Reader Case Study: pay off student loans or invest? Help me prioritize.

[frugurl]

Hi all,

Lurker here, and loving every second of it. Looking forward to your awesome advice and probably some face punches.

Me

31, live alone, want FI by 45.
Graduated with my Master’s in May 2013, spent like a crazy fool, found MMM in May 2014 and have reduced spending and embraced mustachianism (still working on getting spending down further).
Will probably move in with my boyfriend in the next year or two, and probably have children after that.


Income

Gross: $80,000 / year
401k Contribution: 3%, matched by employer
Insurance: ~$45/mo
NET: $4,396 / month


Expenses

Rent: $1,090 ← this could be lower but, during school I lived in a loud, rundown apartment and am absolutely loving my new, quiet, peaceful place.
Gas/Elec: $130 ← this is the high end during super cold winters. it’s been more like $70 lately.
Water: $25
Phone: $72
Internet: $55
Netflix: $8

Groceries: $220
Restaurants: $100
Toiletries: $50
Coffee Shops: $30
Cat Food: $26

Gas: $80
Rolling Expenses: $120 ← vet, doctors bills, car insurance, car maintenance

Shopping: $60
Smokes: $200 ← I know, I know, I’m facepunching myself as we speak.

SUBTOTAL: $2,265
+ $950 student loan payment
TOTAL: $3,210

Savings: ~$1,100/month


Assets

Cash: $12,261 ← working towards goal of $15,00 as part emergency fund and part new car fund.
Current 401k: $5,807
Traditional IRA: $7,003 ← previous employer; sitting with a broker now, and I plan to move it to Vanguard.
403B: $1,283 ← previous employer
401A: $2,569 ← previous employer
2002 Ford Focus: $1,500
TOTAL: $30,420


Liabilities

All federal student loans, on a 10 yr repayment plan with the maximum monthly payment.

$1,280 @ 6.8
$3,687 @ 6.8
$5,227 @ 6.8
$64,209 @ 5.94
$3,117 @ 2.33
TOTAL: $77,522


Question

My emergency fund will be complete at the end of this year, which will give me an extra ~ $1,100 per month to do something with.

My current plan is to go into aggressive loan payment mode; $2,150 per month will see the loans paid off in about 3.5 years, not including potential yearly bonuses and raises, which would all go towards the debt, too. I will *definitely* pay off the first three, since the interest is so high, which should only take me a couple/few months, depending on if I get a bonus in January.

My question is about the big one: do I stick with my current plan and pay off the $64k first, do I start investing, or some combination?

[MDM]

frugurl, welcome to the forums.

Yep, lose the smokes.  More saving, less spending, and healthier for you - but you know that.  Anyway...:

Given the original numbers in your post (including smokes), you could contribute the maximum $17,500/yr to your 401k now and still have ~$4,000/yr left over to put toward student loans.  Any salary increases in future years could go to the student loan payoff. 

Depending how secure you are in your job, you could simply pay the 6.8% loans in full from the e-fund now.  That might be too aggressive for comfort, but something to consider....

Good luck!

[frugurl]

Thanks MDM! I will definitely look more into upping my 401k contribution.

I feel quite secure in my job, but I'm hesitant to lose the e-fund - it feels like a security blanket. I don't know if that's logical or mustachian, but it's where my brain is right now. Plus I definitely wouldn't want to get rid of the car portion of it - I have been woefully neglectful of my car over the years (primarily because of being a student and not having any money to put into it), and I worry that it will just crap out on me. I'll be taking it in to the shop soon for some much overdue love, so maybe after that I'll feel more secure with it and more willing to part with money from the e-fund.

[Calvawt]

I would use some of the emergency fund immediately to pay off the two smallest loans at 6.8%.  I would then quit contributing to the emergency fund until the loans are paid off.  Once you are down to the 2.33% loan you have made it! 

I would also eliminate the smokes and try to lower the phone bill.  Hopefully you will address the rent situation at some point like you mentioned.

Since the rates are fairly high, I would only increase you retirement contributions up to the max after the loans over 5% are gone.  At that point, I would get it to the max of $17,500.  You will get people recommending both ways, but figure out which is more comfortable to you: eliminating debt or building a nest egg.

[duck-duck]

You can also refinance those higher rate loans. I refinanced with Darian Rowayton Bank and went from 7.4% fixed to 3.5% variable. They offered fixed rates too, just a bit higher. With out checking the math, I'd guess that this alone would save you $150 per month in interest. There's also SoFi, but they didn't accept loans from my school.

[RichMoose]

I would lose the cigs like right now (and I'll toss in an extra facepunch as a reminder of how bad this is), cut the restaurant and coffee shops in half at minimum, and look to change cell plans. Pay off the 6.8 loans immediately with your cash pile. You will still have a couple grand left in the account so it should be an adequate safety net. IF your car craps out, chances are you it won't cost too ridiculously much and if it does maybe you can temporarily use other transportation options (borrow a bike, public transit, carpool, etc). It might actually even help you change your transportation mindset.

Then bump 401k up to at least 10% and invest in something like Vanguard index only. Keep working hard on paying down the big remaining student loan because 5.94 is still a high interest rate.

If you're looking to FI in less than 15 years, you will need to crank it up a bit in the savings dept.

[frugurl]

Thanks, all. I wasn't even considering using my e-fund for this, but given that it seems to be consistent advice, I will seriously try to change my mindset there.

I am totally on board with Vanguard index only - unfortunately, my 401k options don't include any of them :( But I'm slowly learning more and once I figure out my debt plan I'll probably be back for a "help me figure out the right investments" post. I really want to be smart and soak up all the good wisdom you guys have to offer!

Totally agree with cutting the smokes - one of the great things about finding MMM was that it got me to start cooking, drastically reduce food spending, and eat way healthier (I was spending about $400+/mo on restaurants before May, which is completely bonkers both in the money and health department - I can't even believe it's true now). So quitting smoking is absolutely the next step in this path, just a little harder to actually do. The face punches help. Also, I will take the advice to cut back on restaurants / coffee shops even more. Coffee shops tend to be my primary source of friend time, but I can always order something cheaper than a $4 latte :) Good reminders, all.

ETA: I never thought about refinancing my student loans - I will look into this! If I could get the big one under 5% fixed, I would feel more comfortable letting that debt drag out longer and focusing on savings.

[GGNoob]

If you could refinance all loans into one under 5%, then you could focus on maxing out IRA/401k and put anything left towards the student loans. If you can't refinance, I'd use the e-fund money to pay off the higher interest loans.


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