23 Year Old Seeking Advice

[KevinSaves]

This site is great. I found it last night and spent hours just reading and searching!

I'd like to get out of debt sooner, rather than, later. I go back and forth about keeping my car or selling it and getting something less expensive that I can buy with cash.

My current gross annual salary is $60,000. I rent a thrifty one-bedroom apartment and live pretty conservatively, besides my car. I was foolish after a year out of college, I decided that I deserved a new car. Outside of 401(k), I typically save somewhere around 12-18% of my net earnings.

DEBT:
Credit Card = $0
Student Loans = $31,000 (4.5% - 6.5%)
Auto Loan = $18,500 (1.99%)
Value of Auto = $21,000

Total Debt = $49,500

ASSETS:
Cash Savings = $10,000
Retirement (401k/RothIRA) = $9,000

Total Assets = $19,000

What should I do? Sell the car and buy a cheap beater with cash?

Thanks!

[UnknownXV]

First of all, congratulations on taking the first step to a brighter financial future, especially at your age. It's awesome to see people in my age group trying to be smart about finances!

Now as far as debt goes, I would attempt to pay it off as soon as you can, in the order of what debt has the highest interest rate. Those student loans are pretty bad to be honest. That's a decent chunk of debt with about 5% interest, must sting quite a bit.

If, even after paying off the minimums for your debt, you're still saving 12% or more of your income, then you have a lot of breathing room. It would take a few years to do it, but try to focus on paying down your student loans first.

Also, you should post your budget, so we can see if there's anywhere else you can cut. $60,000 a year is a very good salary, and I feel if you're single that you can definitely save more than $8,000 a year.

For the car, I would only see it if you would be able to get a profit on it after the remaining debt is cleared. Since cars lose their value fast, I'm not sure you could. The interest rate on your car loan is very low, so don't worry about that just yet. The reason for this is the $10k you have in cash should act as your emergency fund, that should cover at least 3 months in case something goes wrong. I recommend building this up a bit more, but it is sufficient for now.

[snafu]

Good on you for being aware of the need to manage your money effectively. You'll find lots of clever ideas reading SA archives. Do you know the current Kelly Blue Book [KBB] value of your car? What is your 401K invested in? What is your Risk tolerance? What are you doing to grow your savings? I suggest you pick up Wealthy Barber or Millionaire Next Door at the library for a quick & easy read.

[Wino]

My current gross annual salary is $60,000. I typically save somewhere around 12-18% of my net earnings.

DEBT:
Credit Card = $0
Student Loans = $31,000 (4.5% - 6.5%)
Auto Loan = $18,500 (1.99%)
Value of Auto = $21,000

Total Debt = $49,500

ASSETS:
Cash Savings = $10,000
Retirement (401k/RothIRA) = $9,000

Total Assets = $19,000

What should I do?

Quick math: your Student loans are the highest rate, and should be paid off first. Your income is such that you don't need to sell your car, unless you just MUST be out of debt psychologically. Don't count your 401K. That money does not exist. These aren't the 'droids you're looking for.

You don't need $10K in your emergency fund, unless you just wouldn't feel comfortable without it. If you have a single loan that's less than $7,000, I'd use money from the emergency fund to get rid of it immediately. This will free up more money to go after the highest-rate loan.

You did not say how many student loans you have, or their payments. Also, you didn't say your other amounts of spending (rent, car payment, etc). If I had hard figures, I could give you more precise ideas for you to try. (Excel is a great tool for debt payment and finance tracking).

You need to do a budget, but since I don't have enough data to do that, I'll give you some guidelines: Use your money going in to savings now to pay off the student loans, one by one. After they are gone, pay off the car (no need to sell it, most likely). Do NOT amass any more debt for anything in the meantime. Looking at the amounts and your income, I would think you could be out of debt in about 3 years to 3.5 years. At that time, you'll have enough money to throw toward savings, IRA's, and any other investment you'd like. By the time you're 50, you'll have at least a million in the bank.

[KevinSaves]

First of all, congratulations on taking the first step to a brighter financial future, especially at your age. It's awesome to see people in my age group trying to be smart about finances!

Now as far as debt goes, I would attempt to pay it off as soon as you can, in the order of what debt has the highest interest rate. Those student loans are pretty bad to be honest. That's a decent chunk of debt with about 5% interest, must sting quite a bit.

If, even after paying off the minimums for your debt, you're still saving 12% or more of your income, then you have a lot of breathing room. It would take a few years to do it, but try to focus on paying down your student loans first.

