New Here - Invest or Pay Off Debt or Keep Money in EF

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Topic Author
TheFire
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Joined: Mon Apr 01, 2019 1:51 pm

New Here - Invest or Pay Off Debt or Keep Money in EF

Post by TheFire »

Hi all -

I'm new to this forum and just started taking my finances more seriously. I'm a single guy who turned 28 last month and was wondering what I should do given my current financial situation. Here's a quick snapshot about my finances:
-75K annual income in a relatively LCOL area
-25k in HY savings account
-11,500 car loan at 4.89%
-15,500 in student debt at an average interest rate of 4.00%
-Max out 401k contribution at work
-No CC debt

Given the details above, would it be wise to work on paying the debt off first and leave 3 months of expenses in an EF (roughly 8K) before I begin to think of investing in stocks or an index fund? I also want to eventually start savings for a home. Just want to know what the best approach would be.

Any advice would be appreciated.

Thanks.
mortfree
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Joined: Mon Sep 12, 2016 7:06 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by mortfree »

What are the individual student loan amounts? Assume you have multiple loan amounts and rates
Topic Author
TheFire
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Joined: Mon Apr 01, 2019 1:51 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by TheFire »

mortfree wrote: Mon Apr 01, 2019 2:24 pm What are the individual student loan amounts? Assume you have multiple loan amounts and rates
Yes, there are 5 of them.
1. $4800 at 4.66%
2. $4800 at 3.40%
3. $2200 at 3.86%
4. $1900 at 4.66%
5. $1800 at 3.86%
Grt2bOutdoors
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Location: New York

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Grt2bOutdoors »

How secure is your employment? I would not drain the savings account to pay off the debt, pay it off as you earn income.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Gufomel
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Joined: Sat Feb 14, 2015 9:52 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Gufomel »

How much monthly disposable income (if any) do you have after expenses and max 401k contribution? Also, are you contributing to a Roth IRA?
Last edited by Gufomel on Mon Apr 01, 2019 2:53 pm, edited 2 times in total.
Topic Author
TheFire
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Joined: Mon Apr 01, 2019 1:51 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by TheFire »

Grt2bOutdoors wrote: Mon Apr 01, 2019 2:46 pm How secure is your employment? I would not drain the savings account to pay off the debt, pay it off as you earn income.
I'd say it's fairly secure. The division of the company I work for has had extremely low turnover rate the last 10 years.
Topic Author
TheFire
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Joined: Mon Apr 01, 2019 1:51 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by TheFire »

Gufomel wrote: Mon Apr 01, 2019 2:49 pm How much monthly disposable income (if any) do you have after expenses and max 401k contribution? Also, are you contributing to a Roth IRA?
I'm not contributing to a Roth IRA at the moment, and was thinking that was something I should get started on. On average, I save about on average about $500-700 month after all expenses have been paid off and 401k was maxed.
Gufomel
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Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Gufomel »

TheFire wrote: Mon Apr 01, 2019 2:52 pm
Gufomel wrote: Mon Apr 01, 2019 2:49 pm How much monthly disposable income (if any) do you have after expenses and max 401k contribution? Also, are you contributing to a Roth IRA?
I'm not contributing to a Roth IRA at the moment, and was thinking that was something I should get started on. On average, I save about on average about $500-700 month after all expenses have been paid off and 401k was maxed.
I would take $11,500 and pay off the car loan today. I’m not sure what the monthly payment is on that, but that’ll be another few hundred dollars disposable income. Take that plus the $500-700 per month you already have and start paying down the student loans over 4%. That will only take a few months. You’ll be there well before the end of the year. Then start building your EF back up. Personally I would contribute to a Roth (low risk money market or short-term bond fund) before building your EF back up in a taxable account. You’ll have until April 15 of next year to contribute for 2019 (and should have your higher interest debt paid off well before then). If you do end up having to use that money in an emergency, you can withdraw the contributions penalty free. If you don’t end up needing it for an emergency, you’ve filled up your tax advantaged space. Once you’ve got your EF built back up (savings account plus Roth money market), you can start buying stocks in Roth and saving cash in your savings account until your savings account is back to your original $25k.

Just my opinion.
Last edited by Gufomel on Mon Apr 01, 2019 3:06 pm, edited 1 time in total.
Flyer24
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Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Flyer24 »

I wouldn’t touch your emergency fund to pay down a car loan. Continue focusing on the student loan. Once it is paid off then divert the money to a Roth IRA.
geospatial
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Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by geospatial »

Gufomel wrote: Mon Apr 01, 2019 3:00 pm
TheFire wrote: Mon Apr 01, 2019 2:52 pm
Gufomel wrote: Mon Apr 01, 2019 2:49 pm How much monthly disposable income (if any) do you have after expenses and max 401k contribution? Also, are you contributing to a Roth IRA?
I'm not contributing to a Roth IRA at the moment, and was thinking that was something I should get started on. On average, I save about on average about $500-700 month after all expenses have been paid off and 401k was maxed.
I would take $11,500 and pay off the car loan today. I’m not sure what the monthly payment is on that, but that’ll be another few hundred dollars disposable income. Take that plus the $500-700 per month you already have and start paying down the student loans over 4%. That will only take a few months. You’ll be there well before the end of the year. Then start building your EF back up. Personally I would contribute to a Roth (low risk money market or short-term bond fund) before building your EF back up in a taxable account. You’ll have until April 15 of next year to contribute for 2019 (and should have your higher interest debt paid off well before then). If you do end up having to use that money in an emergency, you can withdraw the contributions penalty free. If you don’t end up needing it for an emergency, you’ve filled up your tax advantaged space. Once you’ve got your EF built back up (savings account plus Roth money market), you can start buying stocks in Roth and saving cash in your savings account until your savings account is back to your original $25k.

