The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: bravenewworld on January 10, 2015, 04:30:37 PM
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HEY MUSTACHES!
I am currently saving for a down payment on a home, however I still have student loan debt. Is this smart? Should I be socking away all my extra cash (from cutting my expenses) to pay this debt first?
Bit of background -
Salary: 40k/year before taxes, contributing 5% to my 401k (I know, face punch?).
Age: 27
Student Loan: 14k, paying $287/mo
Current savings for house: 3k, continuing to contribute $440/mo
Current rent: 1k (split with my partner. Also, we will be purchasing/saving for the house together - combined income is about 90k)
(Also, side note, I am currently in graduate school in IT, but I am fortunate enough that my company pays for it. I am hoping this will translate to more salary in the future, but am not necessarily counting my chickens before they've hatched).
I know I havent given much information to go off of (budget, etc), I guess my question is, no matter how much extra I can save through these new mustachian ways, whats the best way to utilize the savings? Any bonuses, salary increase, tax refund, etc I plan on putting into my house down payment fund.
IS THIS WRONG?
Thanks Mustachians, I am eager to keep learning from you.
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What's the interest rate on the student loan?
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Oh, yeah, 7% :)
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Oh, yeah, 7% :)
Damn. I'd focus on paying that sucker off asap. Then you can use the $287/mo to funnel towards home savings. That means after it's paid off, you can throw $727/mo to the house fund - that's nothing to sneeze at. What $ amount does your partner contribute?
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Oh, yeah, 7% :)
At a 7% interest rate, you should probably be putting your extra monthly money towards the loan, and not the downpayment. Consider the loan payments a guaranteed 7% return on your asset - not bad! Plus you can deduct the interest on that loan (7%) from your taxes, so it's really closer to an 8% return annually.
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Yes....the loan....ASAP!
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and take that $3K for the house and use that to pay off the loan on Monday...then contribute all to the loan until it's paid off...then consider saving a portion for a house vs. a portion for investing.
At your age, I would really favor investing in the market vs. collecting depreciating savings (assuming you have your "house fund" in a savings account or equivalent). If you can get used to a good chunk going to the market at your age, compounding will make a house fund and a good start to retirement.
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At 7% student loan all the way.
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To give you a different option, could you look at refinancing that loan?
Even a balance transfer to a credit card for 18 months?
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At a 7% interest rate, you should probably be putting your extra monthly money towards the loan, and not the downpayment. Consider the loan payments a guaranteed 7% return on your asset - not bad!
Agree completely up to this point.
Plus you can deduct the interest on that loan (7%) from your taxes, so it's really closer to an 8% return annually.
This part is backward. The deductibility of the loan interest means that it costs you less than 7% to maintain the loan balance.
Think of it this way: you have to pay both the loan holder and the IRS. Let's say that without the tax deduction you would pay $980 (=7%*$14K) in interest and $5,214 in federal + state taxes (guessing at state tax). With the tax deduction you would pay $5,067, or $147 less.
In rough numbers, that makes your loan cost ~($980 - $147) / $14K = 6%.
But I still agree with the overall suggestion to pay down the loan ASAP.
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Thanks for the respones everyone - the SO and I are tempted by the home purchase because we are looking to purchase a cheap home, thereby reducing our monthly expenses (I think we pay an outrageous amount for rent - my SO somewhat agrees, but enjoys the "perks" of the property too much); I gather no one here is a fan of spreading out student loan payments as some "financial advice" givers suggest....
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Thanks for the respones everyone - the SO and I are tempted by the home purchase because we are looking to purchase a cheap home, thereby reducing our monthly expenses (I think we pay an outrageous amount for rent - my SO somewhat agrees, but enjoys the "perks" of the property too much); I gather no one here is a fan of spreading out student loan payments as some "financial advice" givers suggest....
Not at 7%!! LOL Who told you to do that? A mortgage broker? Ha Ha
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You guys make almost 100K a year. You should be living on one income and saving the other. (saving $50K a year)
The 14k is so trivial in this situation
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You guys make almost 100K a year. You should be living on one income and saving the other. (saving $50K a year)
The 14k is so trivial in this situation
Thank you, I guess I did ask for a face punch :\