This is the first time I have said anything foolish.Convieniently enough for me I have just landed my first "career worthy" job out of college one month before my first payments on my student loans start to come due. I had been on defferment after graduation because I am/ have been completely broke. Now with some hard earned chash rolling in I have to figgure out how best to "pay the man" while still making as much money as possible. If anyone has advice it is gladly appreciated. (My investment goals are to create long term wealth and I have a very high risk appetite)I have 2 loans, Grad Plus (27K @ ~8%) and stafford (22k@ 6.8%). I have them both set to minimum payments right now and I plan to pay more per month (no peanalties on repayments of any size [thanks govornment?]). My company also offers 401k which I plan on front loading to maximum matched contribution and then not adding to it untill the next year. I know enough to pay down my grad plus loan first before i make more than the minimum on the stafford. I guess my main question is; my test portfolio that i started undergrad soph year has made ~9%YTD (no actual money in it because im poor remember), should I get into investing at all now or should I wait untill my loans are gone? Is there anything I should be considering that I didn't mention and am probably in the dark about?If there is something else I can answer which would be helpful please let me know.Thank you fools!
should I get into investing at all now or should I wait untill my loans are gone?Nothing wrong with getting your feet wet in the investing world now as long as you're meeting all your other financial obligations first. Your student loans are likely tax deductible so in my opinion there's no rush to pay those off right away. Just keep in mind that any money you use to pay off those loans has a guaranteed return (whatever interest you're saving by paying the balance down) while any money you invest in the market has a theoretical return. It hurts twice as much to lose money on an investment when that money could have paid down debt instead.Is there anything I should be considering that I didn't mention and am probably in the dark about?You mention that you have a very high risk appetite. Many people say that before they've experienced their first big loss. It hurts way more to lose 50% of the value of an investment than you think it will. You're young so that's the right time to do risky things but be careful not to over estimate your risk appetite. You'll find out what it really is sooner or later.
My company also offers 401k which I plan on front loading to maximum matched contribution and then not adding to it untill the next year.Does your company offer any sort of match on your 401k contributions? If so, check to see how they do the match. I have worked at companies where it didn't matter when you contributed, but they would match quarterly up to their maximum contribution. But now I'm working some place where they will match a set percentage, but on every paycheck, so if I were to front-load my contributions as I did on the previous job, I would lose all the company match for any paycheck where I did not have a contribution. That is something you will want to check.should I get into investing at all now or should I wait untill my loans are gone?If you have enough money to cover all your expenses including your loan payments, then I would put money into investments from now as you have time on your side. Make sure, though, that you are also building your emergency fund to cover at least 3-6 months of your expenses, and keep that in cash somewhere, even though it will not earn much in the way of returns. In case of an emergency such as losing your job, you will not want to have to sell into a potentially down market to use your investments.
Pay the loans as fast as you can. You might invest and get 8% or higher. But for your "test portfolio", past gains are no guarantee of future returns. The market could slump next week. There's no way to know. You do know that you have an 8% (and a 6.8%) drag on your TODAY. I'd kill that as fast as possible. Once that is done then you can start investing on your own with a long enough horizon to ride out any ups and downs (and there will be ups and downs).You're already used to living the poor life. Before you ramp up your living standards get those loans paid-off. It will be less painful (and cheaper).Yes, use the 401K. Good plan.Just my opinion. I'm not a professional (investor/adviser). Just a former grad student who lived on ramen noodles for several years.1poorguy (to this day HATES ramen noodles)
This would be a good article to read and that web site might get you some more detailed response.http://www.bogleheads.org/wiki/Paying_down_loans_versus_inve...Generically speaking I would look at making the payments in this order;1) Contribute enough to get any 401K match.2) If you have modest income you might qualify for a retirements savings credit especially if you are married. If so make enough of a contribution to get all of that that. Note: the income limits are after a lot of adjustments so be sure to look at the details of the adjusted income numbers.http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employ...3)Build up a modest emergency fund. Getting into a bind and carrying a credit card balance can be big trouble.4) You have bad interest rates on the student loans even if you can deduct the interest. Paying them off is a question of when not if, so the sooner you can pay them off the better. Every dollar you use to pay them off will increase your net worth by a dollar just like you invested the dollar. At those interest rates you are getting a good risk free return on any amount that is paid off.A good thing to do is to make a simple spreadsheet with all your assets and debts ad of January 1st. It looks like it will be negative now and that is OK since most of the debt was used for college to get better future earnings in your career. With a negative net worth you have a few more years of frugal living ahead of you since you don't want to still have a negative net worth for very long. Add a new column to the spreadsheet each year so you can see how your net worth changes over the years.
One more thing, on the 401K match ask the payroll department how they calculate it the match. Some companies match it each paycheck so if you make all your contributions in February then they may not catch up match over the rest of the year.
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |