Money questions: student loans vs. 401k/IRA

[Mo0o]

Soon I'll be earning a real salary like most working adults and I need some money advice. I have a lot of student loans at 6.8% interest. Is it better to pay that off asap or should I still follow the conventional wisdom maxing out 401k/ira allocation with company match etc.

Also, what's the appropriate size for emergency funds assuming I know my wife and I will not be fired in the next 4 years.

 

[silverpig]

6.8% is pretty low interest, so pay them off as slowly as you can. If you're getting a higher return elsewhere, put that money elsewhere.

It'd be nice to have say $10k sitting in a savings account that you can access in a few days (sort of like an ING account or something similar). Basically you want to be able to service any foreseeable emergency without having to worry.

If you're guaranteed to not lose your job, then having enough to buy a new transmission for your car, to fix a hole in your roof, and to fly across the country for a week for a funeral is a good place to start.

 

[Mo0o]

6.8% is pretty low interest, so pay them off as slowly as you can. If you're getting a higher return elsewhere, put that money elsewhere.

It'd be nice to have say $10k sitting in a savings account that you can access in a few days (sort of like an ING account or something similar). Basically you want to be able to service any foreseeable emergency without having to worry.

If you're guaranteed to not lose your job, then having enough to buy a new transmission for your car, to fix a hole in your roof, and to fly across the country for a week for a funeral is a good place to start.

What are some good, low risk, places to put my money that could be higher than 6.8% return?

Sorry, I'm retarded about making my money work for me.

 

[jteef]

6.8 sounds high for student loans.. I'm paying about 2.7%. There aren't many reliable investments that will match 6.8% today unless you spend your workday finding them.

 

[dullard]

The appropriate size of an emergency fund depends on your insurances. If you can't cover an insurnace deductible in an emergency, then you don't have enough savings. If your deductible is low, then you are wasting money paying the insurance company a ton of money each month.

The sweet spot tends to be about a $2000 deductible for health insurance, homeowners insurance, etc. That $2000 also happens to match what it would cost to get a running car if yours is wrecked, to replace an engine or transmission if it breaks, to replace a broken furnace, etc. So, I like to tell people to get $2000 in an emergency account. If your emergency is bigger than that, then you have a big lack of insurnace policies that should be corrected. No emergency should cost much more.

Of course, that is just a starting point. You can have more than $2000. But the majority of people will never even reach $2000, it is silly to recommend more than they will ever have. Plus, once you go much over $2000 you just have money earning next to nothing when you could be paying off much bigger loans.

Once you get $2000, get yourself a safety net. Build up some leeway so you can borrow money if you really need it. That means paying off debt and eventually building wealth. I'd rather have $10,000 in investments earning 8% interest and get a $10,000 loan against it if a rare situation comes up than have $10,000 sitting idle at 1% or less in a bank just in case something that probably will never happen actually happens.

 

[Mo0o]

The appropriate size of an emergency fund depends on your insurances. If you can't cover an insurnace deductible in an emergency, then you don't have enough savings. If your deductible is low, then you are wasting money paying the insurance company a ton of money each month.

The sweet spot tends to be about a $2000 deductible for health insurance, homeowners insurance, etc. That $2000 also happens to match what it would cost to get a running car if yours is wrecked, to replace an engine or transmission if it breaks, to replace a broken furnace, etc. So, I like to tell people to get $2000 in an emergency account. If your emergency is bigger than that, then you have a big lack of insurnace policies that should be corrected. No emergency should cost much more.

Of course, that is just a starting point. You can have more than $2000. But the majority of people will never even reach $2000, it is silly to recommend more than they will ever have. Plus, once you go much over $2000 you just have money earning next to nothing when you could be paying off much bigger loans.

Once you get $2000, get yourself a safety net. Build up some leeway so you can borrow money if you really need it. That means paying off debt and eventually building wealth. I'd rather have $10,000 in investments earning 8% interest and get a $10,000 loan against it if a rare situation comes up than have $10,000 sitting idle at 1% or less in a bank just in case something that probably will never happen actually happens.

Hmm so going forward from where I am, my wife and I will have about 300k in student loans. We currently have ~50k in our bank accounts on account of previous savings and wedding gift money. Our combined salaries for the next ~7 years will go from about 90K combined to ~140k combined. At which point I would expect it to go to ~400k-500k depending on the healthcare compensation system.