Also, you should post your budget, so we can see if there's anywhere else you can cut. $60,000 a year is a very good salary, and I feel if you're single that you can definitely save more than $8,000 a year.

For the car, I would only see it if you would be able to get a profit on it after the remaining debt is cleared. Since cars lose their value fast, I'm not sure you could. The interest rate on your car loan is very low, so don't worry about that just yet. The reason for this is the $10k you have in cash should act as your emergency fund, that should cover at least 3 months in case something goes wrong. I recommend building this up a bit more, but it is sufficient for now.

I could sell the car for more than I owe on it right now. I've considered doing that and just take $5,000 to buy a car outright. I will post my budget below to give you a better idea of my overall situation.

[KevinSaves]

Good on you for being aware of the need to manage your money effectively. You'll find lots of clever ideas reading SA archives. Do you know the current Kelly Blue Book [KBB] value of your car? What is your 401K invested in? What is your Risk tolerance? What are you doing to grow your savings? I suggest you pick up Wealthy Barber or Millionaire Next Door at the library for a quick & easy read.

The current KBB value is right at $21,000. The market value should be a tad better right now.

My 401(k) is in a middle of the road, pretty conservative asset mix. If you're familiar with Vanguard's funds, I have the Wellington Fund (stocks and bonds). I've been researching this a little more lately. I'd like to get a little more aggressive.

Risk tolerance is fairly high. You couldn't tell based on my current setup, but I am willing to take on risk.

My savings is just an emergency fund. It sits in a checking account earning 1.51% APY.

I'll check out those books. Thanks for the recommendation.

[KevinSaves]

WINO,

Here's my total budget based:

My net monthly income after 401(k), insurance, taxes, and pretax fees is right about $3,320. Regarding taxes withdrawn, I aim to breakeven (no refund/no owe)come time to file.

Housing Costs:
Rent = $550
Electric = $60
Water,Sewer,Trash = $25
Internet = $15
Netflix = $8
Renters Insurance = $10
TOTAL HOUSING COSTS: $668

Student Loan Debt:
Federal Loans (8) = $320
State Loans (2) = $58
TOTAL STUDENT LOAN DEBT = $378

Vehicle Costs and Debt:
Auto Loan = $331
Car Insurance = $55
Gas Expense = $350
TOTAL VEHICLE COSTS AND DEBT = $736

Living Expenses and Entertainment:
Cell Phone = $83
Gym = $35
Food and Dining = $575
Cleaning/Household = $10
Grooming/Health = $30
Entertainment/Other = $130
TOTAL LIVING EXPENSES AND ENTERTAINMENT: $863

Savings:
What is left over. Sometimes my living expenses and gas will vary a little bit.

I think this about covers everything. I usually will pay a little extra on various debts or go over some of the amounts I have listed below depending on what's going on during the month. If I'm traveling more, I will eat out more and drive more, etc..

[UnknownXV]

The two things I see where you could cut is in food and dinning, and gas costs. Do you have a very long commute? 350$ a month for gas is a lot, even at the current prices. If this is due to your car being very inefficient gas wise, it could make it a good idea to sell your car.. since you'd still get more than you owe on the car, I would certainly consider doing that.

The second thing is your food budget. 575$ is a ton of money a month on food. You don't necessarily have to dine out, or at least not as much. My current food budget is $200 a month, and that's in Canada with rather expensive food. I'd look into trying to cut that down. You could easily cut it by $100, and gas by $75. That's an extra $175 saved a month, either pay down your school loan debt faster with that, or save it.

You currently save $8,100 a year. With another $175 a month, you'd be up to $10,200. Not bad.

[Wino]

Assuming your budget is correct and that you can live on what you've written (with nods to unknown concerning apparently high categories), you can easily put an additional $400 toward the loans. There are ten of them at $31K total. This guarantees you can pay off one or two right away, freeing up even more money.

You should attack the debt. You should be able to easily be debt-free within 4 years, and earlier if you are willing to cut back your lifestyle slightly. Your numbers just cause me to repeat that student loan debt followed by car debt would get you debt free no later than 2016. Imagine having $1200 more per month to put toward your goals.

After your debt is gone, you can save to your heart's content. Assuming a couple of raises still ahead of you, you should be very comfortable by the time you're 40.

