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Old 10-31-2007, 12:46 PM   #1
noob_84
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Pay off loans??
I recently graduated from college this past June. This month, I'll have to start making payments on my loans.

The monthly payments will be around $130. I have a fairly good job and could afford to put $1,000-$2,000 towards my loans. I'm living at home with my parents, so I'm saving a lot in terms of housing costs. My question is, should I pay off my loans early? Or should I pay the minimum and save for a down payment or invest it.

Thanks for all your help in advanced!!
Last edited by noob_84 : 10-31-2007 at 12:52 PM.
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Old 10-31-2007, 01:04 PM   #2
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Generally speaking, a $130 payment will always be manageable as long as you are employable. It is most likely a low interest rate and the interest is deductable. I would say pay the minimum on the student loans and max out a Roth IRA for starters.

After the Roth is up and running, try to decide what your financial goals will be for the next 5 years or so (ie. House, more school, etc.). Once the near distant goals/needs are indentified, start a systematic strategy to reach them and invest the money accordingly.

Does your employer offer a 401k with a match?
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Old 10-31-2007, 01:20 PM   #3
noob_84
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Yes, there is a match. I'm currently contributing 10%. I consolidated the loans and the interest on it is 6.5%.

My goal is to move out and buy a condo in Manhattan or Jersey city within 5 years.
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Old 10-31-2007, 07:44 PM   #4
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Advice For New Grads
NooB

I posted a similar question a few years back and I received the advice that pricescpector has offered to you. Do yourself a favor and take that advice.

Dont prepay your loans if they are at a low fixed rate (anywhere lower than about 7%). This is especially true if your income level does not qualify you to deduct the interest you are paying on your student loans.

With the extra dough you should
1) Max out your 401K.
2) Start and try to maximize an IRA at a company with low fees (T. Rowe Price or Vanguard)
3) Start saving 6 months worth of living expenses in a High Yield Savings account (ING, HSBC, Emigrant, etc)

If you plan on buying a condo here in NY/NJ you have to come up with about 20% as a downpayment given the current mortgage market.The average condo in the NYC metro area will cost you about 300-400k. Just to give you an idea of what you will need.

I hope this helps.
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Old 10-31-2007, 08:51 PM   #5
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Thanks guys, I'll let you know in a couple of years how I do
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Old 10-31-2007, 09:05 PM   #6
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We can go a little further for you noob, if you like.

What is the match on your 401k? The general rule of thumb is to contribute only up to the match on the 401k, then max your Roth. The rest can be allocated be allocated to your real estate goals.

By the way, a condo in Jersey City may go for for $300-400k, but a condo worth a dime will gor nearly $1Mil in Manhattan.
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Old 10-31-2007, 09:13 PM   #7
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My company matches 100% up to $4000. I'm currently contributing 10% which is $6,200.
So should I cut it down to only $4k and put the rest towards the down payment?
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Old 10-31-2007, 09:40 PM   #8
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First, I would cut the contribution down to $4000 to capture the match, then concentrate on maximizing the Roth IRA.

Anything left over should be going into an account with the purpose of financing your real estate goal. So, $4000 to 401k, plus $4000 to Roth (2007), $5000 for 2008. Then save for first home purchase.

The reason for giving the Roth priority (over excess 401k & downpayment) is that the cost basis (contributions) can be withdrawn at any time for any reason without tax or penalty. This means that if you need it for your downpayment, you can take it. But, if you don't need it, you can simply leave to continue growing tax exempt until retirment. It's all about options with a Roth.

With a horizon of less than five years to home purchase, the advice of using a high-yield savings (ING, Emigrant, HSBC, etc.) account for those monies is very sound.
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Old 11-05-2007, 12:39 PM   #9
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I would like an opinion. I hope I am not thread hijacking, but it is similar.

I have $6K in emergency funds and I think that will suffice for me as an emergency fund. I have $29K 3.3% in stafford student loans ($40K after interest/20 years). I have $3.5K in perkins loans. I have no IRA but I do match my entire 401K.

I am getting a $15K bonus in December ($10K goes into my company's incentive investing plan and $5K goes to us in cash). Would you guys take the $5K and put $4K into a Roth or pay off the perkin's loan? From what it sounds like, I should put it in a Roth. But the thing is, I know I will just be taking from my Roth and end up using it for my downpayment, so it seems useless to start investing in a Roth, especially since when I take out my contributions, only $10K of it will be from earnings whereas I could just keep it in a savings account and continuously gain 4.5% on it through HSBC.

I also have $11K in car payments over next 5 years at 5.5% interest. Should I be putting more money into this every month or pay it off in 5 years and just use extra money each month to save up for downpayment. And yes, I know paying interest in a car that loses value is bad.
Last edited by eshudnow : 11-05-2007 at 05:59 PM.
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Old 11-09-2007, 01:18 PM   #10
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I would try and pay debt off as soon as possible.
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Old 11-09-2007, 02:43 PM   #11
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Quote:
Originally Posted by eshudnow
I would like an opinion. I hope I am not thread hijacking, but it is similar.

