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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: Beginner wants to invest beyond ROTH IRA. He Date: 9/5/2011 9:07 AM
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I suppose my only concern about paying off loans and investing later is my fear of losing time for the investments to grow. Since messing around with compound interest calculators it seems that every day I don't invest now will be a huge regret in the future.

Right now, paying interest is working against you. Any money you put into investments you are essentially borrowing at a 6.8% rate. So you need to subtract that from the 'return' you are planning on getting.

I would suggest that you change the way that you are making payments on your student loans, assuming that the $160 each is not the minimum paymnet on each loan - I would suggest that you pay the minimum payments on the 4.875% and 5% loans, and pay the rest of the $480 toward the 6.8% loan. So if your minimum payments on the 4.875% and 5% loans total, say, $200, pay $280 on the 6.8% loan. Paying off the highest interest rate first will cost you the least in interest.

In addition to getting some/all of your student loans paid off before investing in taxable accounts, I would strongly suggest starting to build an emergency fund. Especially as a self-employed freelancer, you really need to have at least 6 months living expenses in a liquid account that doesn't have the risk of principal loss. When you are starting out, counting on 'investments' to pull you out of an emergency is risky - what if you lose a client, or they don't pay, at the same time that the stock market drops 10% - 20%? (See recent stock market action for confirmation that it can happen.) Your negative return on having to sell stock that's down will cost you more than if you had put that money in a bank accout at 1% interest and let it sit there, not earning 'market returns'. So, once you get at least the 6.8% loan paid off, my recommendation would be to save at least $1000 in a 'starter' emergency fund, then split your extra cash flow 50/50 between savings and investing.

As far as what to invest in - Vanguard has one fund that I am aware of that has a $1000 minimum - the STAR fund - if you want to get started earlier than it takes you to save up $3000. It's a stock/bond mixture. Additionally, you should check to see if Vanguard will start you with an investment account with less than $3000 if you commit to automatic monthly investments. They used to do this, not sure if they still do.

AJ
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