on my way to establishing myelf financially

[Hawkeye]

Hey everybody. I have been a longtime lurker on these boards and have decided to to seek some advice from all of the knowledgable posters on here! You all have been inspirational and motivational for me these last few months!

First off, a little bit about me. I am a 24 year old male who is trying to overcome student loans while saving for the the adult things that I want to have one day.

My income from my main job is 1900/month.
I work part time at a bar and average 300-500/month as well.
I have 37,000 in student loans, while 7,000 are private loans and the other 30000 is federal.

I have just made my last car payment with my tax return. I also have recently paid off my last credit card as well. Dang beer and Dominos during school!

My expenses are:
Rent-300
Insurance-80
Gas-75
Food-200
Utilities-100
Private Student loan-100
Gym-40

I have ~8,000 in my Thrift Savings Plan account and I have 1,000 for my emergency fund.

My student loans are currently deferred until april of this year as I asked for a forbearance so I sould wipe out my car and cc debt. (Probably a dumb decision!)

My student loans make me extremely anxious. I want to wipeout the 7,000 private loans ASAP. I plan on extending my federal loans out over 25 years as i work for the fed govt and all federal loans will be forgiven after 120 payments. Is this a good idea? I figure my federal loan payments will average out to 250/month starting in may.

I realize that my income is relatively low right now, but I expect it to increase substantially over the next 4 years so that will help as well, but for the time being my questions are this:

Should I focus on paying off the private student loans while not focusing so much on saving for the next few months?

Should I open up a Roth IRA? Is it neceasary since i contribute to TSP?

What kind of accounts should I keep my savings in? Specifically, my EF compared to my future house fund? Should they be in different accounts?

How do I currently stand financially? Please be completely honest and any suggestions would be greatly appreciated. Precise $ figures with what you would do specifically to budget would be really nice as well!

Lastly, how have you all accomplished what you have financially? I feel like I have been working hard at trying to catch up and I still can't see the end of the tunnel. I will get to where I want to be eventually i guess, I will just have to keep saving and working hard while staying positive while on my journey.

Thank you for your time.

[jIM_Ohio]

Your net income is $2200/mo?

Your budget shows expenses of $900. If you really have $1300 in excess, consider this plan

$200 to savings each month
$500/mo to retirement (TSP or Roth)
$400 to debt repayment (above the minimums)
$200 for spending

[swanson719]

Good job so far, you're doing great. No credits cards is awesome. I'm not a fan of credit cards, but if you pick one with a rewards program and no annual fee, they are good for keeping a high credit score, which is important for interest rates when buying a house in the future. So pick a good one and use it as a debit card, paying it off in full each month. Not that you can't get a good interest rate without them, which is what we did. It just helps.

If I woke up in your shoes tomorrow this is what I would do:

1. TSP to Roth conversion. TSP is tax deferred, Roth is not. This means that all the growth on a TSP plan is taxed at withdrawal, and you have to start withdrawal by age 70 1/2. When you do the conversion, you will pay taxes on all the gains in the TSP to date. That is preferable to paying taxes on the next 40 years of compound interest as compared to a Roth. TSP is supposed to start a Roth TSP in 2011, so you might take advantage of that when it happens, but as far as I'm concerned, Roth is a better option than TSP from a tax standpoint. It also is more flexible, which I like. This is why I chose Roth over TSP. Note that you can still do TSP after you fully fund a Roth.

2. Start working at the bar to the $500 a month tune as often as you can. This gives you $1500 in excess instead of $1300. So if you use $150 a month as fun money, you can pay down $1150 - $1350 in additional principle on the private loans. This would take 5 or 6 months max to pay them off.

Don't worry about contributing to the Roth or TSP until this is all done and you have a 3-6 month Big EF. Most Roths require a minimum monthly contribution with at least one fund open in order to maintain them - for us this is one fund @ $25 a month minimum. So do the minimum to maintain it if you have to.

3. Build up your 3-6 month Big EF. Your expenses are $900 a month. So your Big EF needs to be at least $2,700, preferably $5,400. I still don't think $5,400 is enough because a medical emergency will wipe that out in a blink of an eye. $10,000 is the minimum for a good Big EF in my book. If you're throwing $1150 a month at it, this would take 9 months. Paying off all private students loans and $10,000 in a money market mutual fund for your Big EF in 15 months is awesome.

4. At this point you should be in May 2011. Do two things at this point.

A. Figure out how much house you want to buy as a dollar figure. Just look at a few realty listings of something you would want as a long term house (I don't like the starter house game, it costs too much to buy a house, sell it, and buy a second one 5 years later to do this). You would want 30% of that amount saved. 20% to cover down payment, and 10% to cover closing, minor upgrades/cosmetic work, and furnishings. A good rule of thumb is no more than 4 years worth of gross to be spent on a house. If you plan on a lot of raises between now and then, you would be able to realistically get a $150,000 house. 30% of that is $45,000. If you buy 5 years from May 2011, you divide $45,000 by 60. So you would want to put $750 a month into a target date CD system or money market. A target date CD system is just a CD ladder that all comes due the same date. It's not at all liquid, which makes it a great way to save up a big down payment and not be tempted to spend it on something else. Also earns pretty good interest.

B. Figure out how much you need to retire. Good rule of thumb is 25 times your annual expenses, including fun money. You need to at least match inflation in your investments for this to work. Realistically, with a paid off house and no payments, you need $21,000 a year to support you and a spouse. $350 a month in utilities, $300 a month in groceries, $550 a month in health/life insurance during retirement, $100 a month in car insurance, $150 a month in property taxes, and $300 a month in fun money. That's bare essentials in my book for retirement. So $525,000 as a minimum principle investment, with it at least matching inflation, and not counting compound interest. You're 24, and if you retire at 65, you have 41 years to retirement. So you would need to invest an average of $1070 every month between now and age 65 in order to support you and a spouse. Just for you, that's $535. This would go into a Roth IRA first, which with a $5,000 a year cap still leaves you putting $1420 a year into TSP. When you figure in compound interest on this amount, and if we're lucky Social Security when we get there, you'll be living high on the hog in retirement. Don't forget that it's $1,070 a month after you get married, if you do. You've spent $1285 of you're available minimum of $1300 a month.

This puts you on a good road towards owning a house and retirement. Whatever raises you get along the way would be well spent in a money market mutual fund to be put on an engagement ring and wedding/ honeymoon expenses. I would separate it from your house fund just for clarity and ease of book-keeping. If you don't plan on getting married, then you can add to your house down payment and retirement fund. Weddings and honeymoons don't pay for themselves, and seriously, do you expect someones parents to be able to afford that type of expense after the hit retirement funds have taken in the last few years? Just sayin'.

As far as the federal student loans are concerned, while I don't like the gov't forgiving them after 120 months, that's not your problem. So why should you pay more than required? They made the plan for it to be taken advantage of, so do so. Pay the minimum payments on the federal student loans for 120 months and then let them be forgiven.

This gives you a realistic 6 year plan in which you can pay off the private student loans, get married, buy a house, and heavily invest towards a very comfortable retirement. It's all just my opinion though.