Author Topic: Another "what should I do?" post...  (Read 7685 times)

Dirigo

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Another "what should I do?" post...
« on: June 27, 2013, 09:59:56 AM »
Sorry to add to the pile of these types of postings, but I'm looking to gather some opinions on how to invest some cash I've saved.

Facts:

  • 26 y/o
  • $65k/yr salary
  • $22k savings
  • Contribute 11% to 401(k)
  • $36k student loans @5-6% interest

I already pay more than the monthly minimum on my student loans and my employer contributes as well. I have no other debt. I contribute a healthy amount to my 401(k) (7% of salary, 4% by employer) and have about $22k in a savings account. My questions are in regards to how (and how much) I should invest? I'm considering keeping $15-20k in savings for an emergency fund and contributing everything else, including future savings, to a Vanguard VTSMX account. Opinions? Thoughts?


Thanks!

matchewed

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Re: Another "what should I do?" post...
« Reply #1 on: June 27, 2013, 10:04:51 AM »
Get full match if you're not already doing so.

Max Roth IRA (you can do one w/ Vanguard if you want there are other such as Fidelity and Charles Schwab which offer similarly priced index funds)

Max 401k

Rest into brokerage or whatever your particular plan is.

As far as how much should you invest - as much as your plan allows you to. You should probably have a plan.

You're starting great. Keep it up and you can't go wrong.

 :)

Senor Smallchange Soulpatch

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Re: Another "what should I do?" post...
« Reply #2 on: June 27, 2013, 10:24:06 AM »
Nuke those student loans.  How far you want to dip into your existing cash savings to accelerate this is a matter of personal preference (I'd argue $22k is unnecessarily large e-fund for a single 26y/o, but others will disagree I'm sure), but either way I'd eradicate the student loans before investing beyond what is necessary to maximize the employer match in your 401k.

Paying down the loans gives you a 5-6% risk free return, which is about 5-6% better than anything available in the market right now.

Dirigo

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Re: Another "what should I do?" post...
« Reply #3 on: June 27, 2013, 10:24:54 AM »
Get full match if you're not already doing so.

Max Roth IRA (you can do one w/ Vanguard if you want there are other such as Fidelity and Charles Schwab which offer similarly priced index funds)

Max 401k

Rest into brokerage or whatever your particular plan is.

As far as how much should you invest - as much as your plan allows you to. You should probably have a plan.

You're starting great. Keep it up and you can't go wrong.

 :)

Great advice. Thanks!

Dirigo

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Re: Another "what should I do?" post...
« Reply #4 on: June 27, 2013, 10:26:28 AM »
Nuke those student loans.  How far you want to dip into your existing cash savings to accelerate this is a matter of personal preference (I'd argue $22k is unnecessarily large e-fund for a single 26y/o, but others will disagree I'm sure), but either way I'd eradicate the student loans before investing beyond what is necessary to maximize the employer match in your 401k.

Paying down the loans gives you a 5-6% risk free return, which is about 5-6% better than anything available in the market right now.

That makes sense. The only argument I can come up with against that is the fact that my employer contributes ~5k per year to the loans, so if I were to pay them off super early, I might miss out on "free" money from them in that regard. What do you think?

matchewed

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Re: Another "what should I do?" post...
« Reply #5 on: June 27, 2013, 10:43:29 AM »
Nuke those student loans.  How far you want to dip into your existing cash savings to accelerate this is a matter of personal preference (I'd argue $22k is unnecessarily large e-fund for a single 26y/o, but others will disagree I'm sure), but either way I'd eradicate the student loans before investing beyond what is necessary to maximize the employer match in your 401k.

Paying down the loans gives you a 5-6% risk free return, which is about 5-6% better than anything available in the market right now.

Investing is a long term thing. While I agree that the loans should be paid off you can get more than 5-6% returns over the long term in a broad index fund (VTSMX shows 8-9% since inception even inflation adjusted it is still slightly higher than 5-6%).

Another Reader

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Re: Another "what should I do?" post...
« Reply #6 on: June 27, 2013, 10:47:42 AM »
The OP may or may not duplicate those returns.  The student loans are fixed and they carry risk.  In the OP's shoes, I would understand and take advantage of the employer's perk, but I would have some extra cash on hand in case the job disappeared or the perk was withdrawn. 

matchewed

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Re: Another "what should I do?" post...
« Reply #7 on: June 27, 2013, 11:05:38 AM »
That's a fair statement. You're right that I didn't include an emergency fund in my original statement and that anyone's plan should include an understanding on what to do if things go south.

