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I am 23 and just graduated from college this past year. I make 30,000 a year and try to save at least 300-500 a month. I also put 6% of my pay into my 401k account. Between the last two months I have put 6,000 into my Roth IRA account maxing out my contributions for 03 and 04, which was money I had made this past summer.

My only debt right now is 16,000 in college loans. My question is this. After I condolidate my loans my interest rate will be 2.3% and my payments will be about 100 a month. I feel as though I should only put the minimum 100 in each month expecting to recieve a higher rate of return on my investments. I predominantly invest in two Vanguard funds (The total market and Reit funds.) Does this logic make sense? I know from reading over the boards that several fools encourage paying off debt as soon as possible, but with such a low interest rate I feel as though I should just let it ride out. Any ideas would be greatly appreciated.
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An S&P 500 Index fund should be able to return about 11% on average. Hence, with the very low interest rate on your loan, investing in stocks in a Roth certainly sounds like a good idea.

In your case, I would keep the loan for now and fund the Roth.
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I am 23 and just graduated from college this past year. I make 30,000 a year and try to save at least 300-500 a month. I also put 6% of my pay into my 401k account. Between the last two months I have put 6,000 into my Roth IRA account maxing out my contributions for 03 and 04, which was money I had made this past summer.

Wow! I am totally impressed. You are off of the right start.

Your logic sounds good, but there is something satisfying about being debt-free.

And, don't forget to enjoy you new financial independence. A car, some dinners out, thest are good for the soul, if not the savings. Take time to smell the roses.

cliff
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My only debt right now is 16,000 in college loans. My question is this. After I condolidate my loans my interest rate will be 2.3% and my payments will be about 100 a month. I feel as though I should only put the minimum 100 in each month expecting to recieve a higher rate of return on my investments

I can tell you that Suze Orman thinks that student loan debt is the only type of debt that's 'good', because it's an investment that you made in yourself!

You didn't mention an emergency fund, do you have one? My only concern with this approach would be that if you ran into a situation where you couldn't work for a while, how would that impact your payments on the student loan? And if you get behind in your payments, does that impact your credit score? (Which would then effect interest rates on mortgages, credit cards, etc.)

I think the Roth is a great idea for you, but I would suggest saving for an emergency fund to cover 6-8 months of expenses (including the student loan monthly payment). The efund money should not be in stocks (because you wouldn't want to have to sell at a time when the market might be low). I have my emergency fund money in short term bonds--Suze Orman suggests a money market account.

That's my 2 cents,
2old



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Aubiemoney...

I am 23 and just graduated from college this past year. I make 30,000 a year and try to save at least 300-500 a month. I also put 6% of my pay into my 401k account. Between the last two months I have put 6,000 into my Roth IRA account maxing out my contributions for 03 and 04, which was money I had made this past summer.

My only debt right now is 16,000 in college loans. My question is this. After I condolidate my loans my interest rate will be 2.3% and my payments will be about 100 a month. I feel as though I should only put the minimum 100 in each month expecting to recieve a higher rate of return on my investments. I predominantly invest in two Vanguard funds (The total market and Reit funds.) Does this logic make sense? I know from reading over the boards that several fools encourage paying off debt as soon as possible, but with such a low interest rate I feel as though I should just let it ride out. Any ideas would be greatly appreciated.


Personally, I think that you are right on the mark - go with your current plan! When you get a raise, you can always start increasing your student loan payments proportionately. Better to make the higher returns from your investments now when the market is zooming. Nothing says thet you can't change your mind later - if necessary.

Way to go!
Bill

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My only debt right now is 16,000 in college loans. My question is this. After I condolidate my loans my interest rate will be 2.3% and my payments will be about 100 a month. I feel as though I should only put the minimum 100 in each month expecting to recieve a higher rate of return on my investments. I predominantly invest in two Vanguard funds (The total market and Reit funds.) Does this logic make sense? I know from reading over the boards that several fools encourage paying off debt as soon as possible, but with such a low interest rate I feel as though I should just let it ride out. Any ideas would be greatly appreciated.

I am doing that exact thing right now. My student loans are close to that percentage and I have opted to pay that debt off over the full term of the loan. However, I am a little further along in the process as I began repayment in 1997.

With an interest rate so low, I think it is wise to maximize the potential of your money. As long as you do not feel uncomfortable carrying the student debt, I see no reason why you should not continue as you are planning. Some people are not comfortable with that debt lingering around and prefer to pay it off as soon as possible.

Are you also saving for an eFund? An eFund (emergency fund) is intended to cover any of life's unexpected emergencies and prevent the need for using credit. If you are not funding an eFund, that would be my first suggestion.

dt
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After I condolidate my loans my interest rate will be 2.3%...

Is that before or after taxes? Because student loan interest, for many people, is tax deductible--so it's even LOWER than that. I would never, ever, ever dream of putting more than the minimum toward that debt, regardless of how big it is.

If you won the lottery tomorrow, I would tell you to max our your Roth (which you have--good on you!), max out your 401(k), make sure you had an E-fund in a boring old money market*, MAYBE look at getting a permanent insurance policy as an investment vehicle and open a plain old taxable brokerage account in an index fund. Even if you won $100mln, I still would say don't pay down that measly debt. You can do much better practically anywhere else.

(*Money market rates are 1% right now, but you don't put the money there as an investment--you put it there because it's your E-fund; apples & oranges)
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Nothing more to add. I'll just reinforce, IMHO, there is no good debt. As pointed out before, what happens if you lose your job. Last hired first fired. No debt, less worry.

JLC
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Just a little more to add. First, your eFund should be 3-6 months expenses, so do your budget and figure out how much that is. Second, can you contribute more than 6% to your 401K? Generally, you want to fund your 401k up to the company match, fund your RIRA, then go back to your 401k. If you see kids in your future, you can also put money away toward their education in a 529. But more importantly do you see a first home down the road? A certain someone you hope will say yes? All these things are life events for which you could start saving.

Fuskie
Who hears that being financially independent is sexy...
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Thanks for all the helpful input everyone. It turns out that I don't have much of an efund..maybe two monthes expenses at the most. That is what I am focusing on now. Again thanks so much for the responses, this board has helped immensely in the past few months.
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