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Helping a friend - was this the right advice?

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    Helping a friend - was this the right advice?

    A friend of mine asked what to do with money this year. He's generally good but has yet to educate himself about investing. He said he wants to buy a home and also start funding a Roth IRA (because someone told him it was a good idea--but he doesn't know how).

    After a long discussion, I learned about his money situation and it seems fine overall. He's employed in public education and makes 55k/year, rents an apartment which is split with a roommate, no credit card debt, he saves money every month, has a pension but no other retirement funds. He just turned 30.

    He's got $20k cash in the bank.

    He says $7500 is an adequate 6+ month emergency fund --if he didn't have debt.

    His outstanding debt is:

    Vehicle loan: $3000 left at 3.24% on a 5 year old car with 50k miles.
    Student loan: $1500 left at 4.5%
    Student loan: $8000 left at 6.6%

    The sum of monthly payments for all those debts is $750/month.

    So I said forget about houses and IRA's. Pay off the debt. We discussed housing affordability and good rules of thumb when buying and I think I convinced him he's probably a ways off still from buying a home. He was reluctant to let go of that idea, and I said it would never be a good idea to try to buy a home with student loan debt on his books anyhow.

    I asked what he'd do with an extra $750/month. Open an IRA he said. And put the rest in savings to extend his EF, part of which could become a downpayment someday.

    So we left it at that.

    Next day he called to tell me he paid everything off. Navient is sending him paperwork on the student loans, and the vehicle title is being released and dropped in the mail.

    I congratulated him.

    I also didn't think he'd take my advice seriously--because he really wants to buy a place. (thanks SA for the education...lol)

    I don't think I steered him wrong, but I also have never had someone take my advice, wholesale, as he did. Should I have told him anything differently?

    #2
    You did him a huge favor.

    As scary as it is watching someone else take advice and put out 12.5k to pay off debt, it sounds like your approach resonated with him.

    Taking on mortgage debt without any other debt will be a great position to be in.

    Continuing to pay on those debts monthly, would just be a perpetual uphill climb as interest continues to be paid on top of principal.

    Now he can save $750/month and his interest expenses are $0. He'll recoup that 12.5k in about 16-17 months.
    Last edited by Jluke; 01-07-2016, 11:42 AM.

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      #3
      Originally posted by Jluke View Post
      You did him a huge favor.
      I second that!

      It is tough giving a friend financial advice, and it can be tough watching them put your advice into action. It makes you second-guess your advice. I have been in your position many times, so I know how tough it can be.

      However, you gave your friend great advice. It is the same advice I would have given someone in that situation. His debt is now gone and he did not have to sacrifice all of his money to do it. He may not have liked shelling out $12.5k all at once, but he is now one of the few debt-free people in our country! And at age 30?! Awesome.

      I am glad he did it. I know so many other people would get scared and not pull the trigger. But he did and that is such a powerful move. Now he can sit back and save up his money and not have to worry about payments or interest. He can save up his down-payment and purchase a house with peace of mind.

      Bravo!
      Check out my new website at www.payczech.com !

      Comment


        #4
        That's amazing work that your friend followed your advice.
        LivingAlmostLarge Blog

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          #5
          Originally posted by LivingAlmostLarge View Post
          That's amazing work that your friend followed your advice.
          agreed!

          Comment


            #6
            Awesome Advice!

            Tell him he owes you a steak dinner out of that $750/month "raise" you just gave him! Well done.
            Phil Danley
            100% Debt Free since 2014
            http://www.ConsumerDebtCoach.com

            Comment


              #7
              What he did on your advice is fine, but I also think it would have been okay to accelerate the debt payments over a year's time. For a single person with $55,000 in shared housing, his debt was not that big a deal. I also don't think a person needs to be totally debt free to buy a house, but I'd prefer to err on the side of exuberant debt pay-off rather than taking forever to knock it down.
              "There is some ontological doubt as to whether it may even be possible in principle to nail down these things in the universe we're given to study." --text msg from my kid

              "It is easier to build strong children than to repair broken men." --Frederick Douglass

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