Not sure whether to invest or pay debt?

[thechoson]

I am pretty young (22), just graduated college, and am headed to law school.

The good news ends there, as I have almost 10k in credit card debt. However, that is locked in for life at about 3 percent (got to love those balance transfer offers at citibank). No other debt at higher rates. I also have stockpiled some cash (around 1.5k in ING MM, 1k, 1k in 1 year cds).

Now, don't know what road to take now. My job itself is rather low-paying and unstable, plus i will be starting law school in August, so income will come to a dead halt. Until then, while I still have income, don't know what to do with it.

My emergency funds are at the lower end (around 3 months of expenses in the ING account), plus another 1k in checking. I have had random health issues that sometimes cost money, so I'd ideally like to stay with around this much in emergency funds, maybe increase it.

With additional money coming in, should I stockpile my cash reserves, or pay off CC debt? With the rate locked in so low and with MM interest rates going up, I would think stockpiling cash would make more sense. Also, how much money minimum should I be keeping in checking (considering it pays me no interest?)

At this point, should I even be considering saving for retirement?

Thanks!

 

[laurence]

I have a couple of questions:

How long is it locked in? Annual fees?

You should be comfortable with the size of your emergency fund, but beyond that I would pay off the debt. Usually the credit cards low rate is only good for a year, and then the rate goes much higher (12-15% or more). If there is an annual fee, well then you need out of that card ASAP and close that account. But if there is no fee and you have a "life of the debt" rate, then more power to you, just don't rack up any more debt!

 

[thechoson]

Thanks for the response.

The credit card offer is really solid. No annual fees, and the rate is locked FOR LIFE until I pay it off.

Of course, the only concern is, I goof one month or have some kind of emergency and I don't or forget to pay that one month. That will screw everything up, as they have the right to jack my rate up to the standard 13-18 percent. However, I will probably be able to avoid this scenario.

So you think my emergency fund size is good? How about the checking account? Do I have too much money in there, considering my ING Direct money is only 2-3 business days away from hitting my checking at any time I need it?

 

[laurence]

No, I meant, one should be comfortable with the size of your emergency fund, that's a personal decision, sorry for the confusion! Won't your law school have a student health insurance plan? If you set up an automatic payment to your CC the late penalty should be a non-issue. You don't have a lot of money, period (more than I had at that age, certainly) 1k in checking sounds right, you never know when your car will break down. how much will you make with your temp job?

 

[thechoson]

haha, thanks for clearing up the confusion. Considering my net worth is probably - 2kish, yes, I don't have a lot of money, period. haha. IT's rather embarassing.

My job (not temp, but might as well be, so I understand your point) pays me about 2k a month pretax. It's PT, 32 hours a week, but has full benefits, so the health issues have not cost me too much. Good point about the car, the 1995 Maxima probably costs me more than anything else in my life.

 

[Cut-Throat]

haha, thanks for clearing up the confusion.  Considering my net worth is probably - 2kish, yes, I don't have a lot of money, period.  haha.  IT's rather embarassing.

Don't be embarrassed by starting with nothing. The ones that should be embarrassed are the ones that are born with a Silver Spoon.

I did not start an agressive savings plan until I was 29. At that point in time, I was deep in Credit Card debt with an 18% interest rate. You are way ahead of most.

 

[Martha]

So how are you paying for school? Loans? Scholarships? Working? It may be hard even to maintain an emergency fund in school. When I was in law school I took out a pile of loans, got some free money, and also ended up working part time. No money saved for school when I started and I didn't have an emergency fund at all.

Ate a lot of Ramen noodles.

 

[kayelem]

I was in the same boat.  I remember very clearly the day my husband to be (weren't even engaged at the time, but he must have been thinking about it) very gently pointed out that despite my good job that my NW was slightly negative.  I had a bunch of school loans at the time and had just bought my first house...that was the turning point when I started saving (by first paying off the debt).  I think I was actually about 32 at that point.

Remember if you take on expensive law school loans that you will have to pay them back.  I hated that feeling once I was working of keeping so little of my income (as I was paying them back faster than required).  However the interest savings were substantial.

It's a tradeoff...the loans helped me to get a much better, higher salary job that allowed me to save more for retirement.  But it was tough going at the beginning.

 

[thechoson]

Martha- yea, loans and scholarships. It's pretty daunting, and I am looking at a lot of debt. However, I always figured school debt usually can be locked in at lower rates, and is secured against your higher earning potential, so I am not too fearful of it. This is why the CC debt is a thorn in my side, cause it is secured against nothing. Even at a lower rate, it's still a bit of a nuisance.

