I'm 24 years old, two years graduated. I just recieved a very very nice christmas bonus, and I'm torn between paying off a big chunk of my student loans, or contributing it to the Roth IRA I opened last year. It's very attractive to me to have my loans paid off, but I also know the earlier the better for the IRA. What do you think?
2006-12-23 03:11:00 · 6 answers · asked by love this site! 2 in Business & Finance ➔ Personal Finance
The decision really depends on what your interest rate is on the studen loans. Many people consolidated in the last several years at very attractive rates, between 3 and 5%. If you have one of those, I'd say go ahead and pay the monthly minimums on those, and use the money in the IRA.
If you have higher rates, paying off that loan looks pretty good.
2006-12-23 03:15:33 · answer #1 · answered by Uncle Pennybags 7 · 0⤊ 3⤋
It is better to pay off your loan. That way you won't be paying too much interest on it on the long run. The less debt you have, the better off you are and the more money you will be able to use later on.
With your Roth IRA, I would invest systematically. That means, you invest money into the funds you picked each month. It is not wise to put a one lump sum contribution every year because you don't know if you are investing when stock prices are high or when they are low. The whole point of investing is to accumulate as many shares as possible. With systematic investing, you lower the cost per share over time. Interest rates are not guaranteed in IRA and you may lose or gain value.
Take a look at this. Let's say you invested $100/month
Market A (rising market):
January: $10/share
February: $12/share
March: $15/share
April: $20/share
May: $25/share
Total shares accumulated: (10+8.33+6.67+5+4)=34 shares
Average cost per share: (82/5) = $16.40
Market B (fluctuating market):
Jan: $10
Feb: $8
March: $12
April: $14
May: $10
Total shares accumulated: (10+12.5+8.33+7.14+10)=47.97
Average cost per share: (54/5) = $10.80
Which market would you want to invest in? Rising market or fluctuating market?
Market A rarely happens in such a short period of time, but it does happen over a long period of time.
Market B is a more realistic scenario because price per share always fluctuate.
In summary, I would use the bonus to pay off the student loan. I would setup a systematic investment plan with the broker and put away at least $100 into the Roth IRA. This is what I'm currently doing.
2006-12-24 14:37:24 · answer #2 · answered by Anonymous · 2⤊ 0⤋
I'd do the Roth. In 35 years the loan will be long gone and the IRA money will be there for to help you enjoy life. You're off to a much better start than most people! Sounds like you're going to be alright!
2006-12-23 07:36:32 · answer #3 · answered by Big R 6 · 0⤊ 0⤋
If you're not having any trouble keeping up with your student loans and the interest rate on them is decent, put the money into the Roth IRA.
Student loans, especially through the government, have all sorts of nice benefits (tax breaks, deferments if you're out of work or going back to school, ect) so you might as well fund your retirement. After all, by the time you and I retire, there may not even be a Social Security left to help us out.
2006-12-23 07:07:04 · answer #4 · answered by Vadalia 4 · 0⤊ 0⤋
Stay current on your student loans, but I'd put the rest into a Roth - you'll be glad you did when you retire. Most student loan rates are fairly reasonable, so no real point in paying them off early.
Congrats on the bonus!
2006-12-23 04:45:17 · answer #5 · answered by Judy 7 · 0⤊ 0⤋
Do the IRA it is the best gift the US Govt ever gave the American Public. The interest accrued over the life of the IRA would excede what the rate of your loan.
2006-12-23 03:20:11 · answer #6 · answered by AN 2 · 0⤊ 0⤋