I am looking for some good advice on some financial decisions in my near future. I'll tell you about myself first. I am 23 years old, and recently "upgraded" as a captain at my regional airline, with a substantial pay increase to my minimum wage jobs I have previous held. I do have a substantial amount of debt. I currently owe $52,000 on my student loan at an interest rate of 8.25% as well as $4400 used car loan at an 11.4% interest rate. My minimum monthly payment on my student loan is $613 however I pay $750 a month. My minimum payment on the car is $240 but I pay $325 a month. I have no other debt and pay off my credit cards in full every month. After living expenses I have an excess of $1200 a month that goes into a savings account. My checking account holds just enough money to pay for my monthly expenses and my savings account currently has $10,000 in it, accruing on average of $1200 a month. I have roughly $3000 with a slightly aggressive portfolio in the stock market, which is mostly for my entertainment at this point. I'm looking for some gold old life advice. Purchasing a home, is something I'd like to do in the somewhat near future 2-5 years, only if that is a good idea. The way I think of my finances, is that I work hard for my money, I want to make sure I'm getting the most out of it and like everyone else, we want to make sure we make the right decisions. I'm seeking advice on what is the best strategy to do this "adult" thing the correct way with the least money out of my pocket. Should I tackle my debt more aggressively? If so how much? Should I focus on growing my money through investing? Keep saving for a down payment on a house? I feel like I've built up a decent emergency fund, and I'd hate to see my money sit in a savings account losing to inflation. Any help is appreciated.
Sat Mar 18, 2017 6:07 am
christcorp Preferred Member
Cash: $ 38.65
Joined: 05 Mar 2015
Some will say that it's ok to have loans, to keep them, and to invest your spare money. That is good advice. However, that only applies when your debt is charging 2,3, or 4% interest. When your debt is charging 8-11% interest, it's difficult to make more interest than you're spending. And the other problem is, investing is a potential return with interest. Your loans are guaranteed interest.
Every year you knock off of that student loan, you are MAKING a guaranteed 8.25% interest on your money. And every year you take off of the car loan, you're MAKING 11.4% interest on your money.
If your loans were at 5% or less, there would be numerous options. But in my opinion, you had only 2 good choices.
1. Refinance the student loan and car if possible to a loan rate at 5% or less, then start investing what is left.
2. Or pay off the loans as fast as possible and then invest.
Me personally, I'd take $4400 out of that $10,000 savings, and I'd pay off the car completely. Then take the $325 car payment you were making, and tack that onto the $750 student loan debt and pay that at $1075 a month. If you have more money per month you can throw at it, do it. You can have that loan paid off in about 4 years. That will earn you 8.25% interest on your money for the 2+ years you paid off the loan early. Plus 11.4% interest for 2-3 years on the car you aren't paying on.
May not seem great, but if you try to invest your spare money while having these two high interest loans, at the very best, you can hope to make about 1% on your money that you're investing and taking off the interest you're paying. Worst cast scenario is, you're investing money and after averaging, you're paying 2-3% interest.
If you can't refinance the two loans to a consolidated low interest, then pay off the 11.4% car loan, combine payments into the student loans, with anything else you can afford to throw at it, and pay it off as soon as possible.
Sat Mar 18, 2017 3:46 pm
oldguy Senior Member
Cash: $ 714.80
Joined: 21 May 2006
It's probably to your advantage to wait for your credit score to build up first, before doing a car refi and getting a home mortgage.
I would cap the savings at $5000, use $4400 to payoff the car. Put the rest, along with the $1200/m, into the $3000 stock fund. Stop prepaying the $52000 loan, pay the required $613/m. Direct as much as you can into an 11%/yr wealth-building fund as soon as you can.
Later, when you buy a house, get a 30 yr loan & pay the min on the mortgage. After 5 or 6 yrs, refi the house, take out enough so that you can pay-off the 8.25% SL (that will add $200/m or so to your mortgage, but it will be a 'keeper', maybe 30 yrs and 4%). And then use the borrowed money to build wealth.)
Sat Mar 18, 2017 10:56 pm
Cash: $ 3.40
Joined: 20 Mar 2017
Location: Denver, Colorado
Tackling the debt is a good plan. What you have left in savings can be held in a low-cost, moderate allocation portfolio to grow/fight inflation instead of sitting in cash. Once you eliminate the debt, you can keep some in the moderate allocation fund for short-term purchases like the house. The extra can go into a long-term retirement account like a Roth IRA with a more aggressive allocation.