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Old 02-08-2012, 04:00 PM
 
Location: Frisco, TX
459 posts, read 1,739,734 times
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hi there.

I am a recent college graduate. I was unemployed for 3 or so months, so I racked up a bit of credit card debt between books for school and paying bills to get by while unemployed.

I recently paid off completely one of my two cards. My other card has since been paid down in the past 3-4 months from 2300 down to 1500.

My goal is to pay this card all the way down to 500 and my parents will pay the rest as it was an expense for my graduation gift.

However I'm really struggling with the best option for me in saving money vs. paying off debt. More specifically student loan debt - I know I can write off the interest.

I would really like to capitalize on having very low expenses (I pay 250 month to live in parents condo, no car payment) and try and make good strides in paying off as much of this as I can (I have around 40k in student loan debt - the loans vary - 5k with no interest, the rest is with a 4.5-7% rate).

To put in perspective, I have around $1700 already stored in savings. Taxes for the yr are already paid! I will also be coming on full time (I work as independent contractor right now) for my company soon and will be receiving access to 401K.


Any advice would be much appreciated!
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Old 02-08-2012, 04:36 PM
 
Location: Wilkinsburg
1,657 posts, read 2,679,687 times
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$1700 saved, $1800 ($2300-$500) CC debt to pay down, $40k student loans, right?

The credit card debt is really not too bad as long as you're working towards paying it off. If your expenses are low, and you've indicated that they are, then you should first pay off the credit card debt as fast as possible.

After you've eliminated the CC debt, which should only take a few months, start building up your emergency fund. Try to save enough cash to cover 8-12 months of expenses.

When you reach the point at which you have no CC debt and a healthy emergency fund, start funding your tax-differed retirement plans. (Actually, if you have access to a 401k match, I would start contributing an amount large enough to qualify for the full match as soon as possible).

Finally, then, once you have no CC debt, a healthy emergency fund, and are taking full advantage of all your retirement-saving options, start accelerating your student loan payments.
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Old 02-08-2012, 04:40 PM
 
Location: Boise, ID
8,046 posts, read 28,371,687 times
Reputation: 9470
Here is my story, so you can compare to what I chose to do.

I didn't have access to a 401k for myself or my husband until 2 years ago (I'm 33), and I had debt, so I ignored the opportunity to put money into an IRA/Roth IRA.

We got married right out of college, and our debt was his student loan (about $30k at low interest rates, sub 4%), a car payment (about $12000 at around 8%), a small credit card bill (about $4000 at 0% for the first year, then at around 12%).

So l chose to pay off the credit card, and the car instead of saving much at all, since those interest rates were fairly high. Then my husband lost his job, and was out of work for a year. We survived on my income, by cutting any costs we could and going through what savings we did have. At the time, I wished I had saved more in an emergency fund instead.

However, in the long run, in my case, because of timing of market conditions, paying down debt instead of investing 10 years ago turned out to be a wise choice, as I see others around me who have lost 30% or more of their portfolio. But I think the market is at a low right now, rather than a high (some may not agree, and it may not be THE low, but I expect it will rise more than it will fall in the next 30 years). Therefore, if I were in your position today and had it to do over again, I would do it this way

1. Fully fund either an IRA or Roth IRA every year.
2. Put enough into a 401k to get the full benefit of a company match. If no company match was available, make sure that between the IRA and 401k, I was saving at least 15% of my gross income.
3. Save up at least 6 months worth of expenses (for you that isn't very much right now)
4. Pay off debt with anything I had left. I would probably still have gone after my 12% cc debt before saving up an emergency fund. Fortunately, you don't have any with interest that high, so that is a good start already.

I would start with your highest interest rate loan and put every leftover penny you get against it. Get a birthday gift, put it against the loan. Get a raise or bonus, put it against the loan. When you pay off the first one, take that freed up money and move to the next highest rate.

If you have one that truly has no interest forever and it isn't from a family member, milk it as long as you can. Pay the absolute minimum payment you can get away with and use the money for other things.

