Investing vs. Student Debt

[InItForTheLongRun]

Hi All,

I'm new to the forum and hoping I can get some financial advice.

Background: I graduated from college in 2012 and have been working full time for a year and a half. I was never really taught the value of money and have gone through life spending unwisely. After evaluating my lifestyle, I decided it's time for some change. I still live with my parents and give them money every week to cover my monthly bills and any extra that's left over from the month they'll use towards groceries or other expenses. I want to start a Roth IRA and build my emergency fund, while trying to repay my student loans ASAP. Here's a breakdown of my financial situation:

Student Loan Debt: $26K @ 6.8%
Total Checking/Savings Balance: $8,000
No Credit Card Debt

Monthly Student Loan Payment:$1,000 (Well above the $400 minimum in order to get rid of ASAP)
Monthly Bills/Groceries: $1,000
Average Monthly Expenses: $900
Average Monthly Deposit into Savings: $400
I'm working on reducing monthly expenses by reducing unnecessary spending, but let's assume that I continue at this rate.

Emergency Fund: If I were to become unemployed, I'd reduce my student loan payments to the minimum of $400, which would make my monthly expenses $2,300. I know 6 months is a good standard for an emergency fund, but with my current savings, I can last 3 months. I want to start investing in a Roth IRA so I don't miss out on starting early to take advantage of the compounding interest and it gives me the convenience of withdrawing contributions without penalty.

Is this a good idea? If so, how much should I take from my average monthly savings deposit to put towards it?

Any and all feedback is greatly appreciated.

[JOHNFRANK]

This really depends on the rate of return you will get from investing. Starting a Roth IRA is a great idea, and any small contribution is worth is. I wrote a piece about this: http://www.bayzat.com/blog/do-i-use-my-savings-to-invest-or-pay-off-a-loan

Realistically, in today's market environment, you will be able to generate around the same interest rate you are paying on the student loan. So it is really a wash in your case!

[mrsggrowsveg]

Your story is very similar to mine.  I graduated in 2012 and had a total student debt of $40,000 @ 6.8% interest.  For me, I really wanted to get rid of that monthly burden and 6.8% interest is pretty good ROI.  I funneled all extra money into the loans and paid them off recently.  Now I have the freedom to invest a larger amount of money.

[shotgunwilly]

IMO, you should funnel all extra money into your student debt. That 6.8% is guaranteed.

[ScroogeMcDutch]

I second the pay off that student loan asap. Having a 6.8% guaranteed return on 'investment' is absolutely worth it, and it is also guaranteed to compound (until you pay it off of course :) )

Try to look at your situation as if your NW would now be 0 - would you pick the 6.8% guaranteed investment, or the risky volatile 8% investment?

[surfhb]

You need to list your income and monthly expenses

You live at home....there's little need for a large EF at this point. Stop putting money in your saving for now and don't investing a dime unless it's a 401k match.

Your main focus should be paying off that loan....can you swing $2000 a month?   Do not pass go and don't invest $200 until you have ALL debt gone.   With $2000 a month plus your $8000 you have, you'll be done right around the summer of 2015

[Terrestrial]

kill your student loan.  6.8% guaranteed is better than investing at this point.  if your parents are the accommodating sort (i.e. will give you a bit of leeway if you find yourself unexpectedly unemployed) keep 1 month of expenses in a savings account and immediately throw the entire rest of your savings account at the loan.  knock it out.

[RyeWhiskey]

Indeed. The rate on the loan is too high to ignore. Pay off the loan first.

[horsepoor]

Why are your expenses $1900 when you're living at home?  I know you're paying some room and board to your parents, which is great, but this seems high.  If you can continue living at home, put some of your current cash towards the SL, and cut expenses, those loans could be gone in a year if I'm understanding your numbers correctly and you're bringing $3,300 home each month.

[nereo]

Emergency Fund: If I were to become unemployed, I'd reduce my student loan payments to the minimum of $400, which would make my monthly expenses $2,300. I know 6 months is a good standard for an emergency fund, but with my current savings, I can last 3 months. I want to start investing in a Roth IRA so I don't miss out on starting early to take advantage of the compounding interest and it gives me the convenience of withdrawing contributions without penalty.

Fund your ROTH or accelerate your SL repayment.  In reality you can take either path and in the end you have a reasonable chance of winding up in the roughly the same place.  However, I'd side with others here and say that the safe play is to pay down your SL first, and THEN worry about funding an IRA.

Let's assume for a minute that long-term stock returns will about equal to your 6.8% returns.  If that's true, then your logic about 'missing out' on compounding is flawed.  Every gain you make in your IRA will be offset by the additional interest you pay in your SL. 
If, OTOH, you pay off your SL, you will suddenly have fewer monthly expenses (liabilities).  Your emergency fund (expressed in # of months it will last) will instantly go up.  With my calculations if you continue your $1k/month payments, you will pay off your student loans in 31 months (Jan 2017).  I suspect you can knock off another year though (see next paragraph)

Finally, agree with HorsePoor and others that your expenses seem wicked-high for a 20-something living at home. $1k for "groceries & bills"?  My wife and I (both 32) spend about $300 on food and about $175 on all other bills, including electricity, phone, garbage, and internet.  Where is that $1k going?  There's also a non-descript $900 for "expenses" - what is in that category?  I suspect there's at least $500/month you can shave from your budget and then really charge into your SL.