Finacial Situation - Pay off Debt, Save or Invest?

[spooky]

Woo hoo! I paid off my credit card today, and managed to save over $2,000 in the process. Now what's the next step?

I want to start investing (possibly $5,000 in a Roth IRA account a year, but I'm still looking into it and educating myself on it). The earlier I get it started the larger the ROI I'll have later down the road though. However, I heard that you should also have emergency savings as well (approx. 3 - 6 months salary), just in case. I also have approximately $10,000 to pay off in student loans. I'm 25 and graduated this past December. I started my job in August and I'll be eligible for benefits (401K, etc.) tomorrow, which I'm signing up for.

It's seems like there's a lot of options I could do with the money I have, but I want to make the most sound decision with financial intelligence so I have more stability later in life.

Should I continue saving? Should I pay off my student loans? Should I invest in a retirement account?

I look forward to all your responses. Thanks so much!

[rawxstasy]

Congratulations on your success ! I'm not a financial advisor or guru but I think it would be best to save an emergency fund first. Then pay off your student loans. Then you can think about investing it.

[Apresto]

You should make some mathematics on a blank paper and see what's best.
Don't keep the money in your head or they will disappear very easily.
That's it from me

[aelle]

A great resource for you: I Will Teach You To Be Rich Blog
Especially the section about automating your finances.

The way I would go about it would be:

1. Have an emergency fund first. Allows you not to go into credit card debt again. How much it should be depends on your life conditions and how comfortable you are with risk and debt. My emergency fund is about $10,000 but I am an expat so it needs to allow me to relocate quickly.

2. After the emergency fund, figure out what is the best use to make of your money. For example, if your employer offers a 401k match, it may be more interesting to max out that contribution and put your loan payment on the back burner.

Your different categories include things like emergency fund, loan repayment, retirement account, mid-term and long term saving (vacations, your wedding, down payment on a house), and daily expenses including FUN stuff!

3. Figure out how you feel about that plan. Money is a means to an end, and that end is feeling good. If it makes you feel uncomfortable to only have a 3 month emergency fund and you'd prefer having a year's worth, or if it makes you feel uncomfortable to have any debt at all, it can feel worth it to dedicate money to these even if it's not the most profitable strategy. But it's good to be aware of why you are making these choices.

[just jr]

Imo dont worry about a emergency fund per say. My advice is to look long and hard at dividend imvesting in a regular brokerage account. You can reinvest the dividends or use the money for a emergency. If the situation is dire then you can sell your positions just my two cents

[alexb5784]

Originally Posted by aelle

A great resource for you: I Will Teach You To Be Rich Blog
Especially the section about automating your finances.

The way I would go about it would be:

1. Have an emergency fund first. Allows you not to go into credit card debt again. How much it should be depends on your life conditions and how comfortable you are with risk and debt. My emergency fund is about $10,000 but I am an expat so it needs to allow me to relocate quickly.

2. After the emergency fund, figure out what is the best use to make of your money. For example, if your employer offers a 401k match, it may be more interesting to max out that contribution and put your loan payment on the back burner.

Your different categories include things like emergency fund, loan repayment, retirement account, mid-term and long term saving (vacations, your wedding, down payment on a house), and daily expenses including FUN stuff!

3. Figure out how you feel about that plan. Money is a means to an end, and that end is feeling good. If it makes you feel uncomfortable to only have a 3 month emergency fund and you'd prefer having a year's worth, or if it makes you feel uncomfortable to have any debt at all, it can feel worth it to dedicate money to these even if it's not the most profitable strategy. But it's good to be aware of why you are making these choices.

I love Ramit from IWTYTBR because his advice works! I no longer have credit card debt either and my student loans are almost gone. But before I pay them off completely, I'm putting money aside for an emergency. And then once that's done, I'm paying off my loans while investing more money into buying a home instead of my brokerage account. The stock market can wait.

[chadcharlie]

Originally Posted by aelle

A great resource for you: I Will Teach You To Be Rich Blog
Especially the section about automating your finances.

The way I would go about it would be:

1. Have an emergency fund first. Allows you not to go into credit card debt again. How much it should be depends on your life conditions and how comfortable you are with risk and debt. My emergency fund is about $10,000 but I am an expat so it needs to allow me to relocate quickly.

2. After the emergency fund, figure out what is the best use to make of your money. For example, if your employer offers a 401k match, it may be more interesting to max out that contribution and put your loan payment on the back burner.

Your different categories include things like emergency fund, loan repayment, retirement account, mid-term and long term saving (vacations, your wedding, down payment on a house), and daily expenses including FUN stuff!

3. Figure out how you feel about that plan. Money is a means to an end, and that end is feeling good. If it makes you feel uncomfortable to only have a 3 month emergency fund and you'd prefer having a year's worth, or if it makes you feel uncomfortable to have any debt at all, it can feel worth it to dedicate money to these even if it's not the most profitable strategy. But it's good to be aware of why you are making these choices.

Great advice here. Definitely build the cushion so credit cards are not your only safety net. Then start an automated contribution to a retirement plan, ESPECIALLY if they are matching, but even if they're not.

Lastly, compare interest earned vs interest paid. After you have your safety cushion, it makes no sense to continue saving in a savings account with 1% interest paid to you, if you are paying out 5% interest on money you owe other people. So if any of your debt has any nominal interest rate on it, pay it down, pay it down.

Ramit has great stuff; I also recommend The Richest Man in Babylon (among many others!) from way before Ramit's time, great advice in that very short book.

[Peri]

If I were you I would watch credit card promotions coming in mail and when a %0 interest rate offer comes --chase, discover etc- I would apply to get one. They are usually for small amounts 5.000 or 10.00 then I would cash advance the amount and pay off the student loan or if possible transferring the student loan to that card. So instead of paying a large amount of cash at once I would pay my student loan payments but still with no interest and will be done in a year. This way: a) I would still be building a good credit history--very important b) still have couple hundred dollars to put aside for my savings
Congrats for being debt free this young!

[slinkimalinki]

Just to say hello to everyone out there. I am not able to say too much right now as things are a little hectic, but I promise I will tell you guys my story in the next couple of days.

[AZen]

Hi,

I recommend you to follow the financial planning pyramid rules so:

1) decrease your debt (unless with the debt you are investing in an asset that creates you higher income then the interest rate you are paying on the debt)
2) start saving
3) start investing

You can find a nice link here.

Best wishes!

[splok]

Originally Posted by Peri

If I were you I would watch credit card promotions coming in mail and when a %0 interest rate offer comes --chase, discover etc- I would apply to get one. They are usually for small amounts 5.000 or 10.00 then I would cash advance the amount and pay off the student loan or if possible transferring the student loan to that card. So instead of paying a large amount of cash at once I would pay my student loan payments but still with no interest and will be done in a year. This way: a) I would still be building a good credit history--very important b) still have couple hundred dollars to put aside for my savings
Congrats for being debt free this young!

Cash advances usually have crazy interest rates. Student loans usually have good rates (at least compared to credit cards.) Even if you paid off the loans with current credit cards, then transferred the balance to a new card with an introductory interest rate (which is the only way to do what you're talking about afaik), you would only have the 0% for a short amount of time. Unless you were CERTAIN that you could pay off the loan before introductory period ends, you would very likely end up in a much worse situation than before.

Imo, 2 months of expenses in an emergency fund then pay off your loan. Depending on the loan interest rate and whether or not you have any employer matching options, you may be able to do slightly financially better by investing/saving before eliminating your debt, but imo, getting that loan payment off your back is worth more, psychologically, than a couple of percent here or there.