Request for Advice

[kestrel]

Hello, all!  I've been reader MMM for a couple of weeks now, working my way through the blog to present, and building my dreams of financial independence.  However, because I've only entered the full-time workforce within the last year (student before that), that goal is a bit distant.  But I have managed to save a decent amount through school and in the first months of employment.  My question now is, what do I do with it?

My current situation:

I'm currently renting an apartment about 15 miles from my job.  The apartment is reasonably priced at $600/mo.  My car is paid off but is a 2001 model and is beginning to acquire problems.  (Leaking water pump being one of them.)  I have about $11k in student loans and about $18k earning almost 3% in a bank account.

What I have to work with:  About $13k.  (Keeping $5k in the account gets the high interest rate.)

What I consider my options to be:

1) Pay off the student loans.  I have over $7k at 6.8%, $2k+ at 6.0% and $1k+ at 4.75%.  The interest is tax deductible, monthly (over)payments are currently $230.

2) Purchase a condo closer to work.  Downpayment: $11k-13k.  Monthly payments on the condo would probably be over $800, but it would eliminate the commute.

3) Put $10k into an investment account.  This would leave enough to deal with any car breakdowns/emergencies.  Plus I get my first 'employees'.

I'm currently pretty ambivalent about moving closer to work.  I don't really like the idea of taking on the mortgage debt while I'm still making payments on my student loans, but the price of an apartment in Boulder would be about the same as a mortgage payment.  And, with the interest on the student loans being tax deductible, there's little incentive to pay them off early.  However, the amount of money I'd be saving on gas wouldn't cover the increased shelter expenses.

Any other suggestions?  Recommendations?

Thanks!

[gooki]

Pay off your 6%+ student loans tomorrow.

Then spend the next 6 month evaluating your employment and housing situation while saving any unspent money.

Do you intend to stay in the area for more than 4 years? If so buying a home wouldn't be a bad idea, provided the price is right.

If buying a condo with the $800 for monthly repayments. What term loan is that assuming, what interest rate? How much would you be borrowing?

Are you contributing to any retirement accounts?

[kestrel]

I think I will be here for 4 years since jobs in my field are pretty concentrated in this area.  Because most of the condo complexes in Boulder don't qualify for conventional financing, it would be a 30 year ARM at either 2.75 or 3.0%.  This would adjust with the rate of a 10 year T-bill capped at a maximum increase of 5% and no more than 2 or 3% per year.  These rates reflect different initial periods of fixed-rate, either 5 or 7 years.  I would be making a 10% downpayment so would be borrowing between $105k and $117k, depending on the property.  The $800 to $850 monthly payments includes all insurance, escrow, taxes, P&I, and HOA dues.

I am contributing to a retirement account, enough to get the maximum matching from my employer.

[gooki]

That for the detailed response. And good to hear you are contributing to retirement accounts with employer match. The mortgage financials are getting too location specific and out of my knowledge, but if your not desperately wanting to move I stand by my recommendation of paying down your student loans at/above 6% asap.

[kestrel]

Alright.  Thanks for your advice!

[twinge]

I second the vote for immediate repayment of students loans at 6% or higher.   

[grantmeaname]

Could you rent an apartment much closer to work instead of buying a condo much closer to work? That would cut your commute without the necessity of buying a place.

How do your expenses compare to your income? If you go with the condo route and keep the student loans around, will there be enough to go around? Would you consider getting a roommate? That could really help with your income.

Lastly, if I were you and I were going to kill the two big student loans anyways as a handful of other posters have suggested, I would just go ahead and get rid of the little one at 4.75% while I was at it. Yes, perhaps that's not mathematically optimal and you could beat that return by investing and only paying the minimum, but it's only $1k so you're not talking about a very big difference.

[jpo]

• Put 5k into a Roth IRA
• Put all remaining cash (except emergency funds) into student loans
• ...
• Profit

[grantmeaname]

It may be better to wait until later to contribute to the Roth IRA... you can make 2012 contributions until April 15, 2012, so you could start contributing to it well after you get on your feet with regards to loans and mortgages before you'd have to worry about it. That depends on your saving rate, though.

[jpo]

It may be better to wait until later to contribute to the Roth IRA... you can make 2012 contributions until April 15, 2012, so you could start contributing to it well after you get on your feet with regards to loans and mortgages before you'd have to worry about it. That depends on your saving rate, though.

I agree with this, dependent on the savings rate... as long as he maxes out by April.

[James]

I think the recommendations are solid so far, I would personally pay off all of the loans and just have it done with, but if you want to wait and invest instead I'd consider that a wash and wouldn't say it's wrong.  But I like simplicity myself.  The Roth is a great options for any cash you want to invest, you can use it as your emergency fund and still have it working for you in the market.

Regarding the rest of your situation, you talked about where your are at but not about your goals other than FI.  I would use your salary and where you want to be in 5-10 year to figure out how much you choose to spend on housing and other expenses.  Once you figure it backward to what your budget is, then you can decide the most efficient way to meet that budget by adding up expenses for each option over the next 5 years or so.  Maybe the math works in favor of purchasing the condo and going without a car, etc.

[cdttmm]

I'm with James. I'd pay off all the loans and just be done with them -- but I really, really, really hate debt.  :-)

I would take the $230/mo I was putting towards the loans and start funneling it into a Roth IRA every month.

Then I would sit down and take a long hard look at all of my expenses and decide what else I could eliminate.

Can you bike the 15 miles to work?

[NestEggChick (formerly PFgal)]

I'm impressed at how well you're doing just one year out of school.  With money in savings and in a retirement account, and the ability to pay off your student loans any time you want, you're in great shape.  Congratulations!

[johnnylighthouse]

So if you move closer your housing costs would increase $200?  You're driving something like 15x2x20 = 600 miles per month now, which is >$300 at the federal mileage rate.  If you count your time as well it seems like a clear win to move closer even if you rent.  If you rent you can also still pay off your student loans.

[Devils Advocate]

Good advice as usual from the gang of mustachios.

Dude, don't buy a condo.  Not for a year or so until you know for sure if you want to stay in that area. 

Pay off your loans, live frugally, move closer to work if you want (I probably wouldn't do it in the short term), invest in the Roth IRA, and save your pennies. Congrats on your good start!

DA

[smedleyb]

Good advice as usual from the gang of mustachios.

Dude, don't buy a condo.  Not for a year or so until you know for sure if you want to stay in that area. 

Pay off your loans, live frugally, move closer to work if you want (I probably wouldn't do it in the short term), invest in the Roth IRA, and save your pennies. Congrats on your good start!

DA

Sage advice.  If I had a dollar for every young professional I know who is in a pickle because they bought a house/condo and now must/should move -- I'd have like seven dollars.