The only other thing I can think of is whether you are going to want a car or a place that isn't your parents at some point soon. You might make a separate fund and put $50-$100/month into it to start working toward that goal. Obviously when you have higher expenses, your contributions to paying down debt may have to slow down, but by then, maybe you could get one or two paid off completely. But you want to make sure you have enough in savings to do what you need to do without having to use a credit card. You don't want to pay off a 5% interest rate loan only to have to charge $2000 on a 12% credit card because you ran out of savings.

It is important to remember that it isn't an "all or nothing" process. You can be investing some, saving some, and using some to pay down debt, all at the same time.
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Old 02-08-2012, 09:41 PM
 
643 posts, read 2,377,019 times
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It makes sense to invest in a 401(k) at least up to the matching limit from the company. The match is basically free money so get it if you can.

When it comes to paying off loans vs savings, consider that the true loan cost is interest minus what interest you could get if you paid of the loan. For example, if you have a 12% credit card loan but could get 2% if you put it in a CD, you're paying about 10% interest on the loan. If you could get 20% on that money instead, its cheaper to keep the loan.

Having an emergency funds of 6-12 months expenses is a great feeling. It gives you options you may not otherwise have. Keep it as some kind of cash so if the market tumbles you don't lose your emergency fund.

It probably makes sense to build up your emergency fund before paying down low interest student loans and also establish savings for future expenses. For example you may need to buy a car or move for your job which would take moving expenses and up to two months rent for security deposit. By paying off your student loans too soon you lose flexibility.
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Old 02-09-2012, 12:39 AM
 
Location: Summerville, SC
3,382 posts, read 8,612,460 times
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Put something in the 401k, not matter how stupid or little. Just get it going and add to it randomly, maybe every time you get a raise.

I would pay down credit car debt, save a little bit more, and try to pay down student loan debt.



Just something to add about student loan debt and tax deductable, the max deductions is $2500 in interest only.

My wife and I paid ~$7k in interest last year, only got to deduct $2500
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Old 02-09-2012, 09:00 AM
 
Location: West Orange, NJ
12,546 posts, read 21,338,493 times
Reputation: 3730
Quote:
Originally Posted by ML North View Post
$1700 saved, $1800 ($2300-$500) CC debt to pay down, $40k student loans, right?

The credit card debt is really not too bad as long as you're working towards paying it off. If your expenses are low, and you've indicated that they are, then you should first pay off the credit card debt as fast as possible.

After you've eliminated the CC debt, which should only take a few months, start building up your emergency fund. Try to save enough cash to cover 8-12 months of expenses.

When you reach the point at which you have no CC debt and a healthy emergency fund, start funding your tax-differed retirement plans. (Actually, if you have access to a 401k match, I would start contributing an amount large enough to qualify for the full match as soon as possible).

Finally, then, once you have no CC debt, a healthy emergency fund, and are taking full advantage of all your retirement-saving options, start accelerating your student loan payments.
I disagree with this in the OPs case, because of the higher rates on the debt.

1. Eliminate CC debt
2. Take some portion of the payment towards CC debt, and begin an emergency fund, take the rest, and put it on your 7% student loan. Build up 3-6 months in the emergency fund (parents' condo....if you got in trouble, would you be able to skip rent for a few months, or is it fixed?).

At the same time this is going on, contribute to 401k up to the amount you get company match. Don't leave free money on the table.

I would continue with extra payments on student loans until you only had loans lower than 5%. That's my personal threshold on interest I'd pay.
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Old 02-09-2012, 01:18 PM
 
Location: Frisco, TX
459 posts, read 1,739,734 times
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Quote:
Originally Posted by bradykp View Post
I disagree with this in the OPs case, because of the higher rates on the debt.

1. Eliminate CC debt
2. Take some portion of the payment towards CC debt, and begin an emergency fund, take the rest, and put it on your 7% student loan. Build up 3-6 months in the emergency fund (parents' condo....if you got in trouble, would you be able to skip rent for a few months, or is it fixed?).

