The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Lilz on March 05, 2013, 05:36:02 PM
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I've somewhat recently discovered MMM, and I am trying to figure out how to incorporate more and more of it into my life. I'm 18 and I live at home, taking this semester off from college. I was at an out of state school and am going to an in state school next semester for many different reasons, including money.
I lifeguard about 30-35 hours a week and am trying to save pretty much all of it. I already have loans from my first semester and will continue to have to take loans out.
My question is would it be ridiculous for me to start a Vanguard index fund (trying to learn more about that because of MMM), or should I just save money and pay down loans if I have extra? or is there a better way to help my money work for me for the 3-5 years until I'm out of school, like a bond, or something of the short?
Please Help!
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1. What's the interest rate on your loans like?
2. Are they subsidized (i.e., do they accumulate interest while you are in school)?
3. How likely do you think you are to find a job where the salary will cover your loan repayments upon graduation?
If the loans are higher than 3-4% interest and unsubsidized, I would prioritize keeping the loan amount low and put most of your earnings towards that. However, if the loans don't start accruing interest until you graduate, I'd consider investing it *somewhere*, even if that somewhere is a no-risk choice like a CD ladder, then using the savings+interest to pay down the debt quickly once you graduate.
The other factor is what your financial situation might be like when you graduate. i.e., if you are studying engineering or science, where at worst you can probably get into grad school and earn $20-30k/yr as a TA/RA (and at best you will land an actual job earning quite a bit more), you can probably afford to be a bit more of a risk taker, because you probably won't desperately need the money when you finish. If you are studying something where the job prospects are more grim, or you expect to have constraints on your job search (for example, you'll need to live in a particular location), you're more likely to need to fall back on savings for a while and so you should probably be more conservative in your choices.
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Hey Lilz, welcome to MMM!
To answer your question best, I'd like to clarify something:
would it be ridiculous for me to start a Vanguard index fund (trying to learn more about that because of MMM), or should I just save money and pay down loans if I have extra
When you say "extra", do you mean after saving money? If so, you should evaluate how much you're allocating to savings vs. how much to "extra". Although I do that to a small extent for liquidity purposes myself, that's only because my loans are subsidized and not accruing interest until I graduate. If my loans were actually costing me money, I'd be pushing much more of my cash towards them.
Are your loans subsidized or unsubsidized; and does taking a semester off effect them? Basically, if the interest rate of your loan is greater than the expected yield of an alternate investment like a bond or index fund, that should be where you allocate your money. Otherwise, you're borrowing money via your loan at, say 8%, in order to make 4% in an index fund, effectively losing 4% overall.
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When in doubt, do a little of both. Invest as you retire debt.
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My question is would it be ridiculous for me to start a Vanguard index fund (trying to learn more about that because of MMM), or should I just save money and pay down loans if I have extra? or is there a better way to help my money work for me for the 3-5 years until I'm out of school, like a bond, or something of the short?
Please Help!
Here's the real issue: Before you start picking funds, you need a goal and an asset allocation plan.
Are you going to need the money within 3-5 years? in that case put some of it in a CD (for moving expenses, deposits on your first post-college apartment, relocation expenses) and put the rest of it toward your loans.
Are you starting to save for retirement? Maybe you could put a quarter-half of your savings into a Roth IRA and the rest toward your loans.
But once you've developed the goals, then read up on asset allocation. (http://www.bogleheads.org/wiki/Getting_Started , http://www.bogleheads.org/wiki/Category:Asset_Allocation ) Then you'll be ready to pick a Vanguard index fund.