Truck loan?

[Rocko]

I'm 21 living at home and have managed to save 42 k so far. I have a truck
Loan for 25k that I'm thinking about paying off
But the thing is I wanna buy a house in a few
Years and feel like I should keep the payment
Until then to show credit history? I have a couple
Credit cards but I'm not sure if that will be
Enough. Sorry if this thread comes out
Weird typing it on my phone. The interest rate
On the loan is 4%. Thanks for any help.

[riverwed070707]

I wouldn't pay off the loan, but you should be looking at ways to make all that cash work for you instead of just sitting in a savings account. Are you saving for retirement yet? If not, open a Roth IRA today and get your max in before the 2013 deadline (2 weeks from now!) and then plan to max it again for 2014.

Its great to have your finances in order at such a young age. Sounds like you're making good money, why are you living at home? Do you help your parents with bills and covering your own expenses?

[ua_guy]

You've done a good job of saving seeing that you're only 21.

If you're considering buying a house, you should figure out what you can afford and start saving for a down payment. A good rule of thumb is to put 20% down to avoid PMI (mortgage insurance) which is required by most lenders if the loan is more than 80% of the home's value.

It's recommended that you also have an emergency fund to cover 6 months worth of expenses once you are in your home. Calculate what 6 months of mortgage, plus your car payment, plus utilities and other stuff. So mock up what your mortgage might be. Zillow has a good calculator that estimates the mortgage payment including interest, taxes, and insurance.

With those two things, you can begin your savings goal for the down payment and also to get a good financial cushion beneath you.

Now, consider your truck payment. If you pay it off now, that could be an opportunity cost to getting into a house as soon as you want. Depending on what kind of house you buy and at what price, it may be totally possible to continue paying on your truck. You could also find out that the lender may require the truck to be paid off as a condition of underwriting the mortgage.

In general, the total sum of all your bills and mortgage (all debts) should be no more than 36% of your gross income. This is your debt:income ratio. As a good rule of thumb, your housing expense (mortgage including all taxes and insurance) should be no more than about 25% of your gross income. This is your housing expense ratio and lenders use this to determine affordability and how much money you qualify for.

The best thing you can do now is mock up a realistic scenario. Look at listings of houses you might want to buy and figure out how all your expenses will play out. This will give you a much better idea of what to do with your truck payment.

Good luck and come back with questions if you have any

Also, as Riverwed points out, saving for retirement is important. A rule of thumb here is to have at least 1x your salary in a retirement savings account (can be IRA, 401k, 403b and a host of other taxable or tax-deferred investment "vehicles", or even just cash savings) by the time you are 35. This is separate from all your other cash savings (i.e. bank accounts). A good way to get there is to start socking away 10-15% of your gross income into one of these types of accounts.

[Rocko]

I wouldn't pay off the loan, but you should be looking at ways to make all that cash work for you instead of just sitting in a savings account. Are you saving for retirement yet? If not, open a Roth IRA today and get your max in before the 2013 deadline (2 weeks from now!) and then plan to max it again for 2014.

Its great to have your finances in order at such a young age. Sounds like you're making good money, why are you living at home? Do you help your parents with bills and covering your own expenses?

Staying home to try and get a head start on life.
My parents don't want anything from me as long
As I'm putting money away and not blowing it.