Any left over funds can be applied to the loan. A 6% interest rate is high in the current interest rate environment but I think it makes sense to pay yourself first and have some savings.

I'm not in the camp that says pay your debt off ASAP at all cost. You have ten years to pay. You'll eventually start earning more money and will probably end up paying it off early.

I have a son that started his first big boy job in July. He has $15k in his checking account and will take about $7k out of it when he reaches $20k in savings to retire one of his loans (I think it's 7.8%). The rest of the loans that in the 3-4% range in which he's going to let it ride. In the meantime he's also contributing 15% to the 401(k) plan. In short, he's not stressed out by $30k of student loans since he's building up his assets.

[justjenn]

thanks so much everyone! All of your advice has been super helpful.

I think that paying off my loans quickly and getting rid of that monthly payment would be really helpful in the long run. I don't want to have to struggle to raise a family with a $450 monthly payment looming over my head.

I work at a non-profit that relies on federal grants for funding, so I think a 6-9 month emergency fund would be best.

On a side note, my sky high grocery bill is from a combination of living in Hawaii, where food prices are much higher than average due to shipping costs, and a special diet (medical reasons). Although I'm sure I could cut some corners, I don't see it ever dipping below $300/350.

[netskyblue]

That's very little expenses.  I wonder if you are truly considering everything.

Do you have utilities to pay for?  What's included in "entertainment?"  Do you drive, or have any travel-related expenses?  (bus fares, subway, etc).  Do you give gifts for birthdays/holidays? 

Just looking at my budget line items, some things you don't have that I do are:

Car registration/maintenance
Gas
Energy (electric/propane)
Internet  (though maybe you have this and are lumping it with entertainment?)
Gifts (add up what you will spend per person for everyone you buy for birthday, wedding, graduation, Christmas, Hanukkah, etc, and divide by 12)

Some people have tithing/charitable giving
Do you have laundry expenses (coin operated machines?)

[justjenn]

netskyblue-

I included my utilities payment in the "rent" section.
I mostly take public transportation, which is provided for free as a student, so my gas is only about $40 and I have no car payment. I guess I could budget about $75 total for gas/maintenance/registration.
Internet is provided with my apartment.
I would typically include gifts into my "entertainment" section. I have cheap friends and family, so we typically do not spend much on each other.

My expenses are low right now mostly because I've been living on a $1100-$1200 monthly income for the past two years that I've been in grad school. Until recently, I honestly couldn't afford any other expenses.

[slugline]

Does your employer offer a retirement account like a 401(k) or 403(b)? If so, and the plan offers employer matching, then I'd first contribute to maximize that match.

After that, I'd focus on keeping expenses low, have a few months worth of expenses on-hand as an emergency fund, then attack that student loan fairly aggressively.

[Retired To Win]

Aggressively pay off student loans. 8-12% *possible return* in investments is not as good as 6% *guaranteed return* in paying off the debt, in my opinion.

Get a $1000 emergency fund, Dave Ramsey style, then put everything you got into paying off Sallie Mae.

As pzxc says, you'll be getting a guaranteed 6% return on any money you throw at the student loans, so that is where I too would focus my money.  However, first I would build up an emergency reserve to cover at least 6 months of basic living expenses -- without the entertainment and so on -- plus basic debt payments (all of which would not even be dented by a teeny tiny $1000 reserve).  The peace of mind you will get from having that emergency reserve will make it easier for you to happily keep chopping down your student loan balance.

Good luck!

[Calvawt]

I would focus on crushing the student loans first if the average rate is 6%.  Once you get it down to anything 4% or less, you can slow down.  Be sure to build up at least a $1,000 emergency fund before the loan repayment starts.

[SmallCheese]

Start paying your loans early. I did this and it really gave me a head start on it. I paid off my 10 year loan in ~3.

[Future Lazy]

thanks so much everyone! All of your advice has been super helpful.

I think that paying off my loans quickly and getting rid of that monthly payment would be really helpful in the long run. I don't want to have to struggle to raise a family with a $450 monthly payment looming over my head.

I work at a non-profit that relies on federal grants for funding, so I think a 6-9 month emergency fund would be best.

On a side note, my sky high grocery bill is from a combination of living in Hawaii, where food prices are much higher than average due to shipping costs, and a special diet (medical reasons). Although I'm sure I could cut some corners, I don't see it ever dipping below $300/350.

Re Food: Try to find bulk staples to cook at home. Remember that lentils, rice and beans is a well rounded meal by itself, for example.