Author Topic: Windfall of cash: Student Loan or Rainy Day Fund?  (Read 5749 times)

Pixelshot

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Windfall of cash: Student Loan or Rainy Day Fund?
« on: April 28, 2013, 05:46:42 AM »
Hi all, newbie here, but glad to have the opportunity to pose a question. I'm really digging the MMM blog, reading it from first article on. Thanks in advance for anyone who takes the time to help me out.

My question: My wife and I live in DC. She works full time as an attorney and I watch our son during the week and freelance on the side as a video producer. My freelance gig has brought in some extra dough recently so I have about $25k saved in my business account - taxes paid. I also have about 60k in student loans at 6.25%. My current thinking is to take as much of that windfall of cash as is reasonable to put toward the loan.  The question is how much. (we have no other higher loans, use a paid-for car, rent apartment, bike to work, have good health insurance, etc)

One of my main considerations is how much to leave behind as a rainy day fund - none, some, most...? If "some" then how much is a good amount to have in a rainy day savings?  I already have about $6k in another account not doing much, and I'm able to save more every month to replenish the fund a bit at a time. I estimate my monthly average expenses can go as low as 3k in an emergency.

Any thoughts? advice?

Zaga

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #1 on: April 28, 2013, 07:27:02 AM »
I like to have $10K as a rainy day fund, that would last us 3 months or be enough to replace a roof or a car if needed, but not all of those at once.  I'm not super risk adverse, but I do think a minimal emergency fund like I have is necessary.

homeymomma

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #2 on: April 29, 2013, 06:37:22 AM »
I'm no expert, but I would put another 6K in your emergency fund to total 12K, which is 4 months of expenses for you. Then put the rest toward the loan. This is assuming that your wife has no emergency savings of her own, and that you take the burden on fully of maintaining that fund. If she also has emergency savings, I'd put more toward the loan.

MsSindy

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #3 on: April 29, 2013, 12:00:10 PM »
It all depends on what 'emergency' you think you are saving for and how quick would you need to get at the money.  As a renter, I couldn't think of anything you would need other than maybe $1k or so for car repairs.  Are either of your jobs in jeopardy that it would make sense to have 3 months of expenses sitting under your mattress?  You don't seem to have kids, so no emergencies there.  Only keep the amount of 'emergency' money available that you envision you would actually need.  In my mind, your Student Loan IS the emergency and should be treated as such - pay that sucker off!

I'm a homeowner and I don't have an emergency fund per se, I can handle any expense that would come up.  If true disaster should strike (job loss), I could always sell some of my holdings to tide us over, I don't need it sitting in my savings account. 

Reepekg

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #4 on: April 29, 2013, 12:15:45 PM »
It is raining. You have student loans. Pay those suckers off as much as you can.

To me, the phrase rainy day fund makes it sound like you have money sitting around for the day you wake up and decide what would really be awesome is to buy a hovercraft. But I suspect you're talking about an emergency fund, and like others say, you should be able to cover x months of expenses. This depends on what risks you face, but also what your risk tolerance is.

I have an unstable job, so I saved up $30k for an emergency fund like "you're supposed to." And then it sat earning 0.75% for 2 years while I comfortably paid my bills. I decided I'm more risk tolerant than that, so I made sure I had access to borrow $30k in an emergency and invested the cash in the meantime. I'm in a better financial situation today because of that action... my only point being the "right" amount to put towards your loan could conceivably be all of it, if you'd be comfortable with the risk.

Pixelshot

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #5 on: May 06, 2013, 09:30:59 AM »
The only factor (not mentioned) is that we may have another child someday (we have one), which will mean my wife taking off a couple of months of work (unpaid). Also, we may need a few business expenses in the next year or so (eg new computer, etc). Her job is very stable and we would have time to save extra for that, so I'm leaning toward putting most of the money toward the loan.  Thanks everyone for your suggestions!

CU Tiger

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #6 on: May 07, 2013, 11:41:51 PM »
It is raining. You have student loans. Pay those suckers off as much as you can.

This! You are paying more interest on those loans than your savings is making, unless you have the money in some magic fund that time travels back to the past of much higher interest rates.

Pay off the loans like your hair was on fire!

nktokyo

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #7 on: May 08, 2013, 05:12:27 AM »
It is raining. You have student loans. Pay those suckers off as much as you can.

+1

plainjane

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #8 on: May 08, 2013, 07:22:46 AM »
The only factor (not mentioned) is that we may have another child someday (we have one), which will mean my wife taking off a couple of months of work (unpaid).

You'll have some warning that another child is coming, and you'll have the opportunity then to tighten belts & go for more freelance work to prepare for that period.  Your loans are at a high rate.  Get rid of as much as you can.

Pixelshot

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #9 on: May 08, 2013, 07:36:25 AM »
Thanks. Very helpful.   Should I be holding back on our 401k contributions in order to move more money to the loans? I have always thought that 401k should come first.
« Last Edit: May 08, 2013, 07:58:48 AM by Pixelshot »

unpolloloco

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Re: Windfall of cash: Student Loan or Rainy Day Fund?
« Reply #10 on: May 08, 2013, 07:59:31 AM »
Thanks. Very helpful.   Should I be holding back on our 401k contributions? I have always thought that 401k should come first.

Depends: If there's an employer match, definitely contribute enough to get that.  Beyond that amount, do you expect to get >6.25% returns?  If it were me, I'd put excess towards loans at those rates.