| Deplete my cash to pay off student loans? |
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ClemTiger0408
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| Deplete my cash to pay off student loans? |
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Today I received a large bonus from my job that brings my current cash holdings (emergency fund included) to about the same amount as my Student Loans amount. Here are my details.
26 years old
Working for 3 years
~$18K in Student Loans averaging around 7% interest rate
~$20K in retirement savings and I contribute at 1% higher than max matching.
I pay about $300 in student loans
Absolutely no other debt.
Completely paying off my student loans would deplete my cash reserves for the time being. I am in a position where if a true emergency cropped up I could borrow from my parents.
The other wrinkle is I'm about to get married and we'd like to buy a house within a year. She currently has over $50k in cash and thus could easily pay the 20% down, but I'd feel somewhat guilty making her contribute that much to it.
So what do you think? $300 a month seems like a lot to me and I'd like to get rid of that, but on the other hand having all that cash might be good too.
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Fri Feb 17, 2012 6:51 pm |
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JosiahKnows
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Clem,
To know what you should do, try thinking about your situation another way...
Would it be worth it to you if someone told you could keep an 18k investment in your bank account if you would only be willing to pay them 7% per year to have it?
Most would probably answer- NO WAY!
The reality is that that is exactly what you would be doing. I do not always recommend a complete payoff, but in your case you are still young and it is more important to begin on the right foot than have immediate access to that full emergency fund.
That having been said, much of that decision is dependent upon how comfortable your fiance is with using her cash to make the down on the house. I might be old school, but it is my belief that a couple does best when they are in union, and the finances are part of that union. After marriage, the money, the debt, the goals, and the assets become "ours" not "mine". In this respect, you would be paying off the debt for the both of you, and she would be providing the down payment for the both of you.
I usually recommend keeping at least $1000 in your E-fund when you payoff a debt like this. Although, you did say you can borrow from your parents if there was a major emergency, so you may not HAVE to do that.After you are debt free, use that $300 you were paying towards your student loans and build that reserve back up.
Just to confirm, so that I make sure I understand you correctly, you're not using your retirement savings to pay this off right? It's coming from your bonus and your Efund.
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Fri Feb 17, 2012 7:25 pm |
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ClemTiger0408
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quote:
Originally posted by JosiahKnows
Clem,
To know what you should do, try thinking about your situation another way...
Would it be worth it to you if someone told you could keep an 18k investment in your bank account if you would only be willing to pay them 7% per year to have it?
Most would probably answer- NO WAY!
The reality is that that is exactly what you would be doing. I do not always recommend a complete payoff, but in your case you are still young and it is more important to begin on the right foot than have immediate access to that full emergency fund.
That having been said, much of that decision is dependent upon how comfortable your fiance is with using her cash to make the down on the house. I might be old school, but it is my belief that a couple does best when they are in union, and the finances are part of that union. After marriage, the money, the debt, the goals, and the assets become "ours" not "mine". In this respect, you would be paying off the debt for the both of you, and she would be providing the down payment for the both of you.
I usually recommend keeping at least $1000 in your E-fund when you payoff a debt like this. Although, you did say you can borrow from your parents if there was a major emergency, so you may not HAVE to do that.After you are debt free, use that $300 you were paying towards your student loans and build that reserve back up.
Just to confirm, so that I make sure I understand you correctly, you're not using your retirement savings to pay this off right? It's coming from your bonus and your Efund.
First of all, thanks for the advice. I must admit, this is not the response I expected.
And you are correct. I am NOT touching any of my retirement savings for this plan.
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Fri Feb 17, 2012 7:43 pm |
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JosiahKnows
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Ya, I know it's a response that encompasses a little more than you were asking, but In my career I've also seen too many in their marriages torn apart by money matters, sorry if that sounds preachy.
Also, you might consider something else- you said that currently your company is matching and that you are contributing 1% more than the match. First of all, how much are they matching? Is it dollar for dollar up to a certain percentage, or 50 cents on the dollar, etc?
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Fri Feb 17, 2012 7:56 pm |
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ClemTiger0408
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quote:
Originally posted by JosiahKnows
Ya, I know it's a response that encompasses a little more than you were asking, but In my career I've also seen too many in their marriages torn apart by money matters, sorry if that sounds preachy.
Also, you might consider something else- you said that currently your company is matching and that you are contributing 1% more than the match. First of all, how much are they matching? Is it dollar for dollar up to a certain percentage, or 50 cents on the dollar, etc?
Famous last words, I know, but my Fiance' and I are both REALLY good about money and I really cannot see that being an issue between us going forward.
My company matches 50% up to 6% contribution. So, obviously, a 6% contribution yields an overall 9% deposit in my 401k. I'm currently contributing 7% and dropping to 6% probably won't make a huge impact.
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Fri Feb 17, 2012 8:13 pm |
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littleroc02us
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So, I'm confused, where are you getting the money from to pay down the school loans? From your retirement savings?