I have $6K in emergency funds and I think that will suffice for me as an emergency fund. I have $29K 3.3% in stafford student loans ($40K after interest/20 years). I have $3.5K in perkins loans. I have no IRA but I do match my entire 401K.

I am getting a $15K bonus in December ($10K goes into my company's incentive investing plan and $5K goes to us in cash). Would you guys take the $5K and put $4K into a Roth or pay off the perkin's loan? From what it sounds like, I should put it in a Roth. But the thing is, I know I will just be taking from my Roth and end up using it for my downpayment, so it seems useless to start investing in a Roth, especially since when I take out my contributions, only $10K of it will be from earnings whereas I could just keep it in a savings account and continuously gain 4.5% on it through HSBC.

I also have $11K in car payments over next 5 years at 5.5% interest. Should I be putting more money into this every month or pay it off in 5 years and just use extra money each month to save up for downpayment. And yes, I know paying interest in a car that loses value is bad.
What rate is the perkins loan? If 5.5% is your worst APR, I would not sweat it. I would take advantage in these buying opportunities and give your portfolio a boost. You already have emergency fund and your loans are low, yet the stock market averages over 8% a year. Do the math. If you want, pay a little more toward your car note each month, but I wouldn't try to pay it all off at once.



You mentioned a down payment twice, but I didn't see what it was for. I assume a house. Don't take it from your Roth. Take it from your emergency savings before you do that, and I do not recommend that either. You might want to get more saved beforehand, or give a more in-depth explanation.
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Old 11-10-2007, 11:49 AM   #12
eshudnow
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Quote:
Originally Posted by Dingobiscuit
What rate is the perkins loan? If 5.5% is your worst APR, I would not sweat it. I would take advantage in these buying opportunities and give your portfolio a boost. You already have emergency fund and your loans are low, yet the stock market averages over 8% a year. Do the math. If you want, pay a little more toward your car note each month, but I wouldn't try to pay it all off at once.



You mentioned a down payment twice, but I didn't see what it was for. I assume a house. Don't take it from your Roth. Take it from your emergency savings before you do that, and I do not recommend that either. You might want to get more saved beforehand, or give a more in-depth explanation.

Dingobiscuit, thank you for the reply. Here is some more information:

I graduated college about 1.5 years ago. My current salary is $60,000 and over the next several years it could go to about $80,000 or so. My current college payment is $91/month for stafford and $45 for perkins. Stafford is at 3.3% while perkins is at 5.5% which is also the interest rate for my car loan. Next June my payments for stafford will go to $180/month.

I would like to stop wasting money on rent and save up for a down payment for a mortgage, but I live in an expensive area where the the property taxes are very high and don't really want to move, although I know should sacrifice living where I am and enjoy to stop wasting money on rent. I do like renting though and am beginning a relationship which might eventually allow for more income which would make this easier. But in the meantime, I think I will continue on renting as the years go to see how much money I will be making in a few years. If I do hit the $80K mark in a few years, this will be much easier.

In the meantime though, I am wondering where I should put my money. As stated, I have about $6K in emergency funds. I would like it to grow to $10K and would use this mostly for car break downs, lay offs, etc... I will be using part of that $5k cash return from my bonus (about 1.5K of it) and go visit my family across seas which I have not seen in about 11 years. The rest of it I'm wondering where I should put. Should I add it to emergency fund, pay towards car, pay towards perkins, IRA. If I was sure I was going to have a down payment in a few years, I know I would just put it in my savings to contribute to a down payment, but as stated, I'm not so sure if I will be getting a mortgage in the next few years. As it looks now, probably not. Because of that, I think I am just going to put it in an IRA. The only thing I don't like about putting it in an IRA, is if I have to take it out for a down payment, I can take out $10K with no penalty and the rest of it I'd get a 10% hit on it according to Fidelity.

After I hit my $10k mark on my emergency savings I am going to start a new account with HSBC and start putting money in that for a down payment. That way I can set my goals to grow that money without touching my emergency savings. Also, I currently claim 0 on my taxes so I should be getting a $2k-3K return on my taxes which I'll probably put towards my emergency savings, 401K, pay towards my car, or my down payment savings account.

