Saving advice for a 23y/o: Roth IRA investment or paying down college debt?

[GoCalBears]

Hi everyone,

stumbled across these forums and love the material and wealth of knowledge that there is to be had here! I wanted to ask everyone for advice on my financial situation and how to make the most of it.

I graduated from college a year ago and began working for a major financial services and payments network company 6 months ago. I am 23, single, no dependents, living in San Francisco making 65k a year not including overtime, which I can expect 10k-20k a year from (really depends but for budgeting purposes I have budgeted for 15k). I contribute 6% to my 401k pre-tax which is matched fully.

Over the last few months I have become very diligent with personal finance (thanks Mint.com!) mostly because I live in San Francisco, the 2nd most expensive city to live in the US. With rents in the area soaring, I have been blessed to find a bedroom available for $1,100 a month not including utilities (most of my peers pay 1500-1800).

After expenses with a LOT of effort (living in SF is extremely expensive, but I am not willing to move because my job and social life are both here), I am managing to get by with $1,300 in savings per month. I am in about $25,000 of college debt (6.7% interest), which I am currently paying back at $500 a month out of those $1300 savings, and I am putting the other $800 into a Roth IRA. Trouble is that I have seen my investment decisions in my Roth IRA waver towards negative gains. I am not seeing any gains at all in my Roth IRA while my college loans are accumulating interest at 6.7%

So my question is this: How much should I be putting towards college debt, my Roth IRA, and my 401k, per month? How can i maximize my current financial situation? I hate being in debt but I also keep hearing about the wonders of an IRA and compounding interest. That is why I am contributing so much to it now--to meet the 2012 tax year limit of $5,000.

Can anyone provide some guidance?

Thanks!

[SeanH]

I started working a few years ago and spent quite a bit of time starring at the returns on my ROTH and 401k. I totally empathize with you. You look at it and see your dollars slipping away. You wonder - is there something I can do? What should I be doing? Could I have timed this or sold that?

My advice is - don't fret. My ROTH was in the hole from the day I put the money in. A bit over a year later I looked and its up 20%. Repeat after me. I am doing the right thing. I will continue to put money away. I will review my personal finances and seek savings opportunities.

Some sort of combination of the above and you probably can't go wrong. 5 years from now I don't think you'll have any regrets over aggressive saving or aggressive debt paying.

Do max your ROTH IRA. Do question your cashflows. Do increase your 401K contribution. Adjust your spending to match your savings, not the other way around. Don't forget an emergency fund.

[MonkeyMama]

Personally, I'd pay off the student loan ASAP. It sounds like you could achieve this in 18-ish months with your current savings rate. $1300/month to the student loan.

The reason is you have youth on your side. Contributing 12% (6% + match) is awesome for your age, and a great start. We have consistently put 12% since about the same age (22 or 23) and our retirement funds are very robust. The younger you start and the more consistent you are, the less you have to put away later. So, I do not personally feel that "not putting away more than 12% while you get this student loan quickly paid off" means much for the long run. Once the student loan is gone, you can also do the ROTH, and that is awesome.

Other advice might be to fund the ROTH and put the rest to the student loan. You'd still have $10k per year for the student loan? Either way you'd be in good shape.

On the retirement, just keep contributing. Honestly, the market hasn't done much for us since we graduated college in 1999. Some terrible stock years in there. Last year was great and we gained some ground. & of course we made all the stupid mistakes when we were young. All this to say I think 2012 was the first year we had some real solid stock market gains. (Other years were gainful, but were making up for lost ground in bad years). Even if we otherwise would have come out the same just investing in cash, we have still been able to build a solid nest egg for the future. You'd probably do better just to invest regularly in a low cost mutual fund and not to touch it. You are young enough you should have only seen gains in your ROTH. Which is all the more reason I think it kind of works out to pay back debt in youth while you are learning and starting out on the investment side. Learn small and then you will know more what you are doing when have more to invest. Good Luck!

[bjl584]

So my question is this: How much should I be putting towards college debt, my Roth IRA, and my 401k, per month? How can i maximize my current financial situation? I hate being in debt but I also keep hearing about the wonders of an IRA and compounding interest. That is why I am contributing so much to it now--to meet the 2012 tax year limit of $5,000.

Can anyone provide some guidance?

Thanks!

College Debt = minimum payment for now. You can boost this up later. You can write off part of the interest on taxes, so that will lower your interest rate a bit on the loans.

Roth = maximum ($550 a month)

401K = at least up to the company match (if there is one).

[gostumpy]

Paying the student loans is giving you a guaranteed 6.7% return, and putting money somewhere else instead of paying down the loans is essentially BORROWING at 6.7%!

That is the mentality that got thousands of people out of debt... when in debt, every dollar you spend is borrowed at your debt's interest rate...

As you may assume, I recommend paying off the student loan debt ASAP, buckle down and get it done!

[YLTL_Dan]

I'm with the debt slashers on this one - here's what I'd do:

1. Contribute enough to 401k to receive full company match
2. Save up an emergency fund of at least a couple of months worth of expenses
3. Attack the debt with the rest of your money

Does your company offer a Roth 401k? If so, I'd switch to that tomorrow. You can always increase your retirement savings when you are no longer paying $1,000/month on student loan debt. Knock it out now and be done with it!

[Bades]

1. Contribute enough to 401k to receive full company match
2. Save up an emergency fund of at least a couple of months worth of expenses
3. Attack the debt with the rest of your money

Ditto.

Your savings every month cannot just go to retirement and student loans. You need a safety cushion (emergency fund).

