Let%26#039;s say someone is 2 years out of school and now makes 70K, but their college and grad school debt is 140K at 2.8% for 30 years. This person is not married, has no kids about 5K in credit card debt and is renting an aprtment at 600/month. Now after credit cards are paid off, should this person accelerate payments on their student loan or after paying high interest credit cards, should they buy a house, or save for retirement. This person is currently 30. This question came up because his student loan interest is so low, but he is woried about the total amount owed, but also wants to buy a house.
Personal finance question.. the next move?
I would NEVER prepay those student loans. After inflation, they%26#039;re almost interest-free. If you can deduct any of the interest, it%26#039;s almost like being paid to keep those loans. And the beauty of long-term debt is that you have fixed payments for 30 years. The true cost of those same dollars declines every year.
Absolutely pay down your high-rate revolving credit card debt first, before investing or doing anything else.
And once that%26#039;s gone, invest like crazy with the money you were spending on the cards.
Keep in mind too, those student loans are so low, that if you invested the same dollars monthly over time instead of paying it down, your balance would continue growing over the years at a rate that%26#039;s likely substantially higher than the 2.8% you%26#039;re paying.
$100 monthly at 8% over 30 years would get you $149K at the end of 30 years, for example, only putting in $36K.
Adding $100 monthly against your loan would take your loan from 360 months down to 283 months, and you%26#039;d have paid $191,600 in total. $51,600 in interest. Compared to $207,000 total, $77,000 in interest. Net savings of $25,400 in interest. Invest the $675/mo. you are now not paying for the remaining 77 months at the same 8%, and you%26#039;d have $67,600 at the end of that same 30 years.
In both examples, you will have paid the exact same amounts monthly over the exact same period. The difference between the two is in option #1, you also have $149,000 in the bank. Option #2, less than half that. In fact, $81,400 less!!!
Again, EXACT SAME DOLLARS. Just more in your bank account instead of the bank%26#039;s account.
Keep your housing expense as low as you can as long as you can, and just keep investing everything else you have.
Personal finance question.. the next move?
Tell him not to worry about paying off those student loans quickly- 2.8% is the best deal you%26#039;re ever going to get.
Definitely try to get rid of the high interest credit card debt. Instead, focus on obtaining a bit more equity to generate extra income- if you do it right, the benefits will far outweigh the cheap debt.
Personal finance question.. the next move?
Make the minimum payments on the debt at the lowest interest rate. Use the funds you have to buy your house. You won%26#039;t get a lower interest rate than student loans.
Personal finance question.. the next move?
buy a house before real estate prices go up, that way they will make more money on their investment in the long run, which will give them more money for retirement. i wouldn%26#039;t worry about paying off student loan too quick because interest is so low, unless it keeps them from qualifying for a house, but it shouldn%26#039;t
Personal finance question.. the next move?
The $5K credit card debt suggests that the person does not have much savings built up. It is recommended that you have at least 3 months worth of cash saved up in case of emergencies. Since the interest on the student loan is nearly at the same level as what you would earn in a money market fund, I wouldn%26#039;t worry too much about paying that off until the 3 months %26quot;parachute%26quot; is saved. Do pay off your credit card debt first as the high interest there is eating you alive!
After you have saved your emergency fund, then consider how to make more money (e-business? freelance writing?) because the outstanding debt is too high and will come back and hurt your ability to afford other things like houses, kids, etc.
Personal finance question.. the next move?
Your student loan interest is tax deductible, and your interest rate is very low. Those are two things I noticed right away in your question. Therefore, I would pay off the credit card immediately, then take the money you were spending on credit card payments and put half towards student loans, and focus more on saving.
You could start saving for retirement, and to buy a house. By investing in a Roth IRA or 401(k), you would have all your money in one place (for retirement and a down payment on a house), plus you can take up to $10,000 out of a Roth IRA (or traditional IRA, but not 401(k)) penalty free for a down payment on your first home.
As far as current market returns go, one of the lower risk investments (Money Market accounts)right now on average are earning over 4%. So you%26#039;re already coming out 1.2% ahead just putting money into a money market account, and you can always go riskier for your retirement money, given that you have time on your side to regain any losses. You%26#039;re still a young buckaroo.
Your apartment rent does not seem like it is too expensive, given your income. You didn%26#039;t say what part of the country you live in. There are a lot of areas though, that are experiencing a decline in real estate values. I would wait before buying a house, you could end up getting a bargain. And of course, once you buy a house, any interest you pay on that is tax deductible too.
Your future looks really bright. My only concern is given the amount of student loan debt you have, you may be hurting your ability to qualify for a good mortgage rate, so once the credit card is paid off, I really think you should put half towards your student loans and the other half towards savings, just to knock down your debt-to-income ratio a little.
Good luck!
Personal finance question.. the next move?
1. You should be saving for retirement now. At least enough to get your 401k match. Preferably more since you make plenty of money and your rent is cheap.
2. Second, be putting away at least a few hundred bucks a month in a high yield savings account (after you pay off your credit card debt). This can serve as savings for a home as well as a cushion for emergencies/unexpected expenses--you don%26#039;t want to run up credit card debt again if you want to go on vacation or have to fix your car.
3. Don%26#039;t worry about your student loan debt. Once you pay on time for 3 years they%26#039;ll lower your interest rate by another percentage point. You%26#039;ll soon be paying less than 2%--way below inflation. Just make your payments and stretch it out as long as you can. I know it feels weird to have all that debt hanging over you, but soon it%26#039;ll seem like nothing as you rack up tons more than that in retirement funds, savings, and home equity.
Personal finance question.. the next move?
I%26#039;m no finance wizard but if I am in his situation, I%26#039;d do the following:
1. pay off the credit cards - the higher the interests, the sooner they must be paid off.
2. do not pay all the cards all at once - when you%26#039;re buying a house, they will definitely review your credit and if you%26#039;re showing that you actually owe here and there, then that%26#039;s a plus for you - that means you%26#039;re okay to give credit to coz others had already done so.
3. I would pay the student loan at the time period allowed. take full advantage of that low interest...because of inflation, that%26#039;s gonna be near to nothing in the years to come so it will never impinge on your pocketbook.
It%26#039;s always best to consult a financial expert - not the kind you have to pay for - but a trusted friend maybe.
Personal finance question.. the next move?
I have placed this in the source box. There is a wealth of information there and a great free debt management software program. I bookmarked the site as I return to it often for the advice it offers. I hope this helps you.
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