In the very short term, would you suggest I
1. Put away at least $2000 for emergency.
2. Max out my 401k/IRA each month
3. Choose insurance options with a high deductible (we will likely be doing renter's and health. We wont have cars in NYC and we dont have dependents to need life insurance)
4. Use the rest of the money to pay off the loans or find an investment vehicle that gets higher than 6.8% (which seems difficulty to do)

 

[dullard]

As for the student loans, 6.8% is a bit high. It might be tax deductible, meaning your net cost is closer to 5%. But still it is high. For every dollar you use to pay that down, you'll be GUARANTEED to save that 5% year after year. Nothing else that pays 5% is even remotely safe or guaranteed. So, I'd pay it down with extra cash.

But, first, focus on retirement. Why? If you don't do it now, when will you do it? You'll always have excuses to put it off. Plus, you might get a company match. Plus, you are likely to earn more than 6.8% over the long haul in stocks. Plus postponing taxes for 40+ years and/or never paying taxes on gains is a very powerful way to save money.

So my plan would be in order of priority:
1) $2000 in emergency funds.
2) Pay the 401k up until you maximize the company match.
3) Maximize your IRA/Roth IRA if you can (depends on salary).
4) Have some fun, you earned the money. But don't blow it all needlessly.
5) Pay off student loans
6) Save for a house if you want one.
7) Finish the rest of your 401k.
8) Blow the rest on fun.

Do the stuff on top. Keep going down until you run out of money.

 

[Mo0o]

Awesome. Thanks for the advice.

 

[dullard]

Awesome. Thanks for the advice.

You are welcome.

Remember though, no job is guaranteed for four years. You could be disabled. It may be better to save a bit more for that situation than have disability insurance, or it may be better to have the insurance. Just something to think about.

Also, sounds like you are in the a good position, on a path to eventually make a lot (I assume that is when you get to be a health care specialist of some kind to make that money?). As the years go by, and you eventually reach that salary, you'll need a new plan. I didn't cover non-retirement investment accounts in that list. But, you might want to consider that once you paid off your loans.

 

[Mo0o]

You are welcome.

Remember though, no job is guaranteed for four years. You could be disabled. It may be better to save a bit more for that situation than have disability insurance, or it may be better to have the insurance. Just something to think about.

Also, sounds like you are in the a good position, on a path to eventually make a lot (I assume that is when you get to be a health care specialist of some kind to make that money?). As the years go by, and you eventually reach that salary, you'll need a new plan. I didn't cover non-retirement investment accounts in that list. But, you might want to consider that once you paid off your loans.

Yeah I think we'll get a financial consultant once we start making a lot of money. In terms of disability, I think i might go for disability insurance just because my projected income will be pretty good and I dont do anything dangerous.

Saving up for a downpayment on a house will be tricky to figure out given the student loans hanging over our heads. Not sure how much to allocate to a downpayment fund and how much to use to pay off loans. We probably wont buy in the next 7 years because our residencies will take 4 and then theres a relocation for fellowship for another 3 years before we finally go somewhere more permanent.

Maybe I should just put all my money into lotto tickets and hope for teh best

 

[KnickNut3]

As for the student loans, 6.8% is a bit high. It might be tax deductible, meaning your net cost is closer to 5%. But still it is high. For every dollar you use to pay that down, you'll be GUARANTEED to save that 5% year after year. Nothing else that pays 5% is even remotely safe or guaranteed. So, I'd pay it down with extra cash.

But, first, focus on retirement. Why? If you don't do it now, when will you do it? You'll always have excuses to put it off. Plus, you might get a company match. Plus, you are likely to earn more than 6.8% over the long haul in stocks. Plus postponing taxes for 40+ years and/or never paying taxes on gains is a very powerful way to save money.

So my plan would be in order of priority:
1) $2000 in emergency funds.
2) Pay the 401k up until you maximize the company match.
3) Maximize your IRA/Roth IRA if you can (depends on salary).
4) Have some fun, you earned the money. But don't blow it all needlessly.
5) Pay off student loans
6) Save for a house if you want one.
7) Finish the rest of your 401k.
8) Blow the rest on fun.

Do the stuff on top. Keep going down until you run out of money.

This. The company match is an instant 100% return, so don't miss out on that. I'd even say pay off the student loans before the IRA, but that's debatable. The rest of the priorities seem reasonable. Though I wouldn't blow every penny not in a 401k/IRA. Build your liquid wealth as well for cars/children and their college/etc.

 

[sciencewhiz]

Yeah I think we'll get a financial consultant once we start making a lot of money. In terms of disability, I think i might go for disability insurance just because my projected income will be pretty good and I dont do anything dangerous.

