Best Allocation of Money

**disneysteve** · 10-17-2010, 05:34 PM

Welcome. The rate on your checking account is phenomenal by current standards. Even after the deduction, the effective rate on the student loans is still higher than the interest rate you are earning on your savings, so on a simple dollar for dollar comparison, you would do better to pay off the loans. That does not mean, however, that you should use $12,600 of savings to pay off the loans because you need to maintain an adequate emergency fund. What are your monthly expenses currently (not including the loan payments)?

Never keep a debt just to get the deduction on the interest. Lots of people think that but it makes absolutely no sense when you do the math.

**SeanH** · 10-17-2010, 06:16 PM

I don't have as good an answer for that as I should be able to provide. (I did join mint.com this morning after reading about it on these forums). Before I switched banks I reviewed my account summary and I was pretty consistently increasing my bank balance by $800-1000 each month. I'm not a fan of Wells Fargo, but their summary systems were superior to my current bank's capabilities.

Rent (including water): $460
Power: As low as $50 and as I high as $120.
Phone: $52 (to the best of my knowledge this could be $47 from AT&T and not much lower)
Medical: $170 a month for a PPO. Will be remedying this during open enrollment.
Dental: $20.
401k: 4%
Company Stock: Purchase $50 a paycheck.
DSL: $15
Cable: $50
Car Insurance: Grossly overpaying/remedy shortly. $850 for 6 months. No tickets or accidents, just overinsured.
Gas: $25-50 (2 miles from work)

I do most of my shopping at Costco which makes determining a grocery number difficult (probably need to itemize for a few months). As a summary of the above: once the medical, dental, 401k, and stock come out I think the base number is $1250. Twice that is 2500 and with the non-paycheck expenses listed above I get down to $1600. A review of my bank account shows something like $400 at Costco (that feeds 2 people - down to $1200) and if I am increasing my balance as I think I am a gray area of $200-400 that is restaurants, extravaganc, and anything else.

Clearly I need to have a better idea of where money is going as there is room for additional savings.

**SeanH** · 10-17-2010, 06:24 PM

Having written that I now realize your question was - what are your expenses so that you can determine the amount of money required to have a 6 month emergency fund. I'll have to think on that.

**disneysteve** · 10-18-2010, 04:45 AM

To give another point of view, Dave Ramsey teaches folks to build a starter emergency fund of $1,000 and then pay off debt. After the debt is gone, continue to build the EF to 3-6 months worth of expenses. From that angle, you could take $12,600 from savings and pay off the debt. That would still leave you $9,400 in savings which is plenty as an EF for now, especially if you are still adding to your savings at a rate of $800-$1,000/month.

I do agree, though, that you need to have a better handle on where your money is going. $200-$400/month unaccounted for is a lot. Get control of that and you'll be in much better shape.

Going forward, 4% isn't enough to be putting away for retirement. Is the company stock purchase going into a retirement account or a taxable account? And is that even such a good idea? Your initial goal should be at least 10% to retirement with your ultimate goal being at least 15% (not counting any company match).

So I'd do this. Pay off the debt. Figure out your actual current expenses and hold an EF of 6 month's worth. Boost your 401k contribution to 10% or as close as you can comfortably get to that right now. Remember that the more you contribute, the less you pay in taxes, so putting an extra $1,000 in the 401k might only reduce take home pay by $750. Over the next few years, work on boosting the retirement contribution to 15%.

**jpg7n16** · 10-18-2010, 06:44 AM

Originally posted by disneysteve View Post

Welcome. The rate on your checking account is phenomenal by current standards. Even after the deduction, the effective rate on the student loans is still higher than the interest rate you are earning on your savings, so on a simple dollar for dollar comparison, you would do better to pay off the loans.

Especially when you consider that the 5% you're earning is taxable too. (making it more like 4%) I'm def in favor of paying down this debt, versus keeping it in the account.

Originally posted by disneysteve View Post

From that angle, you could take $12,600 from savings and pay off the debt. That would still leave you $9,400 in savings which is plenty as an EF for now, especially if you are still adding to your savings at a rate of $800-$1,000/month.

My sentiments exactly

So I'd do this. Pay off the debt. Figure out your actual current expenses and hold an EF of 6 month's worth. Boost your 401k contribution to 10% or as close as you can comfortably get to that right now. Remember that the more you contribute, the less you pay in taxes, so putting an extra $1,000 in the 401k might only reduce take home pay by $750. Over the next few years, work on boosting the retirement contribution to 15%.

Besides the full 6 month suggestion, I agree with everything else DS wrote. Good advice sir!

Since your expenses are likely in the 2500-3000 range, I'd personally say that $10-12k in the EF would be enough going forward. (about 3-4 mos) And then you could use that extra $800-1000 each month to boost retirement as DS was suggesting.

I'd only suggest a full 6 months if your life situation changed (ex. married with a kid). Then you'd need a bit more cushion.

**disneysteve** · 10-18-2010, 08:24 AM

Originally posted by jpg7n16 View Post

Besides the full 6 month suggestion, I agree with everything else DS wrote. Good advice sir!

Since your expenses are likely in the 2500-3000 range, I'd personally say that $10-12k in the EF would be enough going forward. (about 3-4 mos)

I can't argue with that. Whether you keep a 4 month or a 6 month EF is really a personal comfort zone thing. It depends on your situation, how stable your job is, how quickly you could change your living situation if necessary, etc.

**Aleta** · 10-18-2010, 09:48 AM

I agree with everything that Steve and the other poster said. Excellent advice DisneySteve. I would do the same. Do you need to maintain a high balance in your account to receive that rate? That is the highest I have seen but it's taxable and you're paying a higher interest rate on your student loan. That payment for your student loan can add on to your emergency fund. You're doing great. Good job.

**SeanH** · 10-18-2010, 03:38 PM

Thanks for the advice all. The 401k is an easy fix and was definitely one of those things that needed to be handled awhile back. I had set it at the amount to receive the maximum match at work and hadn't thought about it since then. I went ahead and bumped the 401k aspect to 8% today and noticed they've added a Roth option also. I went ahead and set that at 2% for starters, but once I have a better idea of what I'm actually spending money on I will try to aim for 15%. I suppose that will mean another post about the ideal ratio.

The company stock is post-tax and comes 10% off. I was motivated to enroll for this because they were offering $250 worth of stock to first time enrollers. The company stock has historically, even during this recession, done well. However, I already feel overexposed to it because the match option on the 401k is provided in company stock. We're also employed owned.

The bank doesn't require a sizable account balance (possibly just $100), but does require the use of billpay and their debit card.

And to wrap up the main topic - I really had not considered the implications of using post-tax dollars to pay interest. Thanks again for the help.

Best Allocation of Money