[snafu]

Do you get matching 401K monies from your employer? Do you see your employment as stable? Based on your review of their holdings and your risk tolerance, I'd recommend using all but $3,000. of your Emergency Fund in Vanguard's Dividend Fund to grow your savings. You can add to your portfolio by Dollar Cost Averaging [DCA] automatic monthly payments. I'm not advocating increasing payments to student loans at this time because I keep reading that there may be a 'forgiveness' clause offered during the upcoming election campaign.

Once you're comfortable with DCA and presuming you'll get raises and perhaps bonus, I'd look at transferring the required minimum to open Vanguard REIT and making DCA payments to REIT. If/when Europe settles it's problems with cheating tax payers, I'd jump to Vanguard's International Equity [I think it's called]. It will really ratchet up your risk but this is all predicated on reinvesting dividends, DCA and your age. If things look like they'll run off the rails like they did in 2008, you will need to re-balance your portfolio [takes about 3 business days.] Twice a year it's a good idea to re-balance which means sell some units of the biggest gainer to buy more units of a slower gainer.

I too hope you'll make the effort to prepare more meals at home because restaurant food is often pre-made, convenience foods full of sodium, fat & unpronounceable chemicals which taste good and are bad for you. Use those savings to pay down student loans making sure those extra sums go directly to principal.

[Vpxggmr17]

I'm in a similar situation...

...except that my numbers a tad bit higher than yours as I was an even dumber college student when it came to purchasing a vehicle. It wasn't until this current vehicle that I looked at my finances and really questioned what I was doing. That said, I don't know where you live and what the cost of living is compared to where I am but let me give you a breakdown of my budget and what I plan on doing since we are in a similar situation:

Housing Costs:
Rent = $750
Electric = $0
Water,Sewer,Trash = $0
Internet/TV = $40
Netflix = $8
TOTAL HOUSING COSTS: $798

Student Loan Debt:
Federal Loan Minimum Payment (2) = $220
TOTAL STUDENT LOAN DEBT = $220

Vehicle Costs and Debt:
Auto Loan = $670!!!
Car Insurance = $85
Gas Expense = $150
TOTAL VEHICLE COSTS AND DEBT = $905

Living Expenses and Entertainment:
Cell Phone = $80
Food and Dining = $400
Grooming/Health = $30
Entertainment/Other = $50
TOTAL LIVING EXPENSES AND ENTERTAINMENT: $560

That said, my Gross Annual Income is almost $70,000 and I'm 24 years old. I just paid off the last of my credit cards and my first aim, even with the auto loan, is to get rid of the student loans completely in the coming months (about $14,000). I would recommend you do the same since the interest rates are higher.

When it comes to the car, you aren't upside down in the vehicle. So you have a difficult choice to make. I happen to be about $10,000 upside down, ugh. I would say if it is reliable, and you can in fact make the payment, then keep it till it dies and look at it as a long term vehicle. Other option includes paying off the student loans first, then taking the money you were paying towards that and sending it towards principle on the auto loan. That would help shave off a lot.

[KevinSaves]

The two things I see where you could cut is in food and dinning, and gas costs. Do you have a very long commute? 350$ a month for gas is a lot, even at the current prices. If this is due to your car being very inefficient gas wise, it could make it a good idea to sell your car.. since you'd still get more than you owe on the car, I would certainly consider doing that.

The second thing is your food budget. 575$ is a ton of money a month on food. You don't necessarily have to dine out, or at least not as much. My current food budget is $200 a month, and that's in Canada with rather expensive food. I'd look into trying to cut that down. You could easily cut it by $100, and gas by $75. That's an extra $175 saved a month, either pay down your school loan debt faster with that, or save it.

You currently save $8,100 a year. With another $175 a month, you'd be up to $10,200. Not bad.

You bring up a good point with the car. Even though I'm not under , I could cut a good amount by getting something more fuel efficient. My commute is pretty long right now. On top of that, my girlfriend lives about 3 hours away while she finishes up graduate school.

With food, yeah I could some there. I really don't eat out all that much. I'm pretty into bodybuilding, and as a result a lot of protein heavy food comes. I should eat more chicken is really the message here.

[KevinSaves]

Assuming your budget is correct and that you can live on what you've written (with nods to unknown concerning apparently high categories), you can easily put an additional $400 toward the loans. There are ten of them at $31K total. This guarantees you can pay off one or two right away, freeing up even more money.

