Kill off remaining Student Loans? New(used) Car? Maxing 401k?

[Apocalyptica602]

Hey everybody,

I've been reading MMM for a while and learned quite a bit, he's definitely made a positive impact on my life.

Anyway I have a few questions specific to my situation.

Background

Profession: Graduated college in May of 2011, I'm a Mechanical Engineer. Currently work in a large international "Medical Device Manufacturing" company.
Compensation: ~67k/year, 401k with a 6% match AND pension (apparently that's a big deal as most non-government companies don't have both?)
Special Note: For the first 3 years of my employment I'm in a rotational program, so I move 3x in 3 years. I started out in Baltimore MD back in June 2011. Going to be moving to Northern NJ in June of this year.

Car: 1999 Honda Prelude with 70k miles on it (bought it from a family friend who's sister passed away in 2008 with 38k miles on it $7,000 paid in cash)

Low mileage and for the most part has been great, except I just put about $1500 of work into it, wheel bearing, tie rods, seized rear brake calipers, yada yada yada lot of things went bad at once. Also back in September I got T-boned on the passengers side. Huge dent which would require a new door / rear quarterpanel and about $2500 dollars worth of work. No claim on the insurance since the collision was deemed 'shared fault' so I chose not to fix it and live with the ugly dent because the door still works and the power window still even works somehow.

Student Loans: When I graduated I had about 35k of purely federal direct sub/unsub loans varying from 4.5% - 6.5%

I've been paying them off aggressively and just knocked out the last of my 6.5% loan, bringing me down to 18.5k remaining debt.

Currently putting 15% of my paycheck into my 401k (I'm a firm believer in 'pay myself first' if I don't see the money in my checking account I can't possibly be tempted to spend it and I know it's going to a good place)

Also a few weeks ago I got LASIK surgery. I've been wearing glasses for 15 years, and went from 20/600 to 20/20. Cost me $5400 though. Ouch. And that was AFTER my vision insurance took 15% off of it.

Worth every penny though. Paid in full.

Main expenses / finances:

Rent: $985/mo - currently live in a pretty nice 800sq/ft one bedroom that is less than a mile from where I work. I walk to work in the morning (drive if I'm late =P) and I walk home to cook / eat lunch for myself.

Student Loan: Automated $500 a month payment, occasionally throwing in heaps of money when I get near a goal, (I just paid $3600 to kill the last 6.5% loan)

Utilities: Electricity + Internet (don't have cable TV, video games are my vice of choice): ~100 or so added together during spring/fall 150-180 or so during winter/summer months.

I have a $2500 emergency fund in a ING savings account. About $7000 in my 401k. No credit card debt.

I feel like I'm "strapped for cash" because I'm saving aggressively into my 401k and paying down my student loans as fast as possible.

In short. I know I've been doing things a lot better than most people my age. (Not even kidding, right after graduation, 4 of my Engineer buddies from school went out and financed a new: Chevy Camaro SS, a Subaru WRX STI, a Ford Mustang GT, and a (2009) BMW 328xi) ON TOP of their debt which is about mine if not more.

In June I'm going to be gritting my teeth and making another smart (but painful) financial move: Moving back in with my parents. Since "cheap" rent in the area of New Jersey where I'll be moving is ~1500/mo I decided to move back in with my parents and pay them ~300/mo just to help out, + 100/mo I'll end up paying to store my furniture that won't fit in my parents house, but I'll be needing when I move again in another year.

Taking out that $400, I should still free up at least another $900 or so per month. Since I will be using my parents electricity and internet, and eating out a lot less. I can cook, but my monthly grocery expense is about $50-70 while my monthly "cheap" eating out expense (pizza, fast food, etc) is ~$80 shamefully.

Sorry for the long history, now my QUESTION!

I'm trying to think which would be the best course of action, should I:

Finish paying down my student loans: Increasing my payments to ~1600 a month (what I'd be paying in rent if I didn't live with my parents) would mean I'd be entirely debt free by June of 2013, not bad for only 2 years out of school haha.

Max out my 401k / Start a Roth with any overflow: To get to $16,500/year of my contribution I'd have to contribute roughly 10% more of my income.

(Probably the least mustachian) Begin putting money aside to eventually get a new(used) car in the next couple of years. I want to buy it in full if at all possible, or at least put enough down to where I can secure a 0 interest loan and pay the remainder off before the 0 interest promotional rate wears off. (Can you even get a 0 interest rate on a used car???)