Risk comes from not knowing what you're doing. (Warren Buffet)
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Fri Feb 17, 2012 10:04 pm |
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JosiahKnows
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That makes sense. I think you are beginning on a good note, and I hope the best for both of you. As your income grows I definitely recommend that you opt to elect an outside account so as not to invest more than the match provided by your company. Something that is tax-advantaged and secured.
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Fri Feb 17, 2012 11:37 pm |
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fast
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| Re: Deplete my cash to pay off student loans? |
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You say that your student loans are averaging (averaging, you say) around a 7% interest rate, and that tells me that you have more than one student loan; how many I don't know, but it does open up the option that it doesn't have to be an all-or-none proposition; thence, you could pay off some (or at least one) loans and reduce your monthly outlay; hence, there is the possibility of strengthening your cash flow without depleting your cash.
I don't think you should deplete your entire emergency fund. Right now, you're not in the position of having to turn to your parents in the event some financial hurdles came your way, but that's not to say that you shouldn't make strides to pay down on this debt.
There are various points of views you could take from the very aggressive idea of taking your emergency fund all the way down to $1,000 and paying the rest towards debt all the way to another extreme of (and again) dropping your emergency fund all the way to $1,000 and putting the rest in an index fund like [EDITED OUT BY USER], but from one tiger to another, my opinion is that you should go to neither extreme, especially with a marriage on the horizon.
Also, I would highly reconsider your goal of jumping into home ownership so quickly. You have a major life change coming upon you, and I don't want your financial life-vest to be both your parents and bride--numbers be damned. There's no overly compelling reason to make a decision that will leave you with such little cash so quickly.
Further, if you go ahead and knock out some of your debt (leaving you about, oh say, five to ten thousand dollars), you might even consider temporarily (temporarily, that is) stopping your contribution so that you could more aggressively attack your debt while maintaining a decent (but not overly extravagant or ridiculously barren) emergency fund as you and your finance approach the big date.
Finally, rent for awhile. I mentioned homeownership earlier. Knock your debt load down a bit. Get married. Get out of debt. Get the 20% down payment in hand and on top of a healthy emergency fund; then, think about buying.
Hope it helps.
Last edited by fast on Sat Apr 28, 2012 11:41 am; edited 1 time in total |
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Sat Feb 18, 2012 12:38 am |
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oldguy
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No more 'mine' / 'yours', everything is 'ours'. As a married couple you will have:
$70,000 cash
$20,000 401k
($18,000) loan
sum = $72,000
In general, keep the "long, low" loans and put your income stream to it's highest and best use. That will help you build wealth steadily and avoid the common pitfall of money arguments.
Eg, you are currentlly having 10%.yr invested in your 401k - if you earn $50k that's $5000/yr. If you invest in the generic market index (at 11%/yr), that will be $1,100,000 in 30 years. (The general market had a 19%/yr return for the most recent 3 yrs while you were building $20k, good job). The point is - don't allow your 30-Year Plan to be derailed by allocating income to small debt prepayments, etc.
So sort thru the SL's (average 7%), set aside the >20 yr term, < 6% loans as 'keepers', and accelerate the >6%, short term loans.
As for allocating 20% to a house - maybe you can do better. Over the yeras we have purchased several rental houses - I have paid 20% 'down' on only one occasion, the rest have been under 10%, sometimes nearly zero down.
The point is - USA mortgage capital is among the chaepaest capital in the world - no other nation allows you to borrow large lumps of money for 30 yrs - and none allow a Fixed Rate. The present 4.25% 30-year terms are at a lifetime low (and I'm age 72). So maximixe the loan size & length. (In the 1980s loan rates shot up over 15%, those of us that had low FR loans in place were in great shape).
Don't know what your familly income will be - but if you two can have $15,000/yr auto-deposited to your 401k's (so that you never see it), then the two of you can enjoy spending every dime that you earn, safe in the knowledge that you will have over $3M waiting in the bank at age 56.
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Sat Feb 18, 2012 4:28 pm |
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ed121212
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Just keep continue paying $300 a month and if your fiancee is going to help you later, then it's not a bad idea so that both of you can save money!
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Mon Feb 20, 2012 7:07 am |
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oldguy
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quote:
Just keep continue paying $300 a month and if your fiancee is going to help
 Seems like odd advice from someone who sells Payday Loans? lol
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Mon Feb 20, 2012 4:30 pm |
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halsay
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in my experience pre-closer of loans is not a good option. they charge some precloser charges which some time more than the actual remaining interest amount. so by getting the information the charges and the interest payable one can decide which one is best. I wish you a happy married life in advance. 
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Wed Jun 13, 2012 3:24 am |
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amz2412
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According to http://moneyfor20s.about.com/od/managingyourstudentloans/tp/Payoff-My-Student-Loans.htm
"One good reason to pay off your student loans is that it will lower your debt to income ratio. This means that you have more money available to you when it is time to buy a house or make other decisions. You will not have the commitment to make that additional payment every month."
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Mon Jul 02, 2012 5:48 pm |
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