I'll stand my original suggestion with a caveat that an emergency fund should be understood and started in the event job loss, and that as long as the employment with student loan aid is steady.

Rebecca Stapler

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Re: Another "what should I do?" post...
« Reply #8 on: June 27, 2013, 11:39:58 AM »

That makes sense. The only argument I can come up with against that is the fact that my employer contributes ~5k per year to the loans, so if I were to pay them off super early, I might miss out on "free" money from them in that regard. What do you think?

What is the $5k/year based on? Is it a percentage of your payments, or a total no matter how much you are paying?

If the latter, I recommend doing that you can to get your payments as close to $5k/year* as possible and going from there. Is it possible for them to recalculate your repayments after you've paid off some principal? (I don't know the answer, but hopefully your lender would) Or, if there is more than one loan, pay off enough so that all that is left are payments amounting to $5k/year.

You will be getting a little boost because you can then deduct up to $2k (or $2500?) of your paid SL interest on your taxes. However, that boost will be offset by the fact that you will owe taxes on the $5k bonus. In the end, you can crunch the numbers like this:
Total annual SL payments - $5k - tax deduction + taxes paid on $5k = annual cost of keeping the SLs

My guess is that you have very little net cost with keeping your SLs as long as you are matching your payments as closely as you can to that $5k/year.

Dirigo

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Re: Another "what should I do?" post...
« Reply #9 on: June 27, 2013, 12:12:24 PM »

That makes sense. The only argument I can come up with against that is the fact that my employer contributes ~5k per year to the loans, so if I were to pay them off super early, I might miss out on "free" money from them in that regard. What do you think?

What is the $5k/year based on? Is it a percentage of your payments, or a total no matter how much you are paying?

If the latter, I recommend doing that you can to get your payments as close to $5k/year* as possible and going from there. Is it possible for them to recalculate your repayments after you've paid off some principal? (I don't know the answer, but hopefully your lender would) Or, if there is more than one loan, pay off enough so that all that is left are payments amounting to $5k/year.

You will be getting a little boost because you can then deduct up to $2k (or $2500?) of your paid SL interest on your taxes. However, that boost will be offset by the fact that you will owe taxes on the $5k bonus. In the end, you can crunch the numbers like this:
Total annual SL payments - $5k - tax deduction + taxes paid on $5k = annual cost of keeping the SLs

My guess is that you have very little net cost with keeping your SLs as long as you are matching your payments as closely as you can to that $5k/year.

The reimbursement is $4600-$8500 depending on "fund availability", paid in a lump sum at the beginning of the year. I just started at the company so I haven't actually gotten this yet and so I don't know how much I will actually receive, if anything. I hadn't considered the extra taxes on the "bonus" as you mentioned, so I'll have to factor that in as well. Right now I pay $6100/yr and was planning on sticking to that and just adding the company payment on top until everything is paid.

Dirigo

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Re: Another "what should I do?" post...
« Reply #10 on: June 27, 2013, 12:13:47 PM »
That's a fair statement. You're right that I didn't include an emergency fund in my original statement and that anyone's plan should include an understanding on what to do if things go south.

I'll stand my original suggestion with a caveat that an emergency fund should be understood and started in the event job loss, and that as long as the employment with student loan aid is steady.

I agree with this and the other post--I do have an emergency fund set up and am planning to keep that at $15-20k. The only money I am considering investing is extra cash on top of that.

Rebecca Stapler

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Re: Another "what should I do?" post...
« Reply #11 on: June 27, 2013, 04:14:42 PM »

The reimbursement is $4600-$8500 depending on "fund availability", paid in a lump sum at the beginning of the year. I just started at the company so I haven't actually gotten this yet and so I don't know how much I will actually receive, if anything. I hadn't considered the extra taxes on the "bonus" as you mentioned, so I'll have to factor that in as well. Right now I pay $6100/yr and was planning on sticking to that and just adding the company payment on top until everything is paid.

OK. See what they give you in January and what that # is based on. You might find that it's not worth it, but if it's $6100 for your $6100/year payments, then that would be worth it IMO -- even taking into account the taxes you'll pay on it. If it does turn out to be worth it, I wouldn't necessarily pay the bonus to your SL servicer on top of your regular payments -- just keep to your regular payments and use the lump sum distribution towards your retirement goals. If you pay extra, then your loans will go away sooner and you won't be able to reap the benefit of the bonus as long.

aj_yooper

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Re: Another "what should I do?" post...
« Reply #12 on: June 28, 2013, 05:56:08 AM »
Way to go on the EF savings!  Practical feel good money. Yes.  Some people use I bonds for some of their EF.  see Bogleheads:  http://www.bogleheads.org/wiki/Emergency_fund and for the I bonds:  http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

You have an interesting twist with an employer assist on student loans. It gives an incentive to keep loans for a while when, ordinarily, we would encourage you to zap them quickly.  Regarding future investments, if your goal is FI, then putting your next money in a Roth IRA is a frequent good choice.  Some also think of some of the Roth as a variant on the EF, as you may withdraw the principal without penalty.  Bogleheads talks about that strategy.  If you are not as committed to FI, then maxing out the 401k has tax advantages (25%, in your situation), which are hard to beat. 


