Author Topic: Pay down student loans or more retirement accounts?  (Read 5796 times)

Peanut Butter

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Pay down student loans or more retirement accounts?
« on: September 01, 2013, 03:34:48 AM »
Background info: 28 year old female, single, cheap apartment dweller

I have a little more than 20k in student loans at a 4.5% interest rate. I am currently investing 10% (for maximum employer match) into my 403b account, with 2% more going into an additional employer account.

I have about 2k in my "emergency fund." I'm pretty comfortable with that amount for right now, I also have an Amazon credit card (paid off every month) where I could get 2k more immediately, in case of a DIRE emergency. I own a car, but I don't use it, it's permanently parked at my folks' place. I get everywhere by bicycle or by bus (my work gives out free bus passes for employees, score!)

I'm slowly working on whittling away at my spending. I currently bring home <30k/year, so my goal is to eventually get to where I'm saving/investing 30%-40% of my take-home pay.

My question is: Should I put my additional savings towards my student loans, or would I be better off investing it? Half and half? If investing it, what should I invest in? Roth IRA, Vanguard MF, Lending Club, or ???

matchewed

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Re: Pay down student loans or more retirement accounts?
« Reply #1 on: September 01, 2013, 04:16:45 AM »
As for whether you should invest the excess - if you feel you can get a higher return than the interest rate on your debt feel free to invest.

As for what vehicle you should invest in - it's up to you. A Roth IRA offers several benefits and would be my choice if I were in your shoes. Some of those benefits are things like - contributions can be withdrawn at any time and earnings/dividends are tax free as long as they are not withdrawn.

Another Reader

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Re: Pay down student loans or more retirement accounts?
« Reply #2 on: September 01, 2013, 09:42:31 AM »
Two things I would consider in your shoes.  First, I would fund the Roth IRA.  The opportunity to stash $5,500 in a tax free investment account for the future disappears each year you don't use it.  Second, I would consider selling the car.  It's not providing any utility sitting at your parents' house.  It's depreciating.  I would probably sell it and save or invest the proceeds.  Oh, yeah, one more thing.  Pay off those student loans as soon as you have covered the Roth.  Those are alligators and you don't want them snapping at your heels if you have a change in circumstances.

Peanut Butter

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Re: Pay down student loans or more retirement accounts?
« Reply #3 on: September 01, 2013, 11:20:55 AM »
I'm glad to hear that my instinct to go with the Roth IRA was a good one - I'm so new to financial stuff I'm only just starting to understand things when I read about the pros/cons of different investment vehicles.

I do want to sell the car. For some reason my folks are really hesitant about me selling it - I don't know why, since their place is a pleasant 20 mile spin on my road bike out to the country so I go to visit often without needing motorized wheels. It's a 1994 Nissan Sentra in only fair condition (it's the same car I bought in high school), I think I'd be lucky to get $800 for it. Hopefully by the end of the year I'll get rid of that boat anchor.

lentilman

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Re: Pay down student loans or more retirement accounts?
« Reply #4 on: September 01, 2013, 06:39:52 PM »
I would throw anything extra at the student loans until they are killed.  They are a beast, and you are never free if they are alive.

Dulcimina

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Re: Pay down student loans or more retirement accounts?
« Reply #5 on: September 01, 2013, 07:29:19 PM »

I do want to sell the car. For some reason my folks are really hesitant about me selling it - I don't know why, since their place is a pleasant 20 mile spin on my road bike out to the country so I go to visit often without needing motorized wheels. It's a 1994 Nissan Sentra in only fair condition (it's the same car I bought in high school), I think I'd be lucky to get $800 for it. Hopefully by the end of the year I'll get rid of that boat anchor.

Good idea.  It's not just the $800 that you might get; it's also the insurance, smog inspection, registration, maintenance that you won't be paying any more.

Peanut Butter

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Re: Pay down student loans or more retirement accounts?
« Reply #6 on: September 02, 2013, 02:54:21 AM »
Good idea.  It's not just the $800 that you might get; it's also the insurance, smog inspection, registration, maintenance that you won't be paying any more.

LOL that's what I keep telling mom - also, there's an Enteriprise car rental place LESS THAN 1 MILE from my apartment if I ever need to go someplace the train can't take me. But she gets all nervous whenever I talk about it, I think she's got this idea in her head that Nice, Middle Class people like us MUST have cars, otherwise we're no better than common plebeians.

It's like, mom, I've got a massively negative net worth because of my student loans, it's OK for me to live like a peasant.

Stache In Training

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Re: Pay down student loans or more retirement accounts?
« Reply #7 on: September 02, 2013, 10:56:16 AM »
Yes, sell the car.  I'd record what you're spending on the inspection, up keep, and everything, and put that extra money towards the principal on the student loans. And of course the 800 (or whatever you get on selling) towards that too.  Think of it this way, you're already used to spending that money, so just put it towards paying off the 4.5% drain (or 8% when you factor in inflation). By paying that off, it's almost like investing in a guaranteed 4.5% investment.  If your mom puts her foot down and says no, you have to keep a car; then say fine, but mom, you're buying it from me, and paying for the upkeep.  Then maybe she'll see why you need to sell it.  If she doesn't see it, well you've solved your problem either way.