Just my opinion.
+1
Gufomel
Posts: 556
Joined: Sat Feb 14, 2015 9:52 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Gufomel »

Gufomel wrote: Mon Apr 01, 2019 3:00 pm
TheFire wrote: Mon Apr 01, 2019 2:52 pm
Gufomel wrote: Mon Apr 01, 2019 2:49 pm How much monthly disposable income (if any) do you have after expenses and max 401k contribution? Also, are you contributing to a Roth IRA?
I'm not contributing to a Roth IRA at the moment, and was thinking that was something I should get started on. On average, I save about on average about $500-700 month after all expenses have been paid off and 401k was maxed.
I would take $11,500 and pay off the car loan today. I’m not sure what the monthly payment is on that, but that’ll be another few hundred dollars disposable income. Take that plus the $500-700 per month you already have and start paying down the student loans over 4%. That will only take a few months. You’ll be there well before the end of the year. Then start building your EF back up. Personally I would contribute to a Roth (low risk money market or short-term bond fund) before building your EF back up in a taxable account. You’ll have until April 15 of next year to contribute for 2019 (and should have your higher interest debt paid off well before then). If you do end up having to use that money in an emergency, you can withdraw the contributions penalty free. If you don’t end up needing it for an emergency, you’ve filled up your tax advantaged space. Once you’ve got your EF built back up (savings account plus Roth money market), you can start buying stocks in Roth and saving cash in your savings account until your savings account is back to your original $25k.

Just my opinion.
I will add that this is under the assumption that you live below your means and are committed to getting the debt paid off and EF built back up as quickly as possible (and not go splurge with your extra disposable income). I’m under the impression that this is the case given that you’re maxing your 401k and have an extra $500-700 per month.

But if you’re not confident you’ll have the discipline to stick with that, then just start knocking out your higher interest debt as quick as possible with your extra $500-700 per month.
Gufomel
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Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by Gufomel »

I was doing a rough calc to see what your monthly expenses were, but then I looked back at your OP and you said $8k was about 3 months of expenses. As a single person with a stable job, I would not hesitate to bring your EF down to 6 months of expenses (maybe even permanently), so $16k. That gives you $9k to pay off debt (essentially the car loan) and you don’t even necessarily need to build your EF back up. Your monthly expenses would also be going down after paying off debt, so all of that $16k EF may not even be necessary after the debt is paid off.

So bring your EF down to 6 months of expenses and get that debt knocked out. You’ll be there in just a few months.
jason1
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Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by jason1 »

If it were me, I would drop your cash holdings to ~3 months of bare bones living expenses. I would then use the money to pay off whatever combination of loans would free up the most cash flow. Finally you can either prioritize the lowest balance (snowball) or highest interest rate (Avalanche) to finish them up with the freed up cash flow. It does not matter much what method you use in this case as the rates are all close to each other and at your income in a LCOL you should be debt free shortly.
Topic Author
TheFire
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Joined: Mon Apr 01, 2019 1:51 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by TheFire »

Gufomel wrote: Mon Apr 01, 2019 3:26 pm I was doing a rough calc to see what your monthly expenses were, but then I looked back at your OP and you said $8k was about 3 months of expenses. As a single person with a stable job, I would not hesitate to bring your EF down to 6 months of expenses (maybe even permanently), so $16k. That gives you $9k to pay off debt (essentially the car loan) and you don’t even necessarily need to build your EF back up. Your monthly expenses would also be going down after paying off debt, so all of that $16k EF may not even be necessary after the debt is paid off.

So bring your EF down to 6 months of expenses and get that debt knocked out. You’ll be there in just a few months.
Thanks for the great advice in this thread. :sharebeer
mortfree
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Joined: Mon Sep 12, 2016 7:06 pm

Re: New Here - Invest or Pay Off Debt or Keep Money in EF

Post by mortfree »

TheFire wrote: Mon Apr 01, 2019 2:42 pm
mortfree wrote: Mon Apr 01, 2019 2:24 pm What are the individual student loan amounts? Assume you have multiple loan amounts and rates
Yes, there are 5 of them.
1. $4800 at 4.66%
2. $4800 at 3.40%
3. $2200 at 3.86%
4. $1900 at 4.66%
5. $1800 at 3.86%
I would pay off 3,4 and 5.

Keyword in that sentence is “I”
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