Whole lotta debt

[Bretttd]

So I'm a 27 year old who just graduated and entered the workforce in June 2012. I sort of have a unique problem. I have ~150k worth of student loans(not that unique among my peers), my wife graduates in may with about the same amount of loans, and we close on a house next month for 180k.
This adds up to well over a half-million in debt when you include how much interest I am going to pay. Luckily, I didn't waste my time in school and have a pretty high income for someone my age(my wife graduates in may with the same credentials and roughly the same pay I have).
My problem is that I really want to go ahead and start saving some. But with our student loans at 6.8% interest I can't think of any investments that will return more than 6.8%, so it makes no sense to save when I could just use that money to pay off more student loans.
I have a 401k at 7.5%, and I really wanted a roth IRA but as it turns out my income right now is just high enough that I am over the income limit to even make partial contributions to one.
I've been lurking on this forum for awhile and thought I'd join to solicit some free advice? Would you still try and start saving even though it is more logical to pay more on your debt? Or Put everything into the debt for ten years then start saving?

 

[Tgancarz]

Seems to me that paying down student loan debt first priority

 

[Tgancarz]

At same time 401k contributions up to company match

 

[nvestysly]

Do Both

I think you can do both - pay off the loans aggressively and save aggressively.

For me (and maybe you) I found saving/investing to be a very satisfying endeavor. The compounding effect of $1k becoming $2k, then $4k, $8k and so on was fantastic. The compounding from $100k to $200k then $400k was nothing short of amazing. Now we're talking about real money. For compounding to work you have to save/invest but you also need time. Time is a very important factor in the equation.

While DW and I didn't have the debt you have we also didn't have the salary back in the day. We paid off loans - student, auto and house as quickly as possible - sometimes doubling the payments - so we could be out of debt by our 40's. When the early 50's rolled around the saving/investment really kicked in.

So my suggestion is do both. Even with your $180k mortgage you can live a relatively simple life and save lots of money even while paying off debt. For your mental sanity I think you have to start saving.

 

[MBAustin]

Good for you to focus on tackling this from the very beginning. One suggestion - before anything else, get an emergency fund set up so you don't end up with credit card debt at higher interest than your school loans when #*%& happens. Good luck!

 

[foxfirev5]

I understand the student loans have pretty good terms. Taking the bird in the hand approach I would save like mad and pay off the loans with slightly less emphasis. A good sized emergency fund can go a long way for security and confidence.

 

[Gumby]

My suggested order of applying money

1. Emergency fund -- if your employment is secure and/or you have qualifications that would limit any period of unemployment, maybe 3 months' worth of expenses.

2. If you have a 401k employer match, contribute enough to get the match, but no more.

3. Pay off the student loans.

 

[Bretttd]

Good advice from everyone.
I'm already at the max of my employers 401k, its a pretty crappy match.
I am working on the emergency fund. Also, since I set my loans and mortgage at 25 and 30 years respectively, I'm paying them off way quicker and so my student loans and car payment are currently a couple months ahead, so if "#%^# happens" I won't have to make those payments for a few months.
In reference to MBAustin, I got a credit card in high school and still have it with an interest rate of 4.1%(yea dont see many of those anymore), so my credit card actually has a better rate than my student loans, but I get your point.

 

[Htown Harry]

Good advice so far.

My tip is to start your planning with net worth targets for the next few years, then focus on the allocations of your wealth-generating savings and debt reduction from there.

Remember paying off the loans is not only a 6.8% return, its a guaranteed return.

You mentioned your current income and good career prospects, but not whether you anticipate increases in future income. One strategy many have used is to set a level of loan payments that achieves loan payoffs at a desired target year. Then make and stick to a resolution put salary increases, bonuses and windfalls toward the retirement fund or savings.

Finally, know that your plan will change. At your age, career and family opportunities are almost guaranteed to unfold in ways that will change spreadsheet assumptions significantly. That's life. If they don't change the LBYM values you show in the OP, you'll be fine.

 

[chris2008]

My top priority would be an emergency fund of 3 months of expenses.
From then on the debt has to go away.
In the beginning repayment would be mixed with increase of the emergency fund up to 6 months expenses, then all dough goes to the debt.
If there is a company match I would build count my portion as part of the emergency fund.

 

[JoeWras]

Welcome Brettd! It is satisfying to see younger folks like you really put some good thought into this. So many don't. With your serious consideration, you are now way ahead of the curve. And it sounds like your large student loans will eventually pay off since you seem to have a good income from that investment (judging by your roth comment).

I pretty much agree with Gumby's approach. For 401k, I started with it up to the match while I was in debt pay-down mode. Then I upped it as my debt went down. This approach paid off very well for me.

Finally, I want to say I laughed at the title of your thread. Maybe it is just me, but when I read "Whole Lotta Debt", I heard this Jimmy Page bowed guitar riff run through my head from "Whole Lotta Love." Perhaps you've heard it. You were, what, minus 16 years of age? I know many of the ER's here are quite familiar with this song.

 

[obgyn65]

I would take the same approach as below.

My suggested order of applying money

1. Emergency fund -- if your employment is secure and/or you have qualifications that would limit any period of unemployment, maybe 3 months' worth of expenses.

