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Need Advice Where to Put Money
Old 01-09-2010, 11:40 AM   #1
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Need Advice Where to Put Money

Hey I am currently 24 years old, making $52k/year - company doesn't offer a match so I am not currently enrolled in 401k and wouldn't be able to until March.

Debts:

Car: $16,159 @ 3.9% fixed paying $357 / month
Student Loan: $21,221 @ 3.66% variable paying $150 / month

Money

EF: $10k about 8 months worth of expenses
$416/ month into roth

Expenses $1160 / month

I have about $1555 available a month. I am planning on paying off either the student loan or the car debt this year. The problem with the car is I drive a lot for work (make .40 cents a mile but don't figure that into my income) so the value of the car right now is $12-14K.

Should I pay 16k on a car that is only worth 14k at best? or pay off student loan debt

Thanks for the help and advice is appreciated

Joe
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Old 01-09-2010, 12:05 PM   #2
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When I was your age I always had new cars also, can't blame you for that. If it were me I'd tell you to sell the car, buy a cheap used one and save $357 the month.

Others here will be better at telling you where to put it.
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Old 01-09-2010, 01:57 PM   #3
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When I was your age I always had new cars also, can't blame you for that. If it were me I'd tell you to sell the car, buy a cheap used one and save $357 the month.

Others here will be better at telling you where to put it.
It's not clear to me whether $16,159 was the original purchase price or the remaining balance on the loan. I would certainly not suggest selling the car if the remaining balance is more than it would sell for. That would leave Joe still owing money on the original loan, plus needing to buy another car. At about that age I bought a new car, but it was an inexpensive subcompact model and I drove it until it fell apart (something more than twenty years later). Maybe the car's value as transportation is greater than its value for resale. There is something to be said for having a really reliable car, especially if (as appears in Joe's case) lots of driving is part and parcel of his livelihood. I would expect a relatively new car to be more likely to be dependable than a cheap used one.

In Joe's situation, I would be inclined to pay off the student loan. It is both a larger amount and the variable interest rate presents some risk that it will cost more to pay off the same loan later than it does now.
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Old 01-09-2010, 03:15 PM   #4
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I also recommend you post at www.boglehead.org. They have a bunch of friendly people who will provide you wonderful advise on this!
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Old 01-09-2010, 03:27 PM   #5
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It's not clear to me whether $16,159 was the original purchase price or the remaining balance on the loan. I would certainly not suggest selling the car if the remaining balance is more than it would sell for. That would leave Joe still owing money on the original loan, plus needing to buy another car. At about that age I bought a new car, but it was an inexpensive subcompact model and I drove it until it fell apart (something more than twenty years later). Maybe the car's value as transportation is greater than its value for resale. There is something to be said for having a really reliable car, especially if (as appears in Joe's case) lots of driving is part and parcel of his livelihood. I would expect a relatively new car to be more likely to be dependable than a cheap used one.

In Joe's situation, I would be inclined to pay off the student loan. It is both a larger amount and the variable interest rate presents some risk that it will cost more to pay off the same loan later than it does now.

Thanks for the advice, the $16,159 is the remaining balance, and I do travel a lot for work. Put on 32,000 miles last year.

I have been taking care of it though with full synthetic oil changes every 5k miles so hoping the car lasts
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Old 01-09-2010, 04:02 PM   #6
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I also recommend you post at www.boglehead.org. They have a bunch of friendly people who will provide you wonderful advise on this!
I second this suggestion. Here is the best format to post your question.

Bogleheads :: View topic - Asking Portfolio Questions

It may require you to do a little research but it is information that you need to understand anyway, to make a good decision.
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Old 01-09-2010, 09:32 PM   #7
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Thanks for the advice, the $16,159 is the remaining balance, and I do travel a lot for work. Put on 32,000 miles last year.

I have been taking care of it though with full synthetic oil changes every 5k miles so hoping the car lasts
Wow, you weren't kidding about driving a lot! My car (successor to the above-mentioned subcompact) is going on four years old and doesn't have 32,000 miles on it yet.
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Old 01-09-2010, 10:31 PM   #8
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Quote:
Originally Posted by joem04 View Post
Debts:

Car: $16,159 @ 3.9% fixed paying $357 / month
Student Loan: $21,221 @ 3.66% variable paying $150 / month

I have about $1555 available a month. I am planning on paying off either the student loan or the car debt this year. The problem with the car is I drive a lot for work (make .40 cents a mile but don't figure that into my income) so the value of the car right now is $12-14K.

Should I pay 16k on a car that is only worth 14k at best? or pay off student loan debt

Thanks for the help and advice is appreciated

Joe
If you want to pay off one of the loans earlier, I suggest paying off the student loan first because of the variable rate. It's also my understanding that it is almost impossible for people to walk away from a student loan.

If you feel comfortable with the $10k emergency fund, that's fine...but it seems a little low to me.

My 2 cents.
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Old 01-14-2010, 07:25 PM   #9
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Since both your loans are at relatively low rates and you can't contribute to the 401k yet, I would:

1) Beef up the emergency fund a little more. Personally I just feel better with more in liquid funds.

2) Put general extra income toward student loans. Your rate is low, but still higher than you would get with most currently available savings instruments

3) Put any money you get for work-related travel toward the car loan -- if you are disciplined about this, you should be able to pay off your loan in under 2 years (assuming most of your 32k in driving is work-related)

4) As soon as you are eligible for 401k, sign up and contribute the max, even if you aren't eligible for employer matching yet. Your W2 income will drop, hence lower taxes, which you can then roll over into paying off the student loan. And at your relatively young age, investing now will really help you get a jump on a good retirement account balance (and eventually FI).

lhamo
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Old 01-15-2010, 07:59 AM   #10
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I'd hack away at the car loan. If you can get it paid off you'll significantly reduce your monthly expenses, and if nothing else you'll be getting out from under water on it which will make life easier if at some point your decide you need to sell it. And as soon as the car is paid off review your auto insurance and consider dropping collision and comprehensive, or at least raising your deductables.

Coach
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Old 01-15-2010, 08:51 AM   #11
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Since your company doesnt offer a 401k match, I would max a Roth IRA. Build emergency fund to 1 year expenses. Once all that has been accomplished, pay down the car first, then student loan. If you plan on owning a home, maybe start saving for it.

My opinion on 401k's is that unless your company matches, the future tax hit we will all be paying is going to outway the cost of taking the hit today.
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