Author Topic: pay off student loans or start emergency fund  (Read 5880 times)

nathan01xl

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pay off student loans or start emergency fund
« on: July 07, 2014, 11:01:09 PM »
I have around $16.5k in student loan debt, currently make a monthly payment of just over $800 ($200 minimum). My fiance and I have an high interest savings account with close to $15k in it right now. We are trying to decide how much money of this we should put towards the loan once we are married in October, and how much to hold in emergency fund. Our monthly take home income is a little under $4k, and our anticipated monthly expenses once married will be around $1500-2000.

So in November after the wedding my loan pay off amount will be around $14k, and after paying for a needed used car and for a wedding we should have about the same amount in saving we have now.

My question is how much money should I apply to the student loan at around 6% interest and how much to save in an emergency fund earning around 1%?

BFGirl

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Re: pay off student loans or start emergency fund
« Reply #1 on: July 07, 2014, 11:06:07 PM »
Pay off the loan.

parsimonious

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Re: pay off student loans or start emergency fund
« Reply #2 on: July 07, 2014, 11:22:37 PM »
Pay it off. You will feel better and you won't do something silly like buy a house / another car / going out to eat before paying off your student loans.

nathan01xl

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Re: pay off student loans or start emergency fund
« Reply #3 on: July 07, 2014, 11:40:28 PM »
how much should we put in an emergency fund once the debt is paid off? both of our salaries are partial commission based, which makes our income a little volatile.

parsimonious

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Re: pay off student loans or start emergency fund
« Reply #4 on: July 08, 2014, 02:05:15 AM »
It really depends in your risk tolerance / anxiety level. I've always kept 10k to 15k around in savings accounts just in case everything goes horrible all at once. (It never has, and we've never used it in eight years...) I think 3 to 6 to 9 months is a good cushion to have. You'll eventually figure out where your comfort level is. :)

You are commission based, so it wouldn't be the worst idea to build back up your emergency fund after paying loans and any tax advantaged investments.

I think you should definitely keep a least one months living expenses in a checking account, just to make bill paying easy.

Gin1984

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Re: pay off student loans or start emergency fund
« Reply #5 on: July 08, 2014, 04:58:10 AM »
Between the two of you can you live on one income?

nathan01xl

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Re: pay off student loans or start emergency fund
« Reply #6 on: July 08, 2014, 08:53:52 AM »
We could live off one income, but it would be tight. I guess the hardest part of the decision is if we should completely wipe out the debt and only have $1k or so in savings for a few months until it builds back up again. Or be a little more conservative, have it cost a bit more and pay the debt down over 6 months. Our individual risk tolerances are different so a compromise has been hard to make, so we need third party input.

GGNoob

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Re: pay off student loans or start emergency fund
« Reply #7 on: July 08, 2014, 09:10:34 AM »
With $15,000 already in savings, I'd go ahead and pay off the loan.

how much should we put in an emergency fund once the debt is paid off? both of our salaries are partial commission based, which makes our income a little volatile.

I'd say 6 months worth of expenses. But I wouldn't put 6 months worth of expenses in a savings account. That's a lot of money that's losing value to inflation. We have our savings/emergency fund invested at Betterment (referral link). Here's Betterment's advice on a Safety Net.

My wife is a hair stylist and therefore commission based. We average out 6 months of her income and tips to create our budget. Because she is constantly gaining more clients, her pay usually goes up each month, so this works good for us. You could also base your budget off of the lowest month for each of you. Living on a budget like that would give you a lot of months with extra income and a lot more money to put towards savings.

GGNoob

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Re: pay off student loans or start emergency fund
« Reply #8 on: July 08, 2014, 09:18:32 AM »
We could live off one income, but it would be tight. I guess the hardest part of the decision is if we should completely wipe out the debt and only have $1k or so in savings for a few months until it builds back up again. Or be a little more conservative, have it cost a bit more and pay the debt down over 6 months. Our individual risk tolerances are different so a compromise has been hard to make, so we need third party input.

This will go along with my last post a bit...

My wife's student loan has about $9,000 left and we have around $10,000 in savings currently. But I won't take money out of savings to pay off the loan because our savings is invested at Betterment and earning returns. Instead I'll pay it off a bit slower.

Since you are putting $800 a month towards this loan already, you could build your emergency fund back up pretty quickly if you drained it to pay off the loan. So here's my advice...

Take out your savings and pay off the student loan when you can (while maybe keeping a couple thousand just in case). Then start putting that $800 every month back into your savings. But at this point, instead of putting it into a savings account, an investment account like Betterment could make great sense. Put $800 a month in and it will allow you to dollar cost average into the market to prevent you from investing all $15,000 at the wrong time.

matchewed

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Re: pay off student loans or start emergency fund
« Reply #9 on: July 08, 2014, 09:22:44 AM »
Keep enough in your emergency fund to keep an emergency fund. Think about the types of emergencies that you may encounter; car replacement, sudden trip for a funeral, medical expenses, loss of a job. Keep enough to handle a couple of these things and use the rest for paying down the loan.

Cheddar Stacker

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Re: pay off student loans or start emergency fund
« Reply #10 on: July 08, 2014, 09:33:13 AM »
I would normally say to invest but 6% sucks so pay that off ASAP.

EF only needs to be 2-3 months of expenses based on the facts you gave, and invest the difference. So 2-3 * $1,500 - $2,000 = $3,000 - $6,000.

Once the loan is paid off max out all 401K, IRA, HSA options and invest anything that's leftover.

Good luck! I hope the wedding goes well.

Gin1984

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Re: pay off student loans or start emergency fund
« Reply #11 on: July 08, 2014, 10:49:19 AM »
We could live off one income, but it would be tight. I guess the hardest part of the decision is if we should completely wipe out the debt and only have $1k or so in savings for a few months until it builds back up again. Or be a little more conservative, have it cost a bit more and pay the debt down over 6 months. Our individual risk tolerances are different so a compromise has been hard to make, so we need third party input.
If you could live off of one, I'd use the money to pay off your student loans (with the exception of about $1000-$2000) and then work my ass off to get a full three months back in savings.