Saving up for a downpayment on a house will be tricky to figure out given the student loans hanging over our heads. Not sure how much to allocate to a downpayment fund and how much to use to pay off loans. We probably wont buy in the next 7 years because our residencies will take 4 and then theres a relocation for fellowship for another 3 years before we finally go somewhere more permanent.

300k in student loans on a 30 year repayment schedule is around 24k a year. With only 90k in annual income you have a debt ratio of 26%. That leaves very little for a house payment. Thus, paying down the loan would be higher on my priority list then saving for a downpayment.

How much money is left in your budget after paying obligations?

 

[DCal430]

Instead of paying it down I would look into consolidating or refinancing it into a decent rate.

 

[Whisper]

300k in student loans on a 30 year repayment schedule is around 24k a year. With only 90k in annual income you have a debt ratio of 26%. That leaves very little for a house payment. Thus, paying down the loan would be higher on my priority list then saving for a downpayment.

How much money is left in your budget after paying obligations?

The ~90k to ~140k to ~400-500k jumps in combined income would lead me to believe these numbers reflect medical residency, post-doc and eventual practice salaries; would also explain the $300k in student loans. Thus, the house down payment would likely become a much more realistic option in a few years.

I'm no finance wiz (in grad school myself, and they don't pay us enough to save anything), but while in residency, if you have an employer option for 401k matching, I say focus on that first (after setting aside an emergency fund).

 

[Mo0o]

Instead of paying it down I would look into consolidating or refinancing it into a decent rate.

We'll look into it but one of teh advantages of the current fed loans we have is that there is a Income-Contigent Repayment option that sets your monthly repayment based on your annual salary. That prevents us from being up shitcreek with monthly loan payments that are too much to bear. I'm not sure if there are consolidation programs where that can still be maintained. If there is, we will definitely look into it.

 

[Bignate603]

How much is the company match worth on your retirement account? For me, I get 50% match up to 8% of my income gross income. There's no better return I can get on my money.

As for an emergency fund, I shot for 6 months living expenses. That's NOT 6 months income. Figure out enough to cover all your bills, then reasonable living expenses (stuff like food, gas, etc), stash away that much, and ignore that it exists.

 

[CrazyAznDriver]

Hiring a financial adviser was one of the first things we did when my wife graduated residency. He has been a great help to us so far.

 

[ElFenix]

Hmm so going forward from where I am, my wife and I will have about 300k in student loans.

i hope both of you will be called doctor shortly

 

[Mo0o]

i hope both of you will be called doctor shortly

We'll be called doctor in 2 weeks. Full attending salary probably wont be for another 7 years

 

[Mo0o]

How much is the company match worth on your retirement account? For me, I get 50% match up to 8% of my income gross income. There's no better return I can get on my money.

As for an emergency fund, I shot for 6 months living expenses. That's NOT 6 months income. Figure out enough to cover all your bills, then reasonable living expenses (stuff like food, gas, etc), stash away that much, and ignore that it exists.

Will I need 6 months living expenses if I'm nearly 100% sure I wont be fired? Medical residency is pretty much a guaranteed thing unless you straight up shoot someone in the face

 

[Dangerer]

We'll be called doctor in 2 weeks. Full attending salary probably wont be for another 7 years

O_O

What did you match into?

 

[Mo0o]

O_O

What did you match into?

I'm Internal medicine with the goal of going into cardiology after that
My wife is Neurology with the possibility of doing epilepsy or stroke after that

 

[Turin39789]

Will I need 6 months living expenses if I'm nearly 100% sure I wont be fired? Medical residency is pretty much a guaranteed thing unless you straight up shoot someone in the face

Don't do that.

 

[Bignate603]

Will I need 6 months living expenses if I'm nearly 100% sure I wont be fired? Medical residency is pretty much a guaranteed thing unless you straight up shoot someone in the face

Simply put, yes you should still have a sizable emergency fund. You may not be fired, but what happens if something happens where you can't work for a while? Serious illness with you or a family member? You may not end up out of a job, but there are other things that will cause a sudden need for money. Family emergencies are one, car accidents are another (especially if you're driving an older car that you don't chose to carry full insurance on), getting seriously sick and needing to pay the full out of pocket cost on your medical plan, etc...

Things happen, and having a stash of money to fall back on makes it easier to deal with. Personally, I found that it was pretty easy to continue living like a college student for a little while and just dumped all the extra money into a savings account. It's easy to save when you're not used to having the money in the first place.