Dirigo

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Re: Another "what should I do?" post...
« Reply #13 on: June 28, 2013, 08:43:02 AM »
Way to go on the EF savings!  Practical feel good money. Yes.  Some people use I bonds for some of their EF.  see Bogleheads:  http://www.bogleheads.org/wiki/Emergency_fund and for the I bonds:  http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

You have an interesting twist with an employer assist on student loans. It gives an incentive to keep loans for a while when, ordinarily, we would encourage you to zap them quickly.  Regarding future investments, if your goal is FI, then putting your next money in a Roth IRA is a frequent good choice.  Some also think of some of the Roth as a variant on the EF, as you may withdraw the principal without penalty.  Bogleheads talks about that strategy.  If you are not as committed to FI, then maxing out the 401k has tax advantages (25%, in your situation), which are hard to beat.

This aligns with my thinking--why rush to get the loans paid off when, essentially, my employer will pay them off for me in a matter of 5-7 years (assuming I get the benefit each year, which isn't guaranteed)? I have since opened a Roth IRA with Vanguard and maxed the year's contributions, so I think I will look more closely into the I bonds route. Thanks for the info!

Dirigo

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Re: Another "what should I do?" post...
« Reply #14 on: July 08, 2013, 10:19:41 AM »
Way to go on the EF savings!  Practical feel good money. Yes.  Some people use I bonds for some of their EF.  see Bogleheads:  http://www.bogleheads.org/wiki/Emergency_fund and for the I bonds:  http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

You have an interesting twist with an employer assist on student loans. It gives an incentive to keep loans for a while when, ordinarily, we would encourage you to zap them quickly.  Regarding future investments, if your goal is FI, then putting your next money in a Roth IRA is a frequent good choice.  Some also think of some of the Roth as a variant on the EF, as you may withdraw the principal without penalty.  Bogleheads talks about that strategy.  If you are not as committed to FI, then maxing out the 401k has tax advantages (25%, in your situation), which are hard to beat.

I'm re-reading the advice here (because it's great!) and was wondering if you could explain the 25% tax advantage from maxing out my 401(k)? It is simply because I will have less taxable income and therefore a lower rate?

matchewed

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Re: Another "what should I do?" post...
« Reply #15 on: July 08, 2013, 10:42:03 AM »
Yeah if you max your 401k contributions (17.5k) that is about 25% of your income that will not be taxed.

Dirigo

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Re: Another "what should I do?" post...
« Reply #16 on: July 08, 2013, 10:43:09 AM »
Yeah if you max your 401k contributions (17.5k) that is about 25% of your income that will not be taxed.

Got it. Thanks!

fiskeb

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Re: Another "what should I do?" post...
« Reply #17 on: July 08, 2013, 06:21:58 PM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!! 


matchewed

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Re: Another "what should I do?" post...
« Reply #18 on: July 08, 2013, 06:29:46 PM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!!

I'm as anti-debt as the next (mustachian) dude but in this case the OP can take advantage of his employer helping pay off his student loans and then use the remaining money to start investing. Paying the student loans ASAP would be suboptimal in a financial sense. Fear based advice is kinda silly.

fiskeb

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Re: Another "what should I do?" post...
« Reply #19 on: July 08, 2013, 08:02:22 PM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!!

I'm as anti-debt as the next (mustachian) dude but in this case the OP can take advantage of his employer helping pay off his student loans and then use the remaining money to start investing. Paying the student loans ASAP would be suboptimal in a financial sense. Fear based advice is kinda silly.

We'll agree to disagree.  I wouldn't keep a $36k debt to the government around another 6-7 years if I could pay it off real quick. Too much can happen in that length of time.  Your math only works if life stays hunky dory for the next 6-7 years.  It's not fear, but protecting yourself, and knowing things don't always go as planned.  It's a great scheme if all goes well, but too often it doesn't.  Though I think in the event of disability this gets forgiven, is that correct???  Wouldn't want to wake up tomorrow with no job, a $36k debt, and a disability check.

matchewed

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Re: Another "what should I do?" post...
« Reply #20 on: July 08, 2013, 08:46:49 PM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!!

