How should I allocate my leftover money at the end of each month?
I am 25 years old and make about $60,000 a year. I have about $55,000 in student loan debt with interest rates ranging from 3.6 percent to 6.7 percent. I have $8,000 saved for a house with a target goal of $30,000. I have about $8,000 in a brokerage account. I max out my contributions to my employer's Roth IRA and have a tax-advantaged 457(b) deferred compensation plan, too.
I have about $300-$400 left each month. Should I put that money toward my student loan payments, my house savings, my brokerage account, or the 457(b) compensation plan?
It depends on your main priorities. If buying a house in the near future is your main priority, saving $400/mo will get you to the $30k you need in 4.5 years. If you want to buy sooner, you'll need to free up more cash flow by either pulling back on your retirement savings or by finding some sort of side hustle to make some extra cash. If buying a home is not your priority, however, I'd be looking at putting that extra cash towards your student loans, particularly the higher interest ones. You can use the debt avalanche method, where you allocate additional payments towards the highest interest-rate loan first until you have that one paid off then use all the money you were paying towards that one to pay towards the next highest interest loan. Mathematically speaking, this is the quickest and cheapest way to get out of debt. If buying a home or paying off your debt is not a priority, then you could save into either your taxable or your 457(b) plan. The 457(b) is tax-deferred and contributions lower your federal gross taxable income. However, right now your marginal tax rate is only 22% and if you were to max out your 457(b) contributions at $18,500/year, you'd still be paying around 22%. I'm going to say at your age, you should be focusing either on the home purchase or paying off your highest interest student loans, perhaps even at the expense of higher contributions to your retirement savings for a couple years.
My first thought would be to put it into your brokerage account with the idea of using it for a house down payment.
Since are starting early, and maxing out a ROTH and have a 457- you are likely on track for retirement.
Depending on your student loan repayment plan- making extra payments won't lower your monthly payment. So paying extra there won't lower you monthly payment for student loan (it will reduce the interest accrue..)
I'm a big fan of having options, if you save it for the house- you can always pull it from that savings at throw it at the student loans if you change your mind. On the flip side, if you pay down the student loans, you won't be able to get that money back to buy a house.
Either way their isn't a 100% right or wrong answer. The important thing is to save the money, and stay on track for your financial goals.
Congratulations, you have choices! First, how fast do you want to buy the house? Is it something you are thinking you will do in 2 years or 5 years? You only want to buy a house if you are sure you will keep it for at least 5 years, otherwise the probability is high that closing costs, realtors fees and other expenses of buying and selling will result in you losing too much money.
Second, regarding student loans, it depends on what repayment plan you are on: income based, forgiveness (for public servants), or 'as fast as possible'? Generally we prioritize some extra money (not necessarily all the extra money) to go to the highest interest rate student loan. That would also help you get your mortgage. However, the rules of your repayment plan are important to know, and you will want to study each of your loans and payment plans.
Third, put a little bit into a Roth IRA every month, even $25/month, in a balanced fund of stocks and bonds. Vanguard.com is a good place to open one with the first deposit of $1,000 deposited into the Vanguard STAR fund, then put a $25/month deposit on autopilot. Nolo lists some good websites to look at and we really like StudentLoanHero, too, links are below.
I hope that helps!
Carol A. Hoffman, CFP(r)
I suggest you consider investing in an index universal life (IUL) insurance policy. This is a modern life insurance policy that offers a wealth of benefits. You can keep the life insurance death benefit low, and the cash value grows substantially. Lots of tax-favored benefits: tax-free death benefit, tax-deferred growth, and tax-free distributions. A great way to accumulate money for whatever you want (i.e. down payment on a home, paying off student loans, tax-free supplemental retirement income, etc.) Growth is based on the upward movement of a stock market index (such as the S&P 500). If the index goes down instead of up, you don't lose a penny. Your annual gains are locked in and become part of the cash value. By saving $300 a month into this policy, your cash value account can grow substantially. And...you will have created an immediate tax-free estate for your beneficiaries.
Congratulations on your savings habits! Good luck!
It’s great to hear that you’re already saving and have some extra money left each month.
For the student loan debt, I’d consider applying at least some of your excess to paying that off, but the focus should be on the deft with the highest interest rate. The portion that you’re only paying 3.6% on can be paid more slowly because the rate is so low - meaning it’s not costing you much.
When is your target date for buying a house? How long do you think you’ll live there? These are factors you should consider when deciding how much more to contribute to that account. When you do buy a home, you’ll want to consider how long you will live there, as it’s likely that costs such as realtor’s commissions, attorney fees, and other closing costs are much more difficult to recover if you only live there for a short period.
Beyond that, you can choose between adding more to your 457(b) and brokerage accounts as I’m assuming you’ve maxed out the amount you can contribute to a Roth IRA account.
Ideally, you want to open an account with low fees and expenses. You can even have them take a fixed amount of money out of your account each month. This will allow you to dollar cost average, meaning you’ll buy more shares of whatever fund(s) you choose if the market goes down and fewer shares if it rises.
At your age, I would favor bonds over stocks. You have many, many years until retirement, which can allow you to be a little more aggressive with your investments.
Above all, make sure you know the expenses associated with anything you buy or invest in. Historically, paying lower investment expenses will typically result in better returns. If you work with an advisor, favor someone that is a fiduciary who will put your interests first.
Good luck. I hope this helps.