Is this a good financial strategy?

Question

Im 24 years old. Ive saved a good amount of money but I also have some debt. I have apx 50k in debt (all my car and student loans, NO credit cards). Ive knocked this down from 65k.

I have apx. 20k in assets. I have about 7.5k in what I call an emergency account, and 3k in a small funds account. I also have a well funded 401k.

Whats my next step? Any extra money I have should i try to knock down my debt, start investing in stocks, or both?

Dont own a house...am a freelancer for a tv station...

dont laugh: am PHASED OUT of a roth IRA, i made 111k....highly unstable!

Answer 1

Without a complete financial picture (do you own a house?), it's a bit more difficult, but here's what I suggest:

First, make a spending plan (if you don't already have one). Start with necessities (rent/mortgage, food, utilities, transportation - auto loan, gas, insurance). After this, budget some for nice-ities (movies out, CDs, books, every week or two). The rest will go to debt reduction.

Now, list your creditors, balances, and interest rates in order from smallest balance to largest (unless you have one very high interest rate, then it will go at the top of the list). This is the order you'll pay off the debts. Pay as much as you can on the first debt, and the minimum on all the others. When debt #1 is paid off, move that money to debt #2, continuing to make minimum payments on the others. The total of your debt payments will remain the same each month until all your debts are paid off.

Since you have more than enough in emergency funding, you need to determine where that money is better suited. For example, if your emergency fund is earning 1 or 2% in a bank savings account and you're paying 15-25% on your highest rate debt, liquidate all but $1000 of the emergency fund and put it on the debts.

If the "small funds" account is a pre-tax account (you'd have to pay taxes and penalties if you withdrew the funds) leave it there. If it's after-tax dollars, consider liquidating it, too, and paying off the debts (again, based on interest rate differences). If you make 10% on this money but pay 12%, you're losing money.

Leave the 401(k) alone, but reduce your contribution to just what the company will match until you pay off the debts. Once the debts are all gone, re-fund your emergency fund with 3-6 months EXPENSES (not pay), then increase your 401(k) contribution again.

For more info, check out Dave Ramsey's books, "Financial Peace" or "Your Total Money Makeover".

Answer 2

depends on the interest rate on your loans. I would say to pay down the car loan and invest the rest. The interest on the student loan is probably tax deductable (doubt you make enough at 24) and you can probably make more in the market now than you are paying. Even if they cancel each other out, then I would rather have $50K in the bank and owe $50K in student loans, instead of having $0 in the bank and owe $0 in student loans. If you want to buy a house, then the loans would hurt you, but not as much as having $0 down. And in the first case, you could always just send the $50K to the student loan company and end up in the 2nd case. You cannot go from the 2nd case to the first.

Wouldn't say this if you didn't seem responsible (having any savings and no CC debt at 24 is impressive). As for stocks, unless you have a lot of time to do the research and keep up to date, just invest in mutual funds. If not it would be like playing poker against a pro in atlantic city. You always hear of the guy that one, but the 99% that lose just keep their mouths shut.

Answer 3

First, have you refinanced and consolidated your student loans to a fixed rate? That's a biggie.

Having emergency funds is great, make sure they're in a high-yield savings account (5% or better is available on the internet).

I would continue to fund your 401(k) enough to get the maximum match from your employer. Leftovers should go to paying off your car, early if possible. I would not recommend paying off the student loan early if there are other options open for you - you get a maximum return on that investment (your degree) whether you pay off the loan early or not, and the interest is tax deductible in most cases.

Once the car is paid off, your leftovers should go to a Roth IRA until you've capