Should I save my money or pay off my loan?

[chase.woodland@yahoo.com]

I am writing this forum post in hopes of getting help with my financial question.
I am a recent graduate of dental school (30 years old) and have a total student loan debt of about $120,000.00 (US) at a fixed interest rate of 3.7% and have about 28 more years left to pay off the loan. I am making my monthly payments (about half of that is interest and half is principal at the moment, though as payments continue, there will be less interest needing to be paid).
As for my question: While I make money, should I look to put it away in a savings account, low risk mutual fund or stock, in a tax-free Bond or CD, etc? Or should I forget about saving money and focus 100% of my money to paying off more and more of the principal of my student loan?

Any financial information you could offer me would be a great help -- thank you in advance for anything you can offer!!

[bjl584]

We need more info. What does the rest of your finances look like? What are your plans over the next few years? Do you want to buy a house? Relocate? Buy a car?

[disneysteve]

The correct answer is that this is not an either-or proposition. Your choices are not just "all debt repayment" or "all savings". You can and should do both.

Strive to live below your means as much as possible. With the surplus income that creates, put some toward savings and some toward accelerated debt repayment.

I graduated med school with $102,000 in debt on a 25-year repayment plan. I paid it off in 12 years while still building savings both in retirement plans and outside of retirement, buying a house, a couple of cars, starting a family, etc. Live lean and you can do it all.

[chase.woodland@yahoo.com]

We need more info. What does the rest of your finances look like? What are your plans over the next few years? Do you want to buy a house? Relocate? Buy a car?

I am just a couple years away from paying off my car, which is my only other debt. I am renting for now but do plan to purchase in the future....though not likely in the next year, but surely some point in the next 5. I am single now, but a family (wife and maybe a child) is very likely within the next 5 years. Clearly I need to have money aside for such things, but I am also going from a status of student (not making money) to worker (where I will be making money). And while I need more than $5.00 in my bank account....my question is, would I be better off having $100,000.00 (making up that number) in my accounts and invest them in some way while I continue to make monthly loan payments, or am I better off using all/some of that money to put against the principal of my loan rather than saving/investing?

Thank you bjl584

[chase.woodland@yahoo.com]

The correct answer is that this is not an either-or proposition. Your choices are not just "all debt repayment" or "all savings". You can and should do both.

Strive to live below your means as much as possible. With the surplus income that creates, put some toward savings and some toward accelerated debt repayment.

I graduated med school with $102,000 in debt on a 25-year repayment plan. I paid it off in 12 years while still building savings both in retirement plans and outside of retirement, buying a house, a couple of cars, starting a family, etc. Live lean and you can do it all.

Thank you for your help disneysteve. It is nice to hear that you have experienced something similar to me. While I said above -- I surely need more than 0 in savings...but when I start earning money and can put away -- you suggest I start paying off the loan at a faster rate rather than just making monthly payments and investing the rest?

[disneysteve]

If you expect to buy a house within 5 years, you definitely need to be saving toward that goal. You need a 6-month emergency fund and a 20% down payment before buying. You also need money for closing costs, moving, buying furniture, etc. If you have some idea where you would likely buy, look around now to get an idea of what homes cost in that area so that you can get a rough concept of how much money you need to save over the next few years to reach that goal.

Since the fixed rate on your loans is fairly low, over the long term, you would do better statistically by investing your money since the long term return of stocks is in the 10-12% range.

In the short term, though, you need to look at your overall budget, expenses, goals and priorities to figure out how much you can afford to save and how much you can use for extra loan payments. If you'd like to post your budget, we can help work through that.

[DebtFree&Broke]

I am writing this forum post in hopes of getting help with my financial question.
I am a recent graduate of dental school (30 years old) and have a total student loan debt of about $120,000.00 (US) at a fixed interest rate of 3.7% and have about 28 more years left to pay off the loan. I am making my monthly payments (about half of that is interest and half is principal at the moment, though as payments continue, there will be less interest needing to be paid).
As for my question: While I make money, should I look to put it away in a savings account, low risk mutual fund or stock, in a tax-free Bond or CD, etc? Or should I forget about saving money and focus 100% of my money to paying off more and more of the principal of my student loan?

Any financial information you could offer me would be a great help -- thank you in advance for anything you can offer!!

Focus on paying off your car as fast as you can, then start paying off your student loan. Don't raise your lifestyle a ton when you start making money, so you can throw as much money as possible at your student loans and savings.

[bjl584]

I am just a couple years away from paying off my car, which is my only other debt. I am renting for now but do plan to purchase in the future....though not likely in the next year, but surely some point in the next 5. I am single now, but a family (wife and maybe a child) is very likely within the next 5 years. Clearly I need to have money aside for such things, but I am also going from a status of student (not making money) to worker (where I will be making money). And while I need more than $5.00 in my bank account....my question is, would I be better off having $100,000.00 (making up that number) in my accounts and invest them in some way while I continue to make monthly loan payments, or am I better off using all/some of that money to put against the principal of my loan rather than saving/investing?