2. If you have a 401k employer match, contribute enough to get the match, but no more.

3. Pay off the student loans.

 

[ERhoosier]

My suggested order of applying money

1. Emergency fund -- if your employment is secure and/or you have qualifications that would limit any period of unemployment, maybe 3 months' worth of expenses.

2. If you have a 401k employer match, contribute enough to get the match, but no more.

3. Pay off the student loans.

^^^^

In this economy, paying off those student loans is unbeatable guaranteed rate of 'return' (i.e. avoiding paying that 6.8% interest). Plus lowering student loan debt load may improve your credit score should you need to borrow elsewhere in future (e.g. car loan).

 

[Candy83]

So I'm a 27 year old who just graduated and entered the workforce in June 2012. I sort of have a unique problem. I have ~150k worth of student loans (not that unique among my peers), my wife graduates in May with about the same amount of loans, and we close on a house next month for 180k.

This adds up to well over a half-million in debt when you include how much interest I am going to pay. Luckily, I didn't waste my time in school and have a pretty high income for someone my age (my wife graduates in May with the same credentials and roughly the same pay I have).

A high income doesn't equate with age. It's still math along with the money. I don't think it's good that you and your wife have a combined $300,000 in student loans. But it will work out for you if both of you have employment, with the income, which overcomes that debt.


You are employed. But your wife is not. And you mentioned — for you — that it's only been since June 2012. That is not even a full year. It's just past 6 months.

I don't recommend buying a house at this point. (But I do recommend building up liquid savings in what way you can.)

I would not recommend taking on buying a house until you've had more time. Time for your wife to become employed as well, and where you both having a realistic, structured program to implement in which you both pay down substantially that combined $300,000 in student loans. This should come before making the commitment to take on another $200,000 for a house. There is also this: If you both insist on buying a house, can you two go for something substantially less in cost?

All of this is with consideration for your desire to establish retirement investment accounts while you have $300,000 in combined student loans and are about to take on another near-$200,000 for a house.

You're 27. You just graduated from college and entered the workforce under a full year ago. One cannot do it all when there is responsibility for being in debt for over a quarter million. And what you mention is an example of overextending yourself. If you don't believe that … how about the consideration that, perhaps in less than five years, a new person comes into the picture.

 

[youbet]

My suggested order of applying money

1. Emergency fund -- if your employment is secure and/or you have qualifications that would limit any period of unemployment, maybe 3 months' worth of expenses.

2. If you have a 401k employer match, contribute enough to get the match, but no more.

3. Pay off the student loans.

+1

I was just about to start typing this same advise when I noted Gumby had already done it. This is the best formula, IMO.

 

[Animorph]

My suggested order of applying money

1. Emergency fund -- if your employment is secure and/or you have qualifications that would limit any period of unemployment, maybe 3 months' worth of expenses.

2. If you have a 401k employer match, contribute enough to get the match, but no more.

3. Pay off the student loans.

That's your answer. Unless the market tanks and you can get in at -30% to -50% off. Paying off loans increases your net worth just as quickly as investing if the returns are similar.

 

[GrayHare]

Don't forget that inflation negates a portion, often a large portion, of all loans. So, for example, if your mortgage is at 4%, and inflation runs 3%, those mortgage dollars are costing you a mere 1% in real terms. You can get better than a 1% real return via investing, so invest rather than pay more than the mortgage's monthly minimum. The student loan, being at a higher rate, gets the paydown priority, but again thanks to inflation it's not as bad as it initially looks.

 

[Letj]

Since you are both high income, could you not live on one salary and aggressively pay down both student loans with the other. Personally, the only loans I am comfortable with is a mortgage loan.

 

[mpeirce]

Since you are both high income, could you not live on one salary and aggressively pay down both student loans with the other.

Give this serious consideration.

As you transition from college to working life, your new spending habits will start to become the new normal. Be careful what that normal becomes.

It's a lot easier to get used to living off a single income and being able to pay off debts with the second, than to get used to living off two incomes and later trying to cut that back to get serious about paying off your debts.

 

[Bretttd]

Since you are both high income, could you not live on one salary and aggressively pay down both student loans with the other. Personally, the only loans I am comfortable with is a mortgage loan.

This is actually the plan. We've talked about it and my paycheck will go strictly to loans and mortgage. My wife has two verbal job offers and another place in the area that has open positions so we know she will be working somewhere(we moved to this area for this reason mainly).
I'm kind of interested in your comment Grayhare, my interest rate is less than 4% so that gives me a little wiggle room to possibly invest in something once I get an emergency fund down, or maybe talk my wife into investing some of hers.

 

[nvestysly]

This is actually the plan. We've talked about it and my paycheck will go strictly to loans and mortgage.

Several years ago, with a little motivation after reading Your Money Or Your Life, DW and decided to live on much less than one income. We both maxed out the 401k's, contributed to Roth back when we could still qualify, paid off the house, saved in I-Bonds (still doing that for the emergency fund), and invested as much as possible. Boy did that ever pay off!

Good Luck in your endeavors. You are so far ahead of most people there's no reason you will not be financially successful.

 

[chris2008]

IMO the benefit of inflation on debt is overvalued.
Only if your income rises more than inflation (or the value of the house that you purchased with debt) you will have a benefit at all.
If your income does not, you will still have to repay the same nominal volume of debt with same interest rates from the same volume of salaries. But you will see price increase of all the goods that you need.