Young adult looking for advice on when to invest!

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Young adult looking for advice on when to invest!

Postby Brutus11 » Wed Nov 21, 2012 5:16 am

I am 24 and recently married, and haven't even thought about investing until very recently. My question is should I pay off student loans before I start investing?
I make 50,000 gross a year and my wife makes 35,000 gross.
I have 2 student loans: 1 has a balance of roughly 10,500 at 9.5%, and 1 at 29,000 at 6.5%.
We recently purchased a home on a 15 year mortgage with a 3.5% interest rate with a principle amount of 90,500, after putting 20% down. That leaves me witha 845/month payment.
I have a emergency fund of 1 month of expenses and about 1000 in my regular savings fund.
I also get bonus checks every month for $900 according to performance which I have gotten for the past 12 months and doesn't seem like it will be a problem in the future. My plan was to put every bit of the bonus checks towards the student loans. My questions is should I start putting that into an IRA right now or wait till I have everything paid off but the house, or even pay off the house first?

Thanks!
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Re: Young adult looking for advice on when to invest!

Postby John Bonzo » Wed Nov 21, 2012 8:55 am

In my opinion you are not ready to invest. You have a decent amount of student loans at very high interest rates -- I would pay those off before investing. Also, I would increase your emergency fund to at least 3 months expenses.

I guess the only exception could be investing in a company 401k if you get a match, but I think you need to get very very aggressive about paying off those student loans. Definitely throw all of your bonus checks at the student loads, but you need to do even more than that. Anything else in your budget that you can cut?
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Re: Young adult looking for advice on when to invest!

Postby nirvines88 » Wed Nov 21, 2012 9:00 am

I would definitely pay off the student debt first, starting with the one @ 9.5% interest. After you pay that one off, then pay off the loan @ 6.5% interest. Both are guaranteed returns, which you will not find guaranteed in the stock market.

After the student loans, I would bump up the emergency fund to 3 months. After that, I would open an IRA. Or, after paying off the student debt, you could just open an IRA and use that as your emergency fund (in case something bad happens).

I would only put extra towards the mortgage after contributing to your employer's plan to get any available match and maxing out an IRA. A 3.5% mortgage doesn't seem too bad for me, but some may disagree.
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Re: Young adult looking for advice on when to invest!

Postby The Wizard » Wed Nov 21, 2012 10:43 am

I disagree with the others somewhat.
I think it will be good for you to start investing NOW to build discipline (and your nest egg).
Get at least your employer match in whatever tax-sheltered plan you have.
And then start Roth IRAs for each of you. $5000 a year (the max contribution) might be too much to start with, so aim for $2000 and up the amount each year.

And work on consolidating those student loans down to a lower rate. My kids edu loans are with https://www.mygreatlakes.org for only 3.25%.
Find a way to get your rate down as well...
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Re: Young adult looking for advice on when to invest!

Postby STC » Wed Nov 21, 2012 10:46 am

You wont find a better tax adjusted, risk free, rate of return then paying off the loans. You should be considering your liquidity requirements, capturing the company match on any 401k, and everything else should target student loans.
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Re: Young adult looking for advice on when to invest!

Postby pingo » Wed Nov 21, 2012 10:51 am

Brutus11 wrote:I make 50,000 gross a year and my wife makes 35,000 gross.


(Emphasis added.)

Get rid of those student loans!

Don't worry about investing yet, with the exception that if you have employer plans that provided matching contributions, make sure you get that free money.
Last edited by pingo on Wed Nov 21, 2012 12:56 pm, edited 1 time in total.
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Re: Young adult looking for advice on when to invest!

Postby Grt2bOutdoors » Wed Nov 21, 2012 10:57 am

Focus on eliminating those student loans - 9.5% and 6.5% first. If you have any extra cash, focus on beefing up that emergency fund to 6 months of expenses. In the meantime, read the wiki on various aspects of developing an IPS and asset allocation and other topics so you'll be prepared for when you are ready to invest.
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Re: Young adult looking for advice on when to invest!

Postby Bob's not my name » Wed Nov 21, 2012 11:05 am

Brutus11 wrote:I make 50,000 gross a year
I also get bonus checks every month for $900
So do you actually gross $58,600 a year?

In any case, you are in the 15% federal tax bracket -- probably right at the top. Your student loan interest exceeds the $2,500 maximum deductible. It's pretty obvious you should pay off the 9.5% loan anyway, since that rate's painful. Your 6.5% loan is deductible, so the rate is effectively 5.5%. You still can't beat that in any guaranteed investment except:
1. Any employer match in a 401k or other retirement plan.
2. An Employee Stock Purchase Plan with a discount and no required holding period.
If you have neither of these, then focus on the loans.
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Re: Young adult looking for advice on when to invest!

