Quote:
Originally Posted by adaway
jIM Ohio, thanks for your input.
Re: the debt...the min is 600/m for 30 years. I think it's best to pay just that bc I don't think I can put a significant dent in it before then. Interest rate is less than 5%. I'm stuck with it and have to live with it.
Re: EF and CD's...so in your case, you chose to put into a CD provided by a local bank despite other options which might provide a higher rate. I think that was my concern also, I would feel more comfortable if there is local branch.
Re: RothIRA...I am thinking I might hold off or if I open one contribute only a small amount. I want to start building on savings for short term use (<5years) for possibility if I need new car and/or down for home.
|
$600/m for 30 years is a lot to pay for student loans. If you can press a 15 year repayment schedule, you will see cash flow open up considerably. I am guessing you consolidated the loans and lowered the payment, in the process the bank increased the repayment period from 10 to 30 years.
You will probably find the student loans get in the way of the house savings. You can't earn 5% "long term" in a savings account or high yield money market. The loans are costing you 5% per year.
Your choices would be
a) pay off loans quicker (consider this a 5% rate of return on money used to pay down).
b) set aside "extra payments" in a money market. You can earn close to 5% short term. This account is subject to frequent moves in interest rates, and 5% rates are a 20 year high, I believe, for money markets.
c) come up with another way for house down payment- maybe a balanced fund or something with a 7-9% type long term return.
In the case of b) and c), I think you will see your budget stretched. Because the accounts grow slower and you have to take on more risk than a) to do it. I am guessing this based on what I know from you online (meaning it's a hunch, not much behind it).
FYI-My CDs are between 1-2% interest rates. I earn around $250 in interest each year on the CDs. A money market would earn me $500. I make $250 in two nights training soccer teams, so I don't consider the interest I lost each year on the CDs to be a big deal. I more than earn that somewhere else, that money from soccer is invested at rates of return much higher than 1-2%. (I send it to PRPFX, which is my mortgage paydown fund).
I think you need to do 2 or 3 things which are independant of each other
1) create a budget. Make sure you know your expenses and what can be cut out if needed (if times get tougher).
2) establish short term, mid term and long term savings goals.
3) establish short term, mid term and long term spending goals. What do you want out of life?
I mention do all 3 of these things independantly, because you may need to re-prioritize things based on a given goal- some long term goals are nearly impossible to attain if you delay them (saving for retirement) where as other short term spending goals might not really be that important, or can be changed when the issue comes up (car).
Do not cloud "how" to achieve a goal with what the goal actually is. Do the "how" after all goals are known. Do not relate one "how" to the other. For example, to pay off student loans requires an extra $50 per month to the loan. To fund retirement is a 10% per paycheck requirement. To save for a car is another technique (maybe $100 per month??). Make sure each how is realistic, but independant of the other goals.
Then prioritize based on what you want out of life. You might find one of the other goals which was long term (paying off student loans) becomes mid term because the money used to pay the student loans could also be used to pay for a house.
For example, if getting a house is the biggest goal, I would tell you I think the priority would be:
a) set aside 10% of income for retirement
b) pay off/pay down student loans
c) get a house
d) establish car fund
You need to start a) now,, when you are young, and build this 10% into your lifestyle-whether this 10% is put into a 401k, a Roth, or some other retirement plan is not important- just make sure it gets done. Experience tells me if you don't start now, you may not start until it's too late. Do not forsake long term financial goal (retirement) for a short term spending goal (get a house). Again, this is why each of above should be a list independant of the others.
In my case- I graduated college with a salary of 39k and student loan debt of 80k at rates around 9% (1997). I also had a monster car payment ($420) which was at a high rate. I started saving 10% for retirement the day I started working. It is the longest term goal I see right now.
Within 3 years I had student loans down to 60k, car paid off, and got a condo. Within 5 years I got married and inherited around 40k of wife's debt. After moving into condo, it took 5 years I had all loans for ME paid off (8 years to pay off 80k) and we bought a 3400 sq ft house (which we live in now). I also racked up 10k of credit card debt my senior year, that was gone before I got the condo. That credit card got up to 20k after we paid for our wedding. That was since paid off before we moved into our current house. The only debt remaining is 3k of wife's student loans, and those will be paid off early (6 months early)- as we need that $220/month for twins in June.
My experience tells me the banks will want to see your debt low (student loans and car payments). Two reasons. The ratios they calculate need to work out in your favor to get good interest rates. Second, if you are choosing between a new car (with a car payment) and a house, get the house first... as the car could prevent you from getting the house, but the car company won't care what debt you have (the house), they'll finance a car to just about anyone with a paycheck. After we bought our big house, we got new cars within 6 months. We drove junkers while saving for the house (some of that 20k debt was car repairs).
I realize I mixed in my experience with some advice to you. This is worth what you paid for it. HTH.