The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: g3 on July 17, 2014, 06:05:51 PM
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Hello Mustachians!
There is a thread with a similar title near the top right now but felt the need to create my own as the circumstances are vastly different. I am looking for advice concerning my small balance of student loans and if/how I should invest funds before interest accumulates.
Current loans:
$3,500 at 4.5%
$5,500 at 3.4%
As a new college grad, both of these loans are subsidized and therefore do not begin generating interest until my 'grace period' ends on 11/15/14. I do not have any other debt.
Without getting too much into the details, I have enough to pay off the loan right now without going completely broke (approx ~$15k in savings and investments). I'd like some advice on how to invest this money as I sit out the duration of my grace period. I'm assuming recommendations will be around low risk bond mutual funds (say VFSTX) or high yield savings accounts or maybe nothing at all. I'm open to hear everything.
Questions I'd like answered:
-- Where to invest (if at all) current savings that are waiting to pay off student loans?
-- Should I make minimum payments on my loans when they finally do begin accumulating interest? I know 3.4% or 4.5% are very reasonable interest rates. If so, how do you recommend investing?
-- Also, if I'm looking to save up $25,000-$30,000 for a house down payment in the next 1-2 years, where do you advise parking that money? I hate the idea of plugging it into a near zero interest rate savings account, but maybe that's the best option.
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VTSAX for now. Wait for the grace period to end. If you feel comfortable with it, the math works out in your favor to pay the minimums on those loans.
For a house - interesting question... VTSAX has the chance of going down if the market goes down. Unlikely, but could happen. I think it's not the best choice. Better choices would be REITs (VGSIX) or high-yield savings. High-yield savings would leave some cash on the table, but if your timeframe is 1-2 years, I think it's a perfectly reasonable choice.
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VTSAX for now. Wait for the grace period to end. If you feel comfortable with it, the math works out in your favor to pay the minimums on those loans.
For a house - interesting question... VTSAX has the chance of going down if the market goes down. Unlikely, but could happen. I think it's not the best choice. Better choices would be REITs (VGSIX) or high-yield savings. High-yield savings would leave some cash on the table, but if your timeframe is 1-2 years, I think it's a perfectly reasonable choice.
I'd be concerned with such a risky investment on a super short time horizon (~4 months for loans)
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There is no investment for such a short time period. Your options are to either invest for a long time period (not for the down payment I'll address that below) while keep making payments on the loans (this will be dependent on how likely you think the market will perform historically "normal" for the long time period), pay it off and invest the rest for a long time period.
The down payment - 1-2 years is still a short time frame. Savings account or CD's.
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I would invest it all in a stock index. You only need $100-250/month to service those loans and that's exactly what I would do, pay only the minimums. As for the house down payment, save it and invest it. If the market goes down wait another year before buying the house. You don't NEED to buy a house in 1-2 years, so take a risk and hope for a reward. When you start seriously looking for the house, put your down payment into cash.
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If I were in your situation I would pay off all the student loans entirely right at the end of grace period. Put that money in a term deposit at the bank until then. Then the rest and future house savings I would put it completely in index funds or select dividend aristocrat stocks or even high yielding corporate bonds. You are young and able to take on higher risk with your investments. As long as your expenses are low and you increasing your income you will be in good shape to take on some more risk.
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If I were in your situation I would pay off all the student loans entirely right at the end of grace period. Put that money in a term deposit at the bank until then. Then the rest and future house savings I would put it completely in index funds or select dividend aristocrat stocks or even high yielding corporate bonds. You are young and able to take on higher risk with your investments. As long as your expenses are low and you increasing your income you will be in good shape to take on some more risk.
Nearly everyone will answer this question differently, and I respect your answer here AssetGrinder as it all seems very prudent, but I have a question:
Why play it safe with the debt, but then take a risk with the investments? It's seems like a conflicting philosophy. You state the OP is young and able to take on risk, but paying off the debts is the least risky thing OP could do.