Personal Finance Advice for 33 Year Old

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VAslim16
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Personal Finance Advice for 33 Year Old

Post by VAslim16 » Sat Jan 07, 2012 10:06 am

Hi everyone. I'm 33 and trying to get my finances in order after a rough few years. My main question is whether I should begin investing now or continue to pay down debt. Here is my situation.

Monthly income to spend (after all expenses) = $2,400

Current debts:

1. Credit card 1: Balance $6,926 at 0% until July 1, 2012
2. Credit card 2: Balance $6,456 at 2.49% through December 31, 2013
3. Personal Loan: Balance $11,855 at 6.5%

For the last few months I have been paying down additional loans and neglecting investing completely. Now that the new year has started, I decided to post the question here to see if I could do things better. By my calculations, I should get everything paid off by end of 2012, at which time I would begin investing roughly $2400 each month. Maybe it is better though to pay of the loan at 6.5% as fast as possible, make sure to pay off the loan with the 0% interest rate by July, and then begin investing while also paying down the loan at 2.49% until end of 2013. I am a bit concerned that I have no money saved for retirement and am wondering if I should do that ASAP.

The other priority is to increase my emergency fund to $10,000 over the next 2 years. Right now I only have $1,500 in that and have not been adding to it as debt elimination has been my biggest focus. Please let me know what you all think. Thanks!

The Wizard
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Re: Personal Finance Advice for 33 Year Old

Post by The Wizard » Sat Jan 07, 2012 10:18 am

I think it's good to find a comfortable BALANCE between accelerating your debt payoff and putting money into investments.
Your Roth IRA in particular is one year at a time. You can't make up for years you've missed after the following April. So put $5000 in your Roth each year starting now.

You don't say what tax-sheltered options you have at your employer, but I would take some advantage of that also.
Your debt load doesn't seem too onerous for the extra income you have, which is one reason I recommend this approach...
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Rod Flash
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Re: Personal Finance Advice for 33 Year Old

Post by Rod Flash » Sat Jan 07, 2012 10:23 am

Paying down that high interest rate debt is the best investment you can make right now. A guaranteed 6.5% return on your money? Wish I could find that (without owing it in interest). It sounds like your paying down the debt plan works well. What does the 0% rate change to in July? As far as building an emergency fund, you can use your credit cards to cover that after you are debt-free until you have time to build it up in cash.

As far as not having saved for retirement, do you have a 401(k) or any similar plan at work that would give matching funds? Those are pretty much a neccesity if they are offered, especially if you can defer taxes on it. But unless it's a pretty good match, paying off the 6.5% debt would still beat it. I would pay that off first, the July debt if the interest rate is going to jump sinificantly, fund any savings vehicle with a company match, pay off the other low interest rate debt, then start building the emergency fund and saving for retirement. In that order. And don't build up any more debt if you can avoid it. At 33 you have plenty of time to fund retirement if you live below your means.

retiredjg
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Re: Personal Finance Advice for 33 Year Old

Post by retiredjg » Sat Jan 07, 2012 10:26 am

Congratulations on whatever progress you have made so far!

Continue to pay off the loans. In the long run, it is the same as investing. You could put some money away, but there is no guarantee that you'd get any return on it, much less a guaranteed return of 6.5%. So that one is a no brainer. If you don't get the 0% loan paid on time, interest will start accruing. It seems more likely than not the interest would be at a high rate, so getting that one paid off on time is likely to be a no brainer. For the same reason, getting the 2.49% loan paid on time is probably a no brainer, but with such a low rate, I'm not sure I'd pay that one off much before it is actually due. So my thinking pretty much coincides with the plan you mentioned.

VAslim16
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Re: Personal Finance Advice for 33 Year Old

Post by VAslim16 » Sat Jan 07, 2012 10:29 am

Thanks for the replies so far. I neglected to mention that I work overseas and can't contribute to a Roth IRA. No 401k or anything like that. If I WERE to invest, it would be a 50/50 split of Vanguard ETFs, most likely VTI and VXUS. I might put a little money into I bonds as well...maybe $50 a month...but with a long time horizon I'd like to get lots of money in stocks and then put money into bonds if I ever return to the US and could open a Roth.