You should attack the debt. You should be able to easily be debt-free within 4 years, and earlier if you are willing to cut back your lifestyle slightly. Your numbers just cause me to repeat that student loan debt followed by car debt would get you debt free no later than 2016. Imagine having $1200 more per month to put toward your goals.

After your debt is gone, you can save to your heart's content. Assuming a couple of raises still ahead of you, you should be very comfortable by the time you're 40.

You bring up a good point. The more debt I pay off, the more money I'll free up monthly. That will create a snowball effect!

I would love to have $1,200 more per month. Hopefully when I become debt free, I'll have seen a few more raises then. I need to remember once I get a raise, I need to take whatever additional I receive and pay down debt.

[KevinSaves]

Do you get matching 401K monies from your employer? Do you see your employment as stable? Based on your review of their holdings and your risk tolerance, I'd recommend using all but $3,000. of your Emergency Fund in Vanguard's Dividend Fund to grow your savings. You can add to your portfolio by Dollar Cost Averaging [DCA] automatic monthly payments. I'm not advocating increasing payments to student loans at this time because I keep reading that there may be a 'forgiveness' clause offered during the upcoming election campaign.

Once you're comfortable with DCA and presuming you'll get raises and perhaps bonus, I'd look at transferring the required minimum to open Vanguard REIT and making DCA payments to REIT. If/when Europe settles it's problems with cheating tax payers, I'd jump to Vanguard's International Equity [I think it's called]. It will really ratchet up your risk but this is all predicated on reinvesting dividends, DCA and your age. If things look like they'll run off the rails like they did in 2008, you will need to re-balance your portfolio [takes about 3 business days.] Twice a year it's a good idea to re-balance which means sell some units of the biggest gainer to buy more units of a slower gainer.

I too hope you'll make the effort to prepare more meals at home because restaurant food is often pre-made, convenience foods full of sodium, fat & unpronounceable chemicals which taste good and are bad for you. Use those savings to pay down student loans making sure those extra sums go directly to principal.

Yes, my employers matches 6%. That's what I currently contribute for 401(k). I've thought about putting some more into a Roth. I figured if I could earn more then 7% in the Roth, it would make more sense then paying down debt.

I would say my position and industry is relatively stable. Nothing's bulletbroof.

I have some researching to do on the Vanguard choices. When you say, take all but my $3,000 from my emergency fund. Are you saying take cash and deposit into an account with Vanguard?

With DCA, why do you recommend this over just trying to buy in at times when I feel there are some bulls approaching the market?

[KevinSaves]

...except that my numbers a tad bit higher than yours as I was an even dumber college student when it came to purchasing a vehicle. It wasn't until this current vehicle that I looked at my finances and really questioned what I was doing. That said, I don't know where you live and what the cost of living is compared to where I am but let me give you a breakdown of my budget and what I plan on doing since we are in a similar situation:

Housing Costs:
Rent = $750
Electric = $0
Water,Sewer,Trash = $0
Internet/TV = $40
Netflix = $8
TOTAL HOUSING COSTS: $798

Student Loan Debt:
Federal Loan Minimum Payment (2) = $220
TOTAL STUDENT LOAN DEBT = $220

Vehicle Costs and Debt:
Auto Loan = $670!!!
Car Insurance = $85
Gas Expense = $150
TOTAL VEHICLE COSTS AND DEBT = $905

Living Expenses and Entertainment:
Cell Phone = $80
Food and Dining = $400
Grooming/Health = $30
Entertainment/Other = $50
TOTAL LIVING EXPENSES AND ENTERTAINMENT: $560

That said, my Gross Annual Income is almost $70,000 and I'm 24 years old. I just paid off the last of my credit cards and my first aim, even with the auto loan, is to get rid of the student loans completely in the coming months (about $14,000). I would recommend you do the same since the interest rates are higher.

When it comes to the car, you aren't upside down in the vehicle. So you have a difficult choice to make. I happen to be about $10,000 upside down, ugh. I would say if it is reliable, and you can in fact make the payment, then keep it till it dies and look at it as a long term vehicle. Other option includes paying off the student loans first, then taking the money you were paying towards that and sending it towards principle on the auto loan. That would help shave off a lot.

Appreciate you sharing your financial situation! $70,000 is a very good salary at 24. I'm hoping to see something around there in a year or so.

With that kind of car payment, you have to be driving a brand new BMW 5 Series!

I like the idea of paying down the student loans first, but I really like the point that Snafu brings up with the election. There's really no telling if there's going to be some student loan foregiveness. I definitely think I should hang tight for the next few months.