Thank you bjl584

You will want to do a mix of both. Save and invest AND start paying down your debt. Also, resist the temptation to raise your lifestyle. Being a dentist, you will most likely be making a high salary. Just don't give into the belief that because you are making good money that you have to buy a fancy car and live in a big house. Strive to live a more modest lifestyle. That will give you the ability to quickly pay down debt and build savings.

[chase.woodland@yahoo.com]

If you expect to buy a house within 5 years, you definitely need to be saving toward that goal. You need a 6-month emergency fund and a 20% down payment before buying. You also need money for closing costs, moving, buying furniture, etc. If you have some idea where you would likely buy, look around now to get an idea of what homes cost in that area so that you can get a rough concept of how much money you need to save over the next few years to reach that goal.

Since the fixed rate on your loans is fairly low, over the long term, you would do better statistically by investing your money since the long term return of stocks is in the 10-12% range.

In the short term, though, you need to look at your overall budget, expenses, goals and priorities to figure out how much you can afford to save and how much you can use for extra loan payments. If you'd like to post your budget, we can help work through that.

My budget is tough at the moment, as I am just starting work (working for myself), so my income is a big of a guess. My best guess is about $30,000.00 in the next 6+ months (before taxes...though will have lots to 'write off', but this total is after business expenses).
Other than that, I have some stocks/bonds that pay about $500 in dividend and interest each year. My home rent, insurance, bills total about $1,350 per month. Monthly food costs and other expenses for myself and pet total about $1,200. My car payments plus gas (I am in the last couple years of a loan to buy my car) plus auto insurance and student loan payments total about $1,200 per month. My checking account + other investments in stocks/bonds/etc total about $35,000. When adding those expenses listed above: I am spending about $3,750 per month ... and $30,000 in a 6 month period means I would be earning about $5,000 per month.

I dont know much about making a 'budget' -- I am new (but very interested in learning) more about money and economics ... so if this budget wasnt posted correctly or if I forgot/missed things -- please direct me or ask. Thank you so much for taking the time to review this info!

[chase.woodland@yahoo.com]

Focus on paying off your car as fast as you can, then start paying off your student loan. Don't raise your lifestyle a ton when you start making money, so you can throw as much money as possible at your student loans and savings.

My car loan interest rate is 2.49% (also fixed)....does that change your answer since my student loan is at a higher rate (3.7% fixed), or is it better to pay off the loan because I only have a few years left to pay it off -- and the student loan I have nearly 3 more decades to pay it off?!

[DebtFree&Broke]

My car loan interest rate is 2.49% (also fixed)....does that change your answer since my student loan is at a higher rate (3.7% fixed), or is it better to pay off the loan because I only have a few years left to pay it off -- and the student loan I have nearly 3 more decades to pay it off?!

It's better to pay off the car first because the balance is lower. If you can throw $1000 a month at your car loan it will be gone within months, if you throw $1000 at your student loan it will still take 10+ years. Plus, getting rid of your car loan frees up more money in your budget.

[jpg7n16]

It's better to pay off the car first because the balance is lower.

I completely disagree. It's better to pay the higher rate because it's more expensive. In fact, a 3.7% expense is nearly 50% more expensive than a 2.49% one. And because SL payments are based on the balance owed, paying extra immediately reduces the cash flow requirement. You'd have to completely pay off the car before seeing any difference in your monthly cash flow.

But you shouldn't focus on cash flow anyways. You should focus on net worth and the overall financial situation.

I would build up a small cash buffer of 2-3 months expenses. Then start saving 10-15% for retirement. Only then would I consider paying extra on low interest rate loans.

[chase.woodland@yahoo.com]

I completely disagree. It's better to pay the higher rate because it's more expensive. In fact, a 3.7% expense is nearly 50% more expensive than a 2.49% one. And because SL payments are based on the balance owed, paying extra immediately reduces the cash flow requirement. You'd have to completely pay off the car before seeing any difference in your monthly cash flow.

But you shouldn't focus on cash flow anyways. You should focus on net worth and the overall financial situation.

I would build up a small cash buffer of 2-3 months expenses. Then start saving 10-15% for retirement. Only then would I consider paying extra on low interest rate loans.

you talked about 10-15% for retirement ... is that 10-15% of each months income? So it sounds like, my goal is to save for now, and only until I reach a specific point, should i start paying down the principal on my student loan ahead of schedule...correct? How many months of saving 10-15% for retirement do you suggest I put away before starting on the student loan extra payments?
Thank you!

[disneysteve]

How many months of saving 10-15% for retirement do you suggest I put away before starting on the student loan extra payments?
Thank you!

You should always be saving 10-15% for retirement. There isn't a limit or a time when it is okay to stop that.

[DebtFree&Broke]

You should always be saving 10-15% for retirement. There isn't a limit or a time when it is okay to stop that.

That wasn't me who asked when to stop contributing to retirement.