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Savings vs Loan Pay Down, Engineering my Monies
Old 10-13-2013, 06:26 PM   #1
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Savings vs Loan Pay Down, Engineering my Monies

Hi

I've been lurking for a number of months and finally am posting here!

I'm a 29 year old electrical engineer who has been out of college for almost 3 years.
This year I'll make 60k from salary and bonuses.

My assets:
2k HSA everything over 1k goes to an index fund
8k 401k (4% matching) 75% domestic stocks 25% foreign
12k CD's earning squat. This is my FU fund.
18k Half a house in another state my brother is buying me out at $500/month
160k House I live in purchased in March 2013

My debts:
130k Mortgage on house at 4.25%
42k Student loans from 2.1% to 6.55%

I have worked through my taxes for the 2013 tax year and decided to up my 401k contributions to 25% from 5% for the last 3 months of 2013. This should put me in the 25% tax bracket by 2k. My idea behind this is to slow the rate of paying down the student loans in favor of the 401k. I'll still be making extra payments on the student loans especially when I get my Christmas bonus which they don't take a 401k contribution out of. Does this make sense? Or would I be better off only doing the 4% until I get the student loans at 5% and higher paid off? My 401k is up 19% ytd so its hard not to want to put more in it!!

My idea for next year would be to max out the HSA again and try to up the 401k till I am just a $2-4k into the 25% bracket then put everything else towards the student loans. I'd be glad to hear some opinions on this. Maybe I just like saving my money more than paying back my loans!!

Thanks
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Old 10-13-2013, 07:45 PM   #2
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I'm a strong proponent of putting as much as you can into the 401k. The company is giving you free money with the match. At your age the 401k is important. You will be pleasantly surprised how that will look in 20 years!
After that pay off your debts as aggressively as you can....that student loan is probably typical fir many these days. You will enjoy promotions and bonuses in the future, use a significant part of those to get rid of debt., but enjoy yourself too, you have earned it.
Good luck!
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Old 10-13-2013, 07:53 PM   #3
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I run with the higher risk crowd. Consider paying off the 6.55% loan . String the 2.1% loan out as long as possible. You only get a limited opportunity to contribute to your 401k (and Roth IRA!) each year. No "rollover" contributions if you didn't fill it up last year. With a reasonable loan rate, you have a chance to do better by investing instead of paying it off. And that's before investing pre-tax in a 401k. So I'd feel very comfortable investing in the 401k and making minimum payments on the lower rate loans. Your comfort level may vary.
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Old 10-14-2013, 07:27 PM   #4
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Quote:
Originally Posted by birdie View Post
I'm a strong proponent of putting as much as you can into the 401k. The company is giving you free money with the match. At your age the 401k is important. You will be pleasantly surprised how that will look in 20 years!
After that pay off your debts as aggressively as you can....that student loan is probably typical fir many these days. You will enjoy promotions and bonuses in the future, use a significant part of those to get rid of debt., but enjoy yourself too, you have earned it.
Good luck!
+1 I'm with Birdie.
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Old 10-14-2013, 07:59 PM   #5
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Quote:
Originally Posted by birdie View Post
...that student loan is probably typical fir many these days. You will enjoy promotions and bonuses in the future, use a significant part of those to get rid of debt., but enjoy yourself too, you have earned it.
Good luck!
Most of my friends have similar student loans, a few were lucky to have family in the industry to hire them for internships and they exited with less loans.

I could save more but I like going places, this year I volunteered in Honduras for 11 days (which doubled as a deductible charitable contribution!!) and with all the travel I do for work I get points and I just purchased my $7.50 ticket to Puerto Rico! I'm going for two weeks of language immersion school. I really want to learn Spanish and if I like this I think I'll go to another language school in a cheaper country for a 12-16 week course.


Quote:
Originally Posted by Animorph View Post
I run with the higher risk crowd. Consider paying off the 6.55% loan . String the 2.1% loan out as long as possible. You only get a limited opportunity to contribute to your 401k (and Roth IRA!) each year. No "rollover" contributions if you didn't fill it up last year. With a reasonable loan rate, you have a chance to do better by investing instead of paying it off. And that's before investing pre-tax in a 401k. So I'd feel very comfortable investing in the 401k and making minimum payments on the lower rate loans. Your comfort level may vary.
The 12k FU fund gives me a feeling of security as I know I can make it last at least 6 months if things should go bad so I'm pretty comfortable with investing instead of paying down debts. That 6.55% really irritates me, especially when I get 0% for 18 month credit card promotions! But the student loan interest is and above the line deduction which helps a little.

I haven't decided if I'll contribute to a Roth IRA for 2013 or not, I can still put that decision off for a few months.
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Old 10-14-2013, 09:59 PM   #6
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I feel like I was in your shoes last year Stiky. What I did was contribute enough to get my 401k match, maxed out my Roth IRA for 2013, and then plowed everything else into my student loans to get those paid off. I feel like I'm a bit more risk adverse at times so I wanted to get rid of those loan payments before stashing large sums into retirement accounts. Now that I have my loans behind me I don't have as much to worry about if the ole business closed down tomorrow and I'm without a job. Instead I'm taking those former loan payments and using the money a bit more freely on my investments.

You'll get 5 years of qualified student loan interest deductions which can be nice, but personally I like an interest rate of 6.55% on $0 rather than a $600 tax deduction on $2,500 worth of interest
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Old 10-15-2013, 04:12 AM   #7
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The fact that you can contribute to the 401k with pretax money makes it a great vehicle for saving. Every dollar that goes there is earning an amazing return well above the annoying 6.55% on that student loan just because you are not paying income tax on it. For that reason, the 401k would be my primary saving tool for any long term savings goals.
If you were talking about an 18% credit card loan my answer would be to focus on the debt, but with such a low rate the 401k is a better idea.
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