Save savings, or spend?

[scfr]

I've always thought of things in payments because I've always made my budgets on a per-month basis. Is this a poor way of thinking?

Nothing at all wrong with having a monthly budget. The difference is that the way a saver would approach a car purchase would be to have a car fund (money earmarked for a future car purchase) to which they made monthly contributions, so that their next car purchase would be in cash, rather than having a monthly payment that included interest.

This is a bit off topic from your original questions, but I think your first step should be to find out the details of the retirement plan of your new employer.

[dczech09]

Nothing at all wrong with having a monthly budget. The difference is that the way a saver would approach a car purchase would be to have a car fund (money earmarked for a future car purchase) to which they made monthly contributions, so that their next car purchase would be in cash, rather than having a monthly payment that included interest.

This is a bit off topic from your original questions, but I think your first step should be to find out the details of the retirement plan of your new employer.

Completely agree. There is a difference between budgeting on a monthly basis and viewing things in terms of payments.

Things like rent, cell phone, and electricity will always be paid on a monthly basis as they are monthly services. There is no definite amount that you could pay as a lump sum.

Things like cars can either be paid in installments or paid in lump sums. Installments come with interest and other costs making it more expensive in the end.

Since there is a definite amount that you would pay for a car, it is best to view a car purchase in terms of TOTAL COST as opposed to monthly payment. If you view cars only in terms of monthly payments, you will be making monthly payments your whole life! Instead, you can view it terms of total cost, pay cash, not have the payments, and not have to pay interest (among other things).

Put it this way- would you rather have to budget for $300 every month for car payments, or instead put that $300 towards savings, vacation, retirement, house downpayment, etc? Yes, a car purchase with cash will result in you having to spend more money up front, but you will save in the long-run as you will not have constant payments. You can instead keep your cash flow open.

[SmrtSpndr]

So, there seems to be a wide consensus to open a Roth IRA and put in $5500, so I will look into doing that week.

Ironically, I consulted with a financial consultant earlier this year, and they said NOT to pay off my student loans, and I've gotten similar advice in the past. But honestly, I thought I had more left to the loan. So now I'm thinking "why not"? Why not pay off the loan?

For accuracy sake, current cash assets are $38k. Monthly expenses average $2900.

CORRECTION: Student loan payoff (if I paid it off today) is 11,700

So if I pay off student loans, and put 5500 into a Roth IRA, that leaves 20,800 for other planning.

[Wino]

I consulted with a financial consultant earlier this year, and they said NOT to pay off my student loan

Financial advisers are paid based on how much you invest. If you don't pay off your loan, you invest more, so they get paid more. Of course, they're not going to say that. They're going to say, "You have a very low interest rate, and you can make more by investing the money, so you come out ahead."

Then, when you sign, there's a statement about the risk that you'll lose money on the investment and come out doubly behind (your interest and your losses), but the financial adviser still gets his cut. Go for the sure thing return and pay off the loan, then invest with your own money.

[MonkeyMama]

I think at the least, you want to start saving for retirement. Figure out work retirement match situation. A Traditional IRA contribution may also may be more wise in your shoes. You'd get an immediate tax break, which may be important if you can only save $100/month otherwise. (I'd agree with the others that a ROTH is probably most beneficial, BUT at your age I took the tax break and I don't regret it. Money was tighter, the tax break meant a lot, and we have since converted all our retirement plans to ROTHs, for the long run. Win-win). Another tip: you have until April 15th of next year to fund an IRA for this year. Just to say, you don't have to decide today. AND sometimes it's wise to just make that decision when you do your taxes. It's easier to fund that IRA when you see you will get a large refund for doing so. (Or, you may come into some cash and feel more comfortable committing to the ROTH at that time).

If you pay off student loan, how much cash per month does that free up? Besides retirement, you need savings for the long run. At the least, to replace your car. But, never get out of the habit of saving. Start small, and save what you can. Maybe saving the student loan payment is a good place to start.

[disneysteve]

I've always thought of things in payments because I've always made my budgets on a per-month basis. Is this a poor way of thinking?

I agree with the others regarding this and I think it is a point worth repeating. By focusing purely on the payments, you're setting yourself up for a problem. Many people are of the opinion that they will always have a car payment so they may as well enjoy what they drive.

Perfect example: I buy my cars. My business partner leases his cars. I joined him in April 2000. At the time, I was driving a 1998 Camry that I bought used in August 1998 and was paid for by then. I kept that car payment-free until June 2013, just short of 14 years, 12 with no payments.

He leases his cars for 2 years at a time, so he got a new car in 2000, 2002, 2004, 2006, 2008, 2010, and 2012. That's 7 cars in the same time period that I had one car. He had 14 years of car payments. I had ZERO. Let's say his lease payments averaged $600/month (he only drives BMWs). That's over $100,000 in payments over those 14 years vs. me who spent nothing.