I'm as anti-debt as the next (mustachian) dude but in this case the OP can take advantage of his employer helping pay off his student loans and then use the remaining money to start investing. Paying the student loans ASAP would be suboptimal in a financial sense. Fear based advice is kinda silly.

We'll agree to disagree.  I wouldn't keep a $36k debt to the government around another 6-7 years if I could pay it off real quick. Too much can happen in that length of time.  Your math only works if life stays hunky dory for the next 6-7 years.  It's not fear, but protecting yourself, and knowing things don't always go as planned.  It's a great scheme if all goes well, but too often it doesn't.  Though I think in the event of disability this gets forgiven, is that correct???  Wouldn't want to wake up tomorrow with no job, a $36k debt, and a disability check.

It's fine if you disagree, I can see that you do. But saying things such as "It's a great scheme if all goes well, but too often it doesn't." is just fear mongering. Sure things happen to everyone but "too often" people persevere. You can disagree and say you're conservative enough to not trust that the government won't come looking for their money (hint they won't as the government debt held in student loans which is in threat of not being paid is a drop in the bucket regardless of the bubble talk http://www.asa.org/policy/resources/stats/ ).

What you can't disagree with is that it is still mathematically optimal to pay the minimum on the student loans to get the employer contribution and then invest the rest. Your worst case scenario leaves the OP holding the bag for loans which his/her employer has helped pay off a portion, a lower tax bill, and money for the future. That seems like a pretty damn good worst case scenario regardless of your boogie man talk.

Rebecca Stapler

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Re: Another "what should I do?" post...
« Reply #21 on: July 09, 2013, 10:04:04 AM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!!

I'm as anti-debt as the next (mustachian) dude but in this case the OP can take advantage of his employer helping pay off his student loans and then use the remaining money to start investing. Paying the student loans ASAP would be suboptimal in a financial sense. Fear based advice is kinda silly.

Although I usually think SLs should be vaporized, I agree with keeping the loans while the employer pays off part of them. We participate in a SL repayment assistance program, which requires that it's kept open and the payments are high, but in the end we're really only paying 10% of the monthly payments and still able to deduct a portion of the interest from our taxes. Sure, hanging onto the debt is not ideal if my spouse is laid off, but the payments can be adjusted based on our income.

Dirigo

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Re: Another "what should I do?" post...
« Reply #22 on: July 11, 2013, 10:38:42 AM »
VAPORIZE the student loans with everything you have, especially if they are government loans.  You don't want to owe money to the federal government.  Nobody has more power as a creditor to screw up your life than the government, and they are merciless when they want their money and don't even have to tell you before the take it. 

If things go south, student loans don't even go away through bankruptcy!!!

I'm as anti-debt as the next (mustachian) dude but in this case the OP can take advantage of his employer helping pay off his student loans and then use the remaining money to start investing. Paying the student loans ASAP would be suboptimal in a financial sense. Fear based advice is kinda silly.

We'll agree to disagree.  I wouldn't keep a $36k debt to the government around another 6-7 years if I could pay it off real quick. Too much can happen in that length of time.  Your math only works if life stays hunky dory for the next 6-7 years.  It's not fear, but protecting yourself, and knowing things don't always go as planned.  It's a great scheme if all goes well, but too often it doesn't.  Though I think in the event of disability this gets forgiven, is that correct???  Wouldn't want to wake up tomorrow with no job, a $36k debt, and a disability check.

It's fine if you disagree, I can see that you do. But saying things such as "It's a great scheme if all goes well, but too often it doesn't." is just fear mongering. Sure things happen to everyone but "too often" people persevere. You can disagree and say you're conservative enough to not trust that the government won't come looking for their money (hint they won't as the government debt held in student loans which is in threat of not being paid is a drop in the bucket regardless of the bubble talk http://www.asa.org/policy/resources/stats/ ).

What you can't disagree with is that it is still mathematically optimal to pay the minimum on the student loans to get the employer contribution and then invest the rest. Your worst case scenario leaves the OP holding the bag for loans which his/her employer has helped pay off a portion, a lower tax bill, and money for the future. That seems like a pretty damn good worst case scenario regardless of your boogie man talk.

Thanks for all the great dialogue here, guys. It's good to know both sides of the argument since there are benefits to each. For now, I'm going to keep my loan payments as they are (which are already close to double the minimum payment) and see what happens with the SLRP program. If for some reason that falls through, I'll dump any extra cash into paying those off.