Do you have any savings at all? I'd get at least 7-10k saved up. Especially with your high rent, within 6 months of having no job you're already out $6,500. Or an expected car payment, entertainment, etc. Keep it in a High Yield online savings account, some are getting around 1% right now.

It's great you're putting so much into your Roth, but I personally wouldn't feel secure without an emergency fund. Besides with $800 a month towards Roth, you'll max out in 7 months for the year.

[Petunia 100]

Hi everyone,

stumbled across these forums and love the material and wealth of knowledge that there is to be had here! I wanted to ask everyone for advice on my financial situation and how to make the most of it.

I graduated from college a year ago and began working for a major financial services and payments network company 6 months ago. I am 23, single, no dependents, living in San Francisco making 65k a year not including overtime, which I can expect 10k-20k a year from (really depends but for budgeting purposes I have budgeted for 15k). I contribute 6% to my 401k pre-tax which is matched fully.

Over the last few months I have become very diligent with personal finance (thanks Mint.com!) mostly because I live in San Francisco, the 2nd most expensive city to live in the US. With rents in the area soaring, I have been blessed to find a bedroom available for $1,100 a month not including utilities (most of my peers pay 1500-1800).

After expenses with a LOT of effort (living in SF is extremely expensive, but I am not willing to move because my job and social life are both here), I am managing to get by with $1,300 in savings per month. I am in about $25,000 of college debt (6.7% interest), which I am currently paying back at $500 a month out of those $1300 savings, and I am putting the other $800 into a Roth IRA. Trouble is that I have seen my investment decisions in my Roth IRA waver towards negative gains. I am not seeing any gains at all in my Roth IRA while my college loans are accumulating interest at 6.7%

So my question is this: How much should I be putting towards college debt, my Roth IRA, and my 401k, per month? How can i maximize my current financial situation? I hate being in debt but I also keep hearing about the wonders of an IRA and compounding interest. That is why I am contributing so much to it now--to meet the 2012 tax year limit of $5,000.

Can anyone provide some guidance?

Thanks!

I think you should continue to max your Roth. ($5500/12 = 458.34 per month) The rest can go to your student loans, provided you have an adequate emergency fund. Do you?

I'm curious why your returns have been negative lately. How is your Roth invested? Are you in high-cost low-quality mutual funds? Are you actively trading? If you're in low-cost, quality funds or ETFs and have a reasonable asset allocation plan, you should have had a nice gain last year.

[GoCalBears]

thank you all for your replies! there is some sound advice in here. it looks like people have different perspectives,and more or less it becomes a matter of personal preference.

to answer some of the above questions, after just having started working I do not have an adequate "emergency fund" yet. I always thought that since ROTH IRAs are after-tax dollars, you can withdraw from them whenever you want (principal that you contribute that is, not interest)penalty free. So, in essence, wouldnt this ROTH IRA be my emergency fund? Why wouldnt I put this "emergency fund" money into a Roth IRA and let it earn interest where I can withdraw it at any time if I absolutely need to? I am relatively close to my parents and know that i can move home if i ever find myself in a sticky situation. How much is an adequate emergency fund? I only have about 4k in my checking account for emergencies/living, with another 4k located in an offshore foreign account in a fixed deposit security.

since there is not much in my IRA now (only opened it a couple months ago and have about $2500 in it) I decided to be my young and foolish self and invest in things that I think will eventually go up. these include emerging market small to mid cap ETFs as well as a couple of gold ETFs (I have always heard gold was a sound decision and will go up over time but I cannot afford to buy bullion at the moment).


I want to max out my ROTH IRA for 2012 but only have until April to do it, that's why im contributing so much now. after I meet the 2012 limit though, i just want to know what course I should take assuming I can continue saving 1200-1300 per month. If I max out my ROTH at approximately 500 a month, that leaves 800 a month to pay towards loans. I am wondering if this is the most sound decision, especially since I know I will not want to stay at my current job for more than 3 years and might not be making as much money in my next job.

Thanks again for your sound advice everyone. I would appreciate any more insight people might have

[TBH]

Hi, GoCalBears.

Sounds like you are asking the right questions.

Since the Roth is for retirement, you do NOT want to think of it as accessible money. Yes, you could withdraw in a pinch, but a good financial plan will make that unnecessary.

I agree with others that you need an emergency fund, even though you have your parents as a safety net. I would save up a couple months' living expenses, and then pay down the student loans. The interest rate is quite high. If you're only going to be at this job for 3 years, it would be great to leave the job with no debt, a healthy emergency fund, and a good start on your retirement savings.

It sounds to me like you would rather fund the Roth than pay down the loans. If that's your preference, then that's okay too. It's not what I would do, but I don't think it's necessarily a bad choice.

Your investments sound fun and exciting, but not very wise. I think you should start with a well balanced mutual fund and read a ton about investing before you get nutty with the emerging markets ETFs.

Good luck. Stick around these boards, keep saving and paying off debt, and you'll be fine.

[TheMom]

The problem with taking money out of the Roth for an emergency, is that you can't put it back in. You can't invest more than $5500/year.

[~bs]

debt & emergency fund.

roths are a good option in that you can always take out the money you put in without penalty. So you'd like to not withdraw money, but if you have to, you can empty all of your contributions. Whereas yearly contributions are limited to 5500.

[Tree0164]

Here is what I would do

1. Fund your 2012 Roth IRA
2. Save up 6 months of worth of living expenses for EF
3. Divide your $1300 between your Roth IRA and your student loans for the rest of 2013