The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: okkiedokki on March 06, 2016, 02:57:13 PM
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I am in need of advice on my student loans; I've read through some recent student loans threads but they don't 100% apply so i figured I'd ask. Currently I owe $21k @ 3.125%; I am paying $88 mostly interest because I was having trouble a little over a year ago and set it up at a lower payment. The payment is set to go up to $246 in Sept 2017. Last month we finally paid off the last of the spendy pants loans we couldn't get rid of so that leaves us with our mortgage and my student loans for debt; that gives us $450 in savings each month, but might be closer to $500 with some budget cuts we just made.
My question is, we really don't have a true emergency fund, we have $5000 in stocks we have that we call our emergency fund. And my 401k is at $30k; i currently contribute $25 biweekly.
I keep going back and forth whether we should grow the stocks/emergency fund to around $12k before we start paying down my student loans, or possibly split the savings and do both. Currently this month is a 3 paycheck month, plus our tax return i could contribute almost $4k towards my student loans, but at the same time that would make for a nice start in savings as well.
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1. Not a good idea to have your EF in stocks, as stocks are too volatile and God forbid you need to withdraw the money at a time when stock prices are low. Better to move this to a more liquid and more stable source, such as money-market fund. Less risk, less return, but more ability to sleep at night in the case that you need to withdraw.
2. 401K contributions are low and as such, there's a lot of wasted savings here. With more contributions, you'll be saving taxes, taking more advantage of employer matching (if available), and reaping the rewards of years of tax-free wealth building.
3. Interest on student loans is thankfully low, so, while it is definitely a priority to get rid of (especially given the large balance), it is not the end of the world if you decide to prioritize 401K contributions at least to the employer match.
4. Regarding the decision to increase EF or pay off student loans, first figure out how much EF you think you need. What is the minimum number of months of expenses that you need? Are you both of you employed? (if you both have jobs then maybe you only need to account for having less months in EF as it is rare, though not impossible, that you both lose your jobs at the same time.
5. Tax return $ does not need to all go into one place - perhaps figure out a break-out that would let you sleep at night, such as maybe 50% toward loans (since you are barely cracking the principal) and 50% towards your EF.
6. More details on the rest of your finances might be helpful in helping us give you more relevant advice.
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+1 to not kerping your efund in stocks. Look for a high interest savings acct.
I would take the tax refund and make that your efund in a savings acct since your current savings are all in stocks. Then start throwing extra cash at the student loans each month. This will give you automatic security and let you immediately prioritize those loans at the same time. My ideal scenario would save the tax refund as efund, increase 401k contributions, and then dedicate whatever you can after that to the loans.
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I am in need of advice on my student loans; .... Currently I owe $21k @ 3.125%;....
My question is, we really don't have a true emergency fund, we have $5000 in stocks we have that we call our emergency fund. And my 401k is at $30k; i currently contribute $25 biweekly.
I keep going back and forth whether we should grow the stocks/emergency fund to around $12k before we start paying down my student loans, or possibly split the savings and do both. Currently this month is a 3 paycheck month, plus our tax return i could contribute almost $4k towards my student loans, but at the same time that would make for a nice start in savings as well.
See the "usual advice" below. Current 10-year Treasury note yield is ~1.9%.
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -
unless your 457 fund options are significantly worse than those in the 401k/403b.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.
WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see
http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
if you want even more details on that topic). See also
https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial
The emergency fund is your "no risk" money. You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
If your 401k options are poor (i.e., high fund fees) you can check
http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"
Priorities above apply when income is primarily through W-2 earnings. For those running their own businesses (e.g., rental property owner, small business owner, etc.),
putting money into that business might come somewhere before, in parallel with, or after step 5.
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At 3.1% and a low minimum, there's no reason to pay down the student loans quickly, especially before you have an efund set up.
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nanana13 & little brown dog,
1. I agree stocks being to volatile, i should have been more clear. Of the $5k in the account only $3k is invested, the rest is sitting in cash if the market turned, i would hedge more then I did. With that said as of recent weeks I have been thinking of the market volatility and it would be bad if i did loose it.
2. My employer doesn't match my 401k anymore. They stopped that a while back but I capitalize on it when they did match. I am going to check in the morning if I can increase my 401k contributions mid year.
4. I figure I'd like about $12k for a minimum and ideally $20k. Currently my wife is staying at home with my kids instead of working/paying for daycare. When the kids go to school she'll start working again.
5. I actually just changed my taxes so we don't get a tax return each year.
6. Other then that, I bring in $3870 a month. Mortgage with taxes, pmi, etc is $1357, total month expenses is averaging $3500. But we changed internet providers for a $45 per month savings, and my wife just started cutting my hair and my son's hair for a $22 savings per month so that's going to drop again.
MDM,
I was going to ask what a good place to save my emergency fund would be but the link at the end of your post saved that. Certainly a lot of information to digest and I am still digesting it.
I looked at my 401k, i currently have it being managed by the advisory service my work has provided. I can't remember what that fee was but, looking at my last statement my total expenses and fees were $48 for my $30k I have. With that said it looks like the expense ratio of most of the funds they have me invested range from 0.42% to 1.17%. Most of them are around 0.8 to 1%. Do I understand the links correctly that the tax advantage of investing in my 401k with those fees outweigh investing in traditional roth or roth ira? I know I still need to hit my goal of a $20k emergency fund first before I even can consider this but I'm just having a hard time understanding what I read.
Thefinancialstudent,
That was my thought too, but I wasn't sure because I want to be debt free. A long way from there but at the same time in the last 2 years we have come a long way and this is the first time we have to make a choice on whether to save the money or continue down the path of knocking out the debt.
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I looked at my 401k, i currently have it being managed by the advisory service my work has provided. I can't remember what that fee was but, looking at my last statement my total expenses and fees were $48 for my $30k I have.
A management fee of 0.16% isn't terrible.
With that said it looks like the expense ratio of most of the funds they have me invested range from 0.42% to 1.17%. Most of them are around 0.8 to 1%. Do I understand the links correctly that the tax advantage of investing in my 401k with those fees outweigh investing in traditional roth or roth ira?
That is certainly possible - would need to know all the inputs/assumptions to say more, e.g., the ones used in the case study spreadsheet tool mentioned in http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/msg798884/#msg798884.
I know I still need to hit my goal of a $20k emergency fund first before I even can consider this but I'm just having a hard time understanding what I read.
Forum posts are not often used as models of lucid prose, so don't hesitate to ask for clarification. You may get people saying more or less the same thing but in different ways, and one of those ways will be more understandable than the others.
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Why not a Roth IRA for an Emergency Fund?
If your job is stable and you want a hefty Emergency Fund, just place your savings in a Roth with an appropriately conservative allocation like 50/50 or 40/60 to maximize growth while minimizing chance of loss.
As you already paid tax on the Roth contributions, if you need to tap into your Emergency Fund, simply withdrawal contributions (but not gains) as needed.