Should I use my savings to pay off all of my student loans, or should I make monthly payments?
I am 23 years old and have $10,300 in student loan debt. I pay $400 per pay check ($10,400 annually) towards my student loans. I live with my parents and don't pay rent. My only fixed expense is a $233 monthly car payment. I have been at my job for 1.5 years. There is very low turnover at my company so I consider my employment stable. My salary is $44,500. I contribute 25% of my pre-tax income to my 401(k). I make maximum contributions to my Roth IRA. I have $10,000 in a savings account and I am considering using $8,000 of it to put towards my student loans. My savings account is losing money because of inflation. My loans have a 3.6% interest rate. Should I use my savings to pay off my student loans immediately, or continue to make monthly payments?
Go ahead and pay off your student loans, then immediately start building your savings back up with your $400/pay check. The fact that you are living at home with your parents rent free and have practically no liabilites, you can build that savings/emergency fund back up within a year. You are doing great things with your 401(k) and Roth savings, and your point about paying interest on the loans while earning money is sitting in a very low interest bearing account is valid. If you had rent/mortgage/other liabilities, then I wouldn't advocate temporarily eliminating your savings. However in your case, this makes sense for the short term. Keep up the good work!
I like the way you think. The only recommendations I can think of are HSA and emergency fund. If you have a high deductible health insurance plan, you can fund & invest your HSA. It will be your retirement healthcare fund. The best part is you can deduct your contribution on your tax return at the same time. If you are hurry, you still have Apr. 15, 2018 to fund your 2017 HSA account.
Since you live with your parents, you have relatively small expenses. However, if and when you decide to move out, you must realistically think how much your living expenses would be. Check out the average rent in the area you want to move to, and don’t forget the food and other utility cost. Add those costs and times 12, and that should be your emergency fund. I know it sucks the interest so low in a checking/savings account, but that’s the purpose for an emergency fund-a quick access without losing the principle you put in initially or being forced to pay a penalty for an early withdrawal.
On the other hand, if you intend to live with the parents for a few more years, I would pay off the student loan completely and be debt-free. When that is said and done, I would re-build up my savings for the emergency fund. Sounds like a plan?
I for one like your thinking. That's probably because I'm not an investment advisor but rather a comprehensive fee-only financial advisor. I very much like the idea of paying down the loan regardless of the interest rate especially with the stock market as high as it is. However I would suggest using half of your savings as a payment against the loan and paying the balance off when you bring savings back up to $10,000. I'd rather you not be without cash in an emergency and in my opinion, paying off the loan early is a terrific idea. As an aside, I'm truly delighted that you are using the 401(k) to what sounds like the maximum and also using the Roth. I hope this helps and good luck.
You're spot on in your thinking. You're working towards multiple goals simultaneously (retirement savings, paying off debt, and establishing an emergency fund). That's not typical of for someone your age, I commend you!
Due to the fact you have a stable living situation at home with your parents, and your job is stable, you should be fine using your emergency fund towards eliminating your student loan debt. Keeping 2k as a buffer "just in case" makes sense as well. You'll have the student loans paid off in roughly 6 paychecks afterward.
Once the student loans are gone, you'll have an additional 400 per paycheck in cash flow. Use most of that to rebuild your emergency fund (typically suggest 3-6 months worth of living expenses). The remainder can be used towards upping your payments on your car loan.
I know most of this is reiterating what you've already said, but that should feel good knowing your thought process is right on track and should be proud of how much you're already putting away! Compound interest, coupled with a long time horizon will work it's magic for you!
Good for you! You are doing great already.
I would definitely consider using a good portion of your savings to help you pay down the debt faster. You an replenish your emergency fund.
A couple of things that I would also consider from the information you are giving us:
- In the future, outside of your home mortgage, try to pay/plan for your bigger expenses ahead of time and use cash for them instead of getting into debt. You should try to avoid car payments, or any other types of payments. Using debt for these things limits your financial flexibility and also doing it this way will give you a better perspective of what you can afford.
- At your age, I would also recommend that you use a Roth 401k if available. Your current investments have so much time to grow that you will much rather pay the taxes on your $10,000ish contributions than what they will grow to at retirement. I recommend that you wait to switch back to traditional 401ks once you are getting closer to retirement. You will probably make much more at that time and you will get much more benefit from your deductions.
I hope this helps.