As hard as it might be, I intend to use the loan payouts during school as "income". I want to live as cheaply as possible, and just develop a habit of even socking away a portion of my loans to save.

For the time I've been on my own paying my own bills, 3000 dollars is the heaviest unexpected expense I've had to deal with (car repair). So I have always felt that's the bare minimum I could deal with in an Emer. account (for me, it's also roughly 3 months living expenses) 10k would be my upper limit, something i'd feel very secure with. So I am not sure if I should go for that 10k, or try to pay my cc debt first, which might mean I might never hit my 10k goal anytime soon.

 

[Nords]

Let's go with the conventional wisdom.

First, go find a credit union.  Many of them extend membership to just about anyone, including Pentagon Federal Credit Union and probably several in your local area.  (Look up credit unions in your yellow pages or contact the CU trade association.)  You should be able to get some sort of checking-account interest, although you'll do much better with ING.  I guess the trick is to keep your checking balance low enough to minimize the interest penalty but high enough to handle the ING transfer delay time.

Does your PT employer happen to match 401(k) contributions?  If so it might be worth contributing your share up to the extent of the match.  But it'd have to be a great match to make it worth your risk.  The only reason that I'm even mentioning this is because conventional wisdom regards 401(k) matches as free money.

Regardless of its great rate, your CC debt is costing you 3%.  If the loan is a thorn in your side, then perhaps you should pay some of it off (and sleep better in the law library) while saving some money.  So you could devote half of your savings to reducing the size of the thorn.

You could put the remainder of your savings/cash in CDs (for unexpected law school expenses or other emergencies).  A longer-term CD (like PenFed's 3 years @ 5%) could beat the CC interest and you may not need the money for the life of the CD.  You can buy them in $1K increments and any early redemptions are only penalized six months' interest.

If you're feeling really lucky, you could open a Roth IRA account-- again in CDs.  The Roth deposits will compound tax free and the contributions can be withdrawn for educational needs.  You'll have to scour IRS Pub 590 to make sure your law school qualifies for that.  (Great lawyer training.)

When I was your age I decided to rent the 1BR apartment WITHOUT the balcony because it saved me $15 on my $350/month rent.  I brownbagged lunch (and kept it up for about two decades).  I found just about all my possesions-- especially clothing, furniture, & kitchen items-- at Goodwill & Salvation Army stores.  The only time I ate out for the next two years was when my later-to-be-spouse took me out for pizza (because she sure wasn't going to live like that!).

 

[laurence]

Like others said above, the fact you are even thinking about it puts you way ahead of the curve, I was thinking of boozing and scoring at that point! Now at age 28-30 I'm finally getting my financial act together. Get an emergency fund amount you are comfortable with, make sure you have plenty of room on your credit cards in case of a disaster, line up your student loans, have as much fun as you can in law school.

 

[lazyday]

You mention scholarships... if any are need-based, they may look at how much assets you have. If so, and debts aren't taken into account, it might make good sense to pay off the debt, to get more scholarship $.

If the above doesn't apply, I'd suggest you consider not paying off the debt (since you say the 3% rate is solid), but not investing either. Instead, you could build up "cash" assets until you had enough to pay the debt off if you wanted to, and still have your emergency fund.

This would keep options open. If you miss a payment and rates go thru the roof, you would be able to pay off the debt all at once. On the other hand, if you're careful and maintain the 3% rate, you might be able to do better than 3% in interest, and could be in better shape for the medical and other costs you brought up, compared to if you paid the debt and then had to borrow at a high rate in case of emergency.

From what you've said so far, your situation sounds much too risky to be investing in the stock market already, but everyone will have their own opinion.

By "cash" above, I mean short term CDs, high interest savings or checking accounts, Vanguard short term bond or money market accounts, etc.

Nords' Roth idea earlier might make good sense too. You should be able to hold cash/shorterm bonds there, and (please double check this)remove your contributions without penalty if needed. I'm not sure if this only is for medical or education uses, or if you can withdraw your contributions for whatever you want. (You may need to leave the interest in there.)
Later, when you're making the big bucks, any money still in the Roth can be put into stocks and accumulate tax free for life. Huge benefit if you're in a high tax bracket.

 

[thechoson]

thanks for the advice, everyone, much appreciated.

lazyday- that's one of my top ideas as well. Just accumulate cash up to the point where it matches or exceeds my cc debt. Since 10k in cash is my goal, that would fit the bill, actually.

I do agree that maybe investing in stocks/ or setting up retirement accounts might not be the wisest choice right now.