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What should I do with my extra money now that I'm done paying off my student loans?

I'm 25 years old and I am on track to pay off my student loans in the next few months. I have about $9,000 in a high-yield savings account (1.85 percent) and $4,500 in my 401(k), to which I am currently contributing $4,200 per year.

Once I am done paying off my loans I expect to have an extra $1,500 left over after my expenses for each month. I am going to need to buy a newer car in the next year or so and also want to start saving for a down payment on a house. At the same time, I know its extremely important to invest into retirement and even better the younger I am. What is the best way to balance my excess income between current and future needs, and where should I be investing the most into retirement (Roth IRA, Roth 401(k), 401(k), etc.)?

Banking, Retirement, 401(k), IRAs, Real Estate
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November 2018

Great job in paying off your student loans, that is a great feeling! $1,500 in left over expenses each month is spectacular.

After reading your current situation, here are a few ideas I had:

1. Investing for retirement starts with your 401k. What does your employer match? The typical rule is to contribute what the employer matches and if that equals 10-15% of your pay, you are saving enough for retirement. If your contributions + your employers match does not equal the 10-15% threshold of your income, you could simply open a ROTH IRA and contribute the remainder.

2. How does your credit look? The auto industry is facing some of the lowest interest rates in a long time. Couple that with Tariffs and maybe a slowing economy, you might be able to get a car loan for very cheap(0-2%) with perfect credit. Perfect credit (750+ score) is a great tool to use on your financial journey. You could easily absorb a new car payment in your cash flow, and just invest the rest and you'll come out ahead.

3. For the down payment, when are you looking to buy? General advice will say to save at least 20% for the downpayment, but if you're not looking to stay in the house for the entire loan term, you could lower the 20% or skip it all together. If this goal is 3 years or less, I would stay away from investing and just use a money market account or CDs to get a little interest and to be sure the money is available when needed.

4. For an emergency savings account, you want at a minimum, 3 months of expenses. Before investing, make sure you fund this account first so you don't have to sell or withdraw at an inopportune time.

Any cash flow left over after meeting those goals above, you can simply open a Brokage account online with any custodian and save and invest there. This money will be available anytime you want, you'll just have to pay short or long term capital gains tax, or a loss can be used on your taxes.

Hope this helps straighten out your situation!

Chance Butler - Intelligent Investor


November 2018
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