Which of us do you think is in better shape financially?

[kork13]

Everybody's giving you some great advice, so I'll just pile on with a couple other notes...

Why is $5500 the magic number for a Roth IRA?

First, $5500 is the "magic number" because that is the maximum contribution limit (set by the IRS) that any individual can add to his/her IRA (Roth or traditional) in any given year. So for 2013, the most you can add is $5500, then you can add another $5500 next year (or whatever the limit becomes), and so on.

Should I dump the rest in investments? At what point does it become safe to spend that money? Do I save it all for retirement?

This is a question of priorities, which to an extent, you'll need to figure out for yourself. From what you've already stated, after your SL's & Roth IRA & car repairs, let's estimate you have a nice round $20k. For your emergency fund, you'll want to keep between $9k-18k in savings (about 3-6 months' expenses). Also keep in mind, you'll need to have an extra 2 months' expenses ready for you next summer when you go to a per diem (e.g., less reliable) income stream.

Beyond that (and with future monthly excess), you might consider adding an additional monthly amount to your 401k/403b/whatever retirement plan your job offers, with the goal of contributing 15% of your total gross income toward retirement. Once you meet that, you can start saving & investing for other goals. That might include saving in a savings account for your next car, or more generally, investing in a few index mutual funds for general "future needs."

You can (and should) set your priorities. But in general, if you can save at least 15% of gross toward retirement, then another 5-10% of gross toward shorter-term goals, you'll do pretty well for yourself.

[MonkeyMama]

One other comment I forgot to mention. The reason to really hit retirement savings now is the more you save when younger, the less you will have to save later. Given all the typical advice, we have found "10% to retirement" more than ample because we have consistently done this since our early 20s. Given your "late 20s" status you may need to aim for something closer to 15%. If you wait, you are going to have to save a higher percentage of your income, later. Just to explain why retirement savings should be a higher priority.

[bjl584]

Do you have definite plans for the $40,000? You can pay off all your debts, fix your car, start a ROTH, and still be left with a significant amount of cash on hand.

[SmrtSpndr]

I'm happy to announce I opened an account with Vanguard!

It's a scary proposition/idea to pay off my student loans... thats a lot of cash! haha...

[dczech09]

I'm happy to announce I opened an account with Vanguard!

It's a scary proposition/idea to pay off my student loans... thats a lot of cash! haha...

Yeah I know it is scary. But put it this way- you will have to pay back the loans eventually. And you have PLENTY of cash on hand. Even after you pay off the loans, you still have enough cash to completely change your car situation AND have an emergency fund.

You can pay $11,700 today. Or you can pay about $13,500 in the future (give or take).

If you pay off the loans right away, you free up any cash flow that was going towards the loans. Even if it was only $100 per month, that is still an extra $100 per month to save for the future, or simply give yourself a raise.

If I were in your shoes, I would pay off the loans in a heartbeat. I myself am at the very end of my own student loans and CANNOT WAIT to be done!

[kork13]

I'm happy to announce I opened an account with Vanguard!

It's a scary proposition/idea to pay off my student loans... thats a lot of cash! haha...

Congrats! And I totally agree with dczech -- $11,700 may seem like alot of money (it is) to pay off at once, but just imagine the freedom of not having any loans! That's probably a $200-$300/mo payment that you no longer need to make each month! Take that student loan payment and send it into savings/investments, and you can continue on a really strong path. Believe me, many of us here have gone through the exact same thing, and it's a bit daunting when you think about it, but once you are free of any debt and saving like a boss, it feels awesome. You have confidence in yourself, in your situation, and control over your future.

[stoney508]

I wish I was able to bank that much while staying at my parents. I have student loans that were around 40k and if I had 40k saved up there is no question in my mind about where that money would go. Paying them off enables you to do so much more with what you bring in each month. Split that payment up into investment/savings. Build up emergency fund to 3-6 months and invest for the long term start now while your income is low so it becomes easier to save for income increases.

[SmrtSpndr]

I'm back revisiting this issue again, as my car is in the shop for a blown brake line. I probably could get another year out of this car, but since it seems the repairs are only going to get more frequent and more expensive from here on out, I figure I should cut my losses while I'm ahead.

I did put $5500 into a Roth IRA.

The cars I am looking at are in the 11,000-15,000 range.

So far the advice I've gotten in this thread seems to be I should be pay off my student loans, and then probably pay for the car in cash too. That would leave me with roughly $9000 in cash. Is that safe if my monthly expenses is about $2800 and income is around $3000-3100? Being that "low" on cash after sitting on $40000 for 2-3 years is scary. I really like having that safe plushy cushion.

Though, technically I can still pull the $5500 in my Roth if I really had to, right?

Is this the best course of action? It'll be an interesting conversation with my parents, that's for sure. They don't know I have this much cash, but I don't think I'll be able to hide it if I'm paying all this off hahaha