At the same time this is going on, contribute to 401k up to the amount you get company match. Don't leave free money on the table.

I would continue with extra payments on student loans until you only had loans lower than 5%. That's my personal threshold on interest I'd pay.
Right. I'm debating on whether or not it would be a good idea to take some of what is in my savings and put it towards that CC debt. The current plan that I have in place is paying $200 a month. I thought that would be a good course of action as technically I'm making good progress on paying it off, but also building up a good savings fund.

I guess in my case, since if I did get into trouble, my parents have told me they would help with expenses. As it stands, all that I pay for living arrangements is our HOA dues + my utility bill. Both on average I pay 250-275 a month which is an absolute steal in the rent department...

I don't know if given above, if I should just take some of what is in my savings already and put it toward the CC debt. I will say that just in the 6 months that I have been working, I've already paid off 1.5k in CC debt.

My savings is probably a little bit more than 1.7k, I could probably easily stuff a thousand more from my checking account there. I just try and have a bit of a buffer in my checking account as I like to pay most of my bills at the beginning of the month so I don't have to worry about it. But I am saving on average around 800 a month right now after all of my bills and expenses.
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Old 02-09-2012, 04:46 PM
 
643 posts, read 2,377,019 times
Reputation: 535
It really doesn't matter where you keep your emergency fund, though it helps to keep it in the highest interest account possible. Some people use multiple savings accounts to budget things like holiday gift savings, vacation savings or a new computer, while other people keep it all in one account and use a spreadsheet to keep track.

I like to keep a few grand in the checking account as a buffer as well, but my monthly expenses are a lot higher than $275.

It sounds like you have about $2,700 between your checking & savings which is about 10 months of expenses? And about $1,500 on your CC ? I would just pay off the CC now which would leave you with about $1,200. That's still 4 months of expenses so you aren't living paycheck to paycheck.

Then I would run up my emergency fund again, and once its back to a higher amount, you can focus on your student loans.

Student loan debt is a fixed amount that won't increase unless you go back to school. You also can't "get back" any of the extra savings you piled into it. Credit card debt is higher interest, but in a pinch you can borrow money from it.

I think it makes sense to have an savings of $5-10K before you start focusing on student loans. If you need to leave your parents house for some reason, you will need moving expenses, and possibly furniture or a new car. Its way better to have the cash for that than try to put it on a credit card.
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Old 02-09-2012, 05:19 PM
 
Location: Boise, ID
8,046 posts, read 28,371,687 times
Reputation: 9470
Quote:
Originally Posted by stargirl007 View Post
My savings is probably a little bit more than 1.7k, I could probably easily stuff a thousand more from my checking account there. I just try and have a bit of a buffer in my checking account as I like to pay most of my bills at the beginning of the month so I don't have to worry about it. But I am saving on average around 800 a month right now after all of my bills and expenses.
In that case, I personally agree with everything md said, I would go ahead and pay off the ($1000? $1500 left - the $500 your parents will pay for you) you have left to pay on your card. Sounds like that would still leave you ok for emergency funds. If you have $2700-$3000 between your checking and savings, that is almost a year's worth of rent (maybe 6 months worth of total expenses? You didn't say what your minimums are, but most student loans can usually be deferred in a crisis, anyway), so using 1/3 of that won't break the bank. Especially since you have mom and dad to fall back on in case of dire emergency.

I wouldn't bother saving $800/month while you have the credit card bill. Pay that puppy off, then go back to saving that much for a couple of months, then hit the 7% student loan. If you aren't comfortable writing that check this month, then just don't add $800 to savings next month, you could pretty much pay off your share without depleting your savings at all and be done in 1 month, while still keeping a full year's worth of your current expenses.

I actually wasn't even including the CC in my prior post since you were so close to paying it off, I just assumed it was going to go away very soon, and just skipped past it.
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