I agree with going to the roth first. After that you can start saving/investing, as you'll now already be paying down the student loans faster with the money from the car. I'd recommend a bit larger emergency fund, as I doubt that 2k is 6 months of your living cost.  Open up an online savings account, as they offer the best interest rates right now, just so you are getting something (no matter how negligible) while you build up your emergency fund.  As for investing (after a bit larger emergency fund), the easiest and simplest strategy you'll find most people here give for when people say "hey I've got extra money, where should I put it?" without much more info, is in either the s&p 500 index fund (VFINX), or the total stock market fund (VTSMX), via Vanguard.  Once you get more money to play with, and more investing knowledge, you may want to try out other funds or avenues, but that's usually the consensus for the best places to start.

Peanut Butter

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Re: Pay down student loans or more retirement accounts?
« Reply #8 on: September 02, 2013, 06:01:43 PM »
StachInTraining - yes, I have a Capital One 360 account. $1000 is in that, and I put $50 into it every paycheck. I would need about $6k for 6 months worth of bare bones living expenses. ($3660 is 6 mos rent, I spend about $35/mo in electricity.) I'm very fortunate in that I've got my family and friends nearby who would take me in before I became homeless. Of course, I left the nest a long time ago, and moving back in with my folks would be a last resort, ha ha. My mom and I get along much better when we're not living together.

So, I went out to have lunch with my mom and stepdad today (I borrowed their SUV to carry my road bike to a triathlon last weekend) and I did a kind of end-run around her. I had been looking for pay-as-you-drive car insurance, but it's only available for newer cars that can be fitted with some sort of tracking device. The cheapest I've been able to find has been $200/6 mos for bare bones insurance. (Ridiculous - I've never even had a parking ticket) Anyways, I did sort of an end-run around her by going directly to my step dad and offering to give him a commission if he sells my car. He was enthusiastic about it, and pointed out that if I ever NEEDED a car, I could always come borrow one of theirs (they have four working vehicles - a pickup, two classic Cadillacs and the Explorer.) for the cost of returning it with a full tank. So that's going to be a big load off my shoulders soon.

Khan

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Re: Pay down student loans or more retirement accounts?
« Reply #9 on: September 02, 2013, 08:35:26 PM »
One of the other super-great things about a ROTH IRA is as a lower-paid employee, you currently pay relatively low taxes(as a % rate). So stashing away a couple thousand dollars in a tax free account, which will -never- get taxed, and currently paying a marginal rate somewhere around ~10-15%, is a great time to do it. Also, like they said, use it or lose it.

I'd up the amount that you -could- borrow on your credit card. 2k isn't a very large credit card buffer, mine is 5k, and a true emergency especially medical(****ing American healthcare system) could easily hit 10k(and do you really trust your insurance provider not to attempt to **** you?).

I'd also consider invest a couple thousand dollars outside of roth into a taxable investment account as an over-buffer above your credit card and savings accounts. ROTH principal has to sit for 5 years before it -can- be withdrawn, whereas money in a taxable investment account(say, vanguard) could be withdrawn at any time, for any reason, and it still avoids the problems of our current shitty interest rate environment and worthless savings accounts.

Stache In Training

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Re: Pay down student loans or more retirement accounts?
« Reply #10 on: September 02, 2013, 11:23:50 PM »
Awesome news on the car! Sounds like a great step-dad.  Glad he offered for to let you borrow their car. As long as you can still have access to a car, then that should keep your mom happy... and of course help you out in a pinch.

Go to a loan repayment calculator, and see what just the 33.33 extra dollars a month (200/6 months) from insurance will do to your student loans. Add in the extra from inspection and registration, and I think you're going to realize, with no change in lifestyle, how much quicker the student loans go down.  I paid just an extra 5 dollars a month on mine, and that alone took like a year of payments off.

Congrats, and good luck!

RhythmKats

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Re: Pay down student loans or more retirement accounts?
« Reply #11 on: September 05, 2013, 09:31:20 AM »
Not to get off topic, but Khanjar mentioned that ROTH PRINCIPAL has to sit for 5 years before it can be withdrawn. I'm pretty new to this as well, but I thought that principal/contributions could be withdrawn at any time from a ROTH. Rather it is EARNINGS that cannot be withdrawn without penalty and are subject to the 5 year rule.

Can anyone clarify?

matchewed

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Re: Pay down student loans or more retirement accounts?
« Reply #12 on: September 05, 2013, 11:03:01 AM »
Contributions can be withdrawn at any time. Earnings have 5 year and age restrictions. https://en.wikipedia.org/wiki/Comparison_of_401%28k%29_and_IRA_accounts

AlmostIndependent

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Re: Pay down student loans or more retirement accounts?
« Reply #13 on: September 06, 2013, 12:01:30 PM »
It sounds like you are well on your way to making you situation better. The car is a huge savings once it's gone, especially since you can borrow one for minimal cost if you need it. You can add me to the list of people who support funding a Roth IRA. It's one of the best things you can do for yourself. Given that you don't have any CC debt or other really crazy debt I say fund the Roth.