I don't think I'd get much for my Honda at that point, especially with the $2,500 dent in a car that blue books at 5k.

Anyway, I'll shut up now and I can't wait to hear your analysis of my situation / advice.

Thanks!

[arebelspy]

All fine choices.  Depends on what's important to you.  I personally am paying off my student loans as slow as possible.  Sounds like paying them off is important to you.

Given that, I'd probably split savings between paying off student loan and car fund (split like 90/10 or 80/20 towards the loans).. once loans are paid off, kick 401k and other investment savings into high gear. Replace car when needed.

Good work so far.

[trammatic]

I think you should try to figure out some long-term plans...  Where do you want to be in 10 years?  What do you want your income to look like?  A lot of MMM'ers are also landlords...do you want to own real estate?  Do you want to buy your own house or stay flexible by renting?  How much is it worth to you to pay off your student loans/be debt free?

Answering those and other longer range plans will help you figure out what the best move is.

[sulaco]

hey apocalyptica, let me start out by saying you're doing great for someone right out of school - high income, high savings, willing to buck the trends of your peers.

+ 100/mo I'll end up paying to store my furniture that won't fit in my parents house, but I'll be needing when I move again in another year.

Depending on how nice your furniture is or how much you're attached to it, I would think about just selling it. You save the expense of moving it, storing it, and have the capital from the sale stored as ones and zeros in your bank account, which take up a lot less room.

You might also want to contribute to your Roth first. As an engineer, you'll likely be phased out of contributing in a few years based on your income. That might seem far away now, but it can come quicker than you'd think.

[sol]

You might also want to contribute to your Roth first. As an engineer, you'll likely be phased out of contributing in a few years based on your income. That might seem far away now, but it can come quicker than you'd think.

That would be my advice as well.  The Roth IRA limit is only $5k so it won't have too much of an impact on your other finances.  It is paid with after tax money and since I expect your salary will only go up over time you should contribute to it as soon as possible.  And you may eventually phase out of eligibility so I recommend taking advantage while you can.  It's a handy retirement vehicle to have around, for several reasons that are explained elsewhere on this site.

After the Roth, your choices are paying down the 4.5% student loan debt or investing in the market pretax through your IRA.  Do you think your investment portfolio will return better than 4.5% over the next few years?  Personally I expect the market to do better than that, and the tax benefits of the 401k are just gravy, so I'd opt for ramping up your 401k purchases. 

I'd also consider putting maybe two or three hundred a month into your savings account for an eventual car replacement, when the time comes, but I'd be in no hurry to replace that Prelude any time soon.

[James]

You might also want to contribute to your Roth first. As an engineer, you'll likely be phased out of contributing in a few years based on your income. That might seem far away now, but it can come quicker than you'd think.

That would be my advice as well.  The Roth IRA limit is only $5k so it won't have too much of an impact on your other finances.  It is paid with after tax money and since I expect your salary will only go up over time you should contribute to it as soon as possible.  And you may eventually phase out of eligibility so I recommend taking advantage while you can.  It's a handy retirement vehicle to have around, for several reasons that are explained elsewhere on this site.

After the Roth, your choices are paying down the 4.5% student loan debt or investing in the market pretax through your IRA.  Do you think your investment portfolio will return better than 4.5% over the next few years?  Personally I expect the market to do better than that, and the tax benefits of the 401k are just gravy, so I'd opt for ramping up your 401k purchases. 

I'd also consider putting maybe two or three hundred a month into your savings account for an eventual car replacement, when the time comes, but I'd be in no hurry to replace that Prelude any time soon.

This is excellent so I won't repeat it all.

Obviously paying student loan vs investing is a hot debate, but remember it's a very personal decision.  You aren't going to look back and hate yourself like you would from buying a new car or something, both are noble options so after doing the research and reading opinions just go with your gut and don't look back.

[Apocalyptica602]

Hey again everyone,

Thanks for the massive amount of insight. It's good to receive affirmation that I'm doing the right thing. It's certainly tough sometimes seeing my friends take lavish ski vacations to places like Vail and Jackson Hole, drive new cars, and whatnot. While (comparatively) I'm buying lift tickets at Mount Peter and driving a 13 year old car.