Also, the 0% loan would go double digits (12% I believe) if not paid off by July.

Thanks for the responses and please keep them coming. You guys rock.

stan1
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Re: Personal Finance Advice for 33 Year Old

Post by stan1 » Sat Jan 07, 2012 11:10 am

Keep paying down the debt.

After its paid off in 2012 for 2013 (assuming your job still looks secure) I'd allocate half of the $2400/month to long term investing and half to an emergency/short term cash fund until you get the short term fund up to a level you are comfortable with.

The idea is that if you need a car, have moving expenses, etc. you can use the emergency/short term fund to pay for those items -- not take out a loan or sell your equities. Since you are living abroad you may want to keep a larger amount of cash to pay for unexpected trips back to the US (family health, etc) or costs to move back to the US if you choose to do that. If you are in a country where you will need quick cash to get medical care you would also want to make sure you have that covered.

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archbish99
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Re: Personal Finance Advice for 33 Year Old

Post by archbish99 » Sat Jan 07, 2012 11:15 am

Investing and paying off debt are two sides of the net worth improvement coin. What matters is what your net worth comes to, and its potential for growth based on the money you put into it.

A 6.5% debt is an asset with negative value which is growing at a pretty competitive interest rate. Reducing that asset increases the total growth of your net worth pretty healthily. Likewise, heading off the 12% is a very good thing. :-)

Unless you have access to an investment which will definitely or with high probability yield more than 6.5% a year (i.e. 401k matching contributions or equivalent in your country), pay down the high interest loan. Make minimum payments on the 0% ones, but have a plan for paying them off (e.g. switch to minimum payments on the 6.5% three months before the 0% is due and pay everything toward it) before they spike. Particularly since loans like that have a tendency to go back and charge interest through the 0% period if not paid off by the end of the promotional period.

You don't have to discharge all debt before investing, but you should get rid of all debt with an interest rate higher than you're confident your investments will earn.
I'm not a financial advisor, I just play one on the Internet.

guitarguy
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Re: Personal Finance Advice for 33 Year Old

Post by guitarguy » Sun Jan 08, 2012 10:34 am

My philosophy towards this is to pay down all higher rate debt (over 3% is where I personally drew my line when dealing with our student loans) and then split between savings/debt/investments at whatever percentages you choose....don't put all your eggs in one basket.

Here's what I'd do:

1. Make 100% certain you get rid of the 0% debt before the promo period (assuming you're on a promo period until July) ends. I'd just split it into 5 or 6 equal payments and guarantee you knock it out comfortably before the deadline.

2. After that, pay off the 6.5% debt as fast as possible. If adding a $100/m or something to your E-Fund to start on building it up slowly helps you sleep better...go for it. However I would not start investing (since you don't have an employer match) before paying down the 6.5% debt.

3. Once those 2 loans are gone and you just have the 2.5% loan left, split between investing, building your E-Fund, and paying down that loan. If it were me I'd do something like 40/40/20 (20% being the debt prepayment), but do whatever makes you comfortable. Whatever percentages you choose, you will be making great progress regardless.

8-)

VAslim16
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Re: Personal Finance Advice for 33 Year Old

Post by VAslim16 » Sun Jan 08, 2012 11:50 am

Thanks for all the replies everyone. I am going to follow your advice and knock out the debt at 0% now but moving up to 12% in July, then I'll pay off the 6.5% debt completely before I begin any investing. Thanks again.

dailybagel
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Re: Personal Finance Advice for 33 Year Old

Post by dailybagel » Sun Jan 08, 2012 11:54 am

I would echo the advice above, and reinforce the idea of adding $100 or $200 per month to the e-fund. This way, you can establish the capital to avoid debt in the future.

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