So many options!
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Old 11-10-2007, 12:14 PM   #13
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Quote:
Originally Posted by eshudnow
My current salary is $60,000 and over the next several years it could go to about $80,000 or so.
What is your free capital per month after your bills?
Quote:
Originally Posted by eshudnow
My current college payment is $91/month for stafford and $45 for perkins. Stafford is at 3.3% while perkins is at 5.5% which is also the interest rate for my car loan. Next June my payments for stafford will go to $180/month.
Is that increase in the Stafford due to the 2%-to-4% increase in minimum payments, or something else?
Quote:
Originally Posted by eshudnow
I would like to stop wasting money on rent and save up for a down payment for a mortgage, but I live in an expensive area where the the property taxes are very high and don't really want to move, although I know should sacrifice living where I am and enjoy to stop wasting money on rent. I do like renting though and am beginning a relationship which might eventually allow for more income which would make this easier. But in the meantime, I think I will continue on renting as the years go to see how much money I will be making in a few years. If I do hit the $80K mark in a few years, this will be much easier.
I think you solved your problem in the meantime. In your area, it may be more beneficial for you to rent, especially when you factor in all the additional costs that comes with home ownership.
Quote:
Originally Posted by eshudnow
In the meantime though, I am wondering where I should put my money. As stated, I have about $6K in emergency funds. I would like it to grow to $10K and would use this mostly for car break downs, lay offs, etc... I will be using part of that $5k cash return from my bonus (about 1.5K of it) and go visit my family across seas which I have not seen in about 11 years. The rest of it I'm wondering where I should put. Should I add it to emergency fund, pay towards car, pay towards perkins, IRA. If I was sure I was going to have a down payment in a few years, I know I would just put it in my savings to contribute to a down payment, but as stated, I'm not so sure if I will be getting a mortgage in the next few years. As it looks now, probably not. Because of that, I think I am just going to put it in an IRA. The only thing I don't like about putting it in an IRA, is if I have to take it out for a down payment, I can take out $10K with no penalty and the rest of it I'd get a 10% hit on it according to Fidelity.

After I hit my $10k mark on my emergency savings I am going to start a new account with HSBC and start putting money in that for a down payment. That way I can set my goals to grow that money without touching my emergency savings. Also, I currently claim 0 on my taxes so I should be getting a $2k-3K return on my taxes which I'll probably put towards my emergency savings, 401K, pay towards my car, or my down payment savings account.

So many options!
Do you have any other investments beside your 401(k) and emergency funds? I would start building a diversified portfolio at this point, depending on your cash flow. You can build up quite a bit in the next few years, depending on your monthly bills. Those 3.3%-5.5% APR loans are not so bad when you can put that capital into a portfolio that can double that year after year. You have $43k in debt, but it a few years you will chip a portion of that away paying the minimums, yet build up a nice portfolio as well.

If you claim 1 on your taxes, you will get a nicer paycheck throughout the year, which will help your portfolio grow quicker as well. Uncle Sam really does not need your interest-free loan!
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Old 11-10-2007, 02:01 PM   #14
eshudnow
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Quote:
Originally Posted by Dingobiscuit
What is your free capital per month after your bills?
About $1,000 per month
Quote:
Originally Posted by Dingobiscuit
Is that increase in the Stafford due to the 2%-to-4% increase in minimum payments, or something else?
I financed with a grad plan. First 2 years I paid less while finding a job and starting off, and then payments would go up.
Quote:
Originally Posted by Dingobiscuit
I think you solved your problem in the meantime. In your area, it may be more beneficial for you to rent, especially when you factor in all the additional costs that comes with home ownership.
Yep, I think that's what I'll do. Start a Roth and max it out every year. In 3 years, I can re-evaluate my plan, and in that 3 years, I'll only have about $13,000. If I take out the $10,000 with no penalty, that should be good. If I absolutely need to take out the $3,000, I won't take much of a hit, but I probably won't tap into it.
Quote:
Originally Posted by Dingobiscuit
Do you have any other investments beside your 401(k) and emergency funds? I would start building a diversified portfolio at this point, depending on your cash flow. You can build up quite a bit in the next few years, depending on your monthly bills. Those 3.3%-5.5% APR loans are not so bad when you can put that capital into a portfolio that can double that year after year. You have $43k in debt, but it a few years you will chip a portion of that away paying the minimums, yet build up a nice portfolio as well.
I only have my 401K and emergency fund. Yep, I'm going to take your advice and just start investing in a diversified portfolio; my Roth IRA. After a few years I can re-evaluate where I am going with my life, my finances, and overall status.
Quote:
Originally Posted by Dingobiscuit
If you claim 1 on your taxes, you will get a nicer paycheck throughout the year, which will help your portfolio grow quicker as well. Uncle Sam really does not need your interest-free loan!
I think this is something I'm going to do. Only reason I have been claiming 0 is to ensure that I don't waste that money during the year and ensure I have a good amount of money at the end of the year to go on vacation if desired and/or invest. Now that I'm making more money (got my raise a month ago) I think I can handle claiming a 1.

Thanks much for the advice.
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Old 11-10-2007, 02:13 PM   #15
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Sounds pretty good. You said you have $1000/month free capital. You can easily max your 2007 Roth ($4,000 - you have until Tax Day 2008 to do so) and each year thereafter. You can also contribute to taxable accounts. If you have $12,000 free cash (obviously, you need to use some for recreation also), not including bonuses, raises, tax returns, etc., you should be able to build up a nice nest egg, as well as start saving towards that house.


How much are you contributing to your 401(k)?
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