Postby Khanmots » Wed Nov 21, 2012 11:27 am

I'll reiterate what so many others have said. Kill the student loans :)

One thing they haven't said yet is that if something financially horrible does happen and you find yourself going through bankruptcy, unlike most other forms of debt, student loan debt won't go away. So paying it off now would help you recover if something bad does happen down the road.

If I were in your shoes I'd do as many others here have recommended. If your employer offers a 401k match (free money!) contribute enough to get it. I'd then start throwing everything I could at the 9.5% student loan. When it was gone (given your incomes, I'd hope in under 6 months) I'd probably up my emergency fund to 3 months or so, then start throwing everything at the 6.5% one (although I might spend a little more on me now that the most horrible of the loans is paid off). At that point I'd open up IRAs, and start investing what I could while spending a prudent amount on enjoying life.
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Re: Young adult looking for advice on when to invest!

Postby The Wizard » Wed Nov 21, 2012 11:33 am

So nobody else thinks he should re-fi the student loans to a lower rate then?
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Re: Young adult looking for advice on when to invest!

Postby donall » Wed Nov 21, 2012 11:38 am

There is good advice in the comments. I think contributing to a 401K up to the employer match (yourself and wife) should be your first priority, as your contribution doubles your money. If you can't consolidate/refinance to a lower interest rate on the student loans, use any other money to pay off the 9.5% loan. You should be able to pay this off in two years. Then do the same for the remaining student loan. Somewhere in between all that I would beef up the emergency funds to 6 months, unless you have some backup from relatives. Best luck
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Re: Young adult looking for advice on when to invest!

Postby Khanmots » Wed Nov 21, 2012 11:42 am

The Wizard wrote:So nobody else thinks he should re-fi the student loans to a lower rate then?

Depends on if he can and what it'd cost. I've got no experience with this.

donall wrote:You should be able to pay this off in two years. Then do the same for the remaining student loan.

Not knowing all of it expenses makes it hard to really say how long, but if it was me in his shoes I'd be aiming at clearing both loans out in under two years.
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Re: Young adult looking for advice on when to invest!

Postby donall » Wed Nov 21, 2012 11:50 am

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Re: Young adult looking for advice on when to invest!

Postby Bob's not my name » Wed Nov 21, 2012 12:15 pm

donall wrote:http://www.alliantcreditunion.org/loans/student/
Buried in the fine print: variable rate.
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Re: Young adult looking for advice on when to invest!

Postby nisiprius » Wed Nov 21, 2012 12:18 pm

I agree with paying down the loans. But If you are chafing at the bit to get started, I don't think there's any harm in setting up a Roth IRA for yourself, funding it with a small amount, and setting up automatic contributions of a small amount per month. This will get you started learning the ropes. By a small amount, I mean such a small amount that it doesn't really interfere much with paying down those loans, paying the electric bill, saving up for a car so that someday you can buy one without financing it, etc. Be careful, though, that you set it up in such a way that you're not incurring any nasty regular account maintenance fees.

Just to be specific--this is not a recommendation, and there are lots of ways to set it up, but just for instance. You could start a Roth IRA at Vanguard. You could make a $1,000 purchase of the Vanguard Target Retirement 2045 fund. You should sign up for electronic delivery of statements so that you won't get dinged $20 a year for account maintenance fees. You could arrange to have further automatic purchases of $50 a month made out of your checking account. (If you don't want to invest that much, you'd have to talk to Vanguard--the minimum seems to be $50 but I think the interval could be longer than once a month).

You'll get your hands dirty with the paperwork, the terminology, see what the annual form 5498 looks like, learn your way around the Vanguard website, have something to talk about in this forum. You'll get to see just how much a stock fund's balance goes up and down--when you hear that "the market plunged" by golly you can log into your account and see how your retirement savings plunged--and find out how you feel about that.

If your wife wants to set one up too, fine. That should be her independent decision.

Only do this if you want to. Keep the amounts low enough not to matter a whole lot. Then a few years from now when you want to get more serious about it, you'll have a better idea what your options are and what questions you need to think about.

For 401(k) versus Roth IRA, I seriously doubt that one is hugely better or worse than the other, except that if your 401(k) plan has an employer match you want to get that. The usual reason for having both is that you've maxed out one of them and are looking for another tax-advantaged place to save more.

Personally, I never have been able to save except through automatic deduction--and the best way I was able to get my savings rate up was to wait for a raise and then bump up the deduction a bit, so that I was putting some of the raise away but still taking more home.
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Re: Young adult looking for advice on when to invest!

Postby Brutus11 » Wed Nov 21, 2012 3:57 pm

Thanks for all the great advice! It really re-affirmed what I was thinking but good to hear from so many people on my first post. Thanks a lot!
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