I took some extra time to do some thinking, and I'll address what I can think of right now:

I would like to be a home owner some day, but the nature of my rotation schedule means I need to keep moving for at least another 2 years before I settle down somewhere.

Rental property intrigues me, but I'm not very do it yourself-y (strange for a Mechanical Engineer I know tell me about it.) and I feel like dealing with tenants would be a nightmare. So I need to do a lot more research / thinking on that.

As for selling / rebuying furniture to save on storage costs. My furniture is reasonably nice, and in anti-mustachian fashion I bought it new. Although it was at Bob's discount furniture and a 7 piece queen bedroom set / dining room table and 6 chairs / super awesome pillowtop mattress ran me "only" $2200 or so. I also snagged a couch and coffee table from someone I knew in college who was moving across the country and had to unload them super cheap and super fast.

My company relocates me 100% free, I pretty much stand around and watch the movers pack up all my stuff, even disassemble and reassemble my furniture on pickup/delivery.

So the only real cost would be the ~1200 for a year of storage. Since I'm estimating I'd get ~$1000 out of my used furniture if I sold it all, plus the hassle and having to rebuy new furniture when I move out again in June 2013, I figure I'll hold onto it.

Regarding my savings goals: I do believe paying off my school loans ASAP is important to me.

Especially as an engineer I can't refute the numbers that the 401k will most likely do much better than 4.5%, currently my rate of return is ~10.5%.

But the psychological aspect of being debt-free ASAP (and I'm much better off than most even!) is certainly driving me.

That is an interesting point about the Roth, during the program I'm in for 3 years the salaries stay pretty flat. Last year's raise was only about $1,800 dollars for instance. However when I "graduate" typically most get hired into "Senior Engineer" roles, and depending on where they are in the country that should push me to 80-90k. So maybe I'll fall out of eligibility soon.

Also my girlfriend of 3 years is finishing Pharmacy school this May and has a offer for ~100k/year so if one thing leads to another and we get married that'll remove all possibility of a RothIRA as well due to a high family income.

I also especially like that you can withdraw your contributions at no penalty, that is what makes me hesitate about dumping money into a 401k because it is extremely unwise to withdraw any of that money until you retire.

So what I think my tentative goal for 12 months from now is as follows, in rough priority:

1) Pay off my student loans in full by June 2013 = ~$1600/mo
2) Start a RothIRA and contribute ~$500 a month until I hit the contribution cap.
3) Bolster my emergency fund from $2500 to $5000, because I feel $2500 will only cover me for like 2 months when I'm out renting again.
4) Once the loans are paid off, out of that former $1600/mo, I'll max my 401k contribution, (at my current salary that works out to about another 250 per paycheck so 500/mo) then take maybe a few hundred a month and start saving toward another car with a rough target purchase date of 2014-2015 provided the 'lude holds out that long.

What do you guys think?

[James]

1) Pay off my student loans in full by June 2013 = ~$1600/mo
2) Start a RothIRA and contribute ~$500 a month until I hit the contribution cap.
3) Bolster my emergency fund from $2500 to $5000, because I feel $2500 will only cover me for like 2 months when I'm out renting again.
4) Once the loans are paid off, out of that former $1600/mo, I'll max my 401k contribution, (at my current salary that works out to about another 250 per paycheck so 500/mo) then take maybe a few hundred a month and start saving toward another car with a rough target purchase date of 2014-2015 provided the 'lude holds out that long.

What do you guys think?

The increased emergency fund also backs up the vehicle in case of any needs there in the short term, and it sounds like you will really appreciate the loan free status over time.  Your plan looks great!

[Apocalyptica602]

Thanks everybody!

Now to print out this plan and plaster it somewhere I can see it often until it becomes second nature. =P

[sol]

I'd consider spreading out your Roth contributions to take better advantage of dollar cost averaging. Normally this means 192.30 per paycheck. I would do this immediately, concurrent with your loan repayments, even if it means carrying the loan for an extra few months.

Once you have the ira, consider depleting your emergency fund. Remember that Roth money can be withdrawn without penalty at any time, so it is available to you in case of emergency.

I also recommend playing with the irs tax withholding calculator. Once you start maxing the 401k, your taxable income will decrease so you'll get a big fat refund check unless you turn down your withholding.

edit: autocomplete typos

[James]

All excellent points sol, and the bonus about using Roth for emergency fund is that the extra effort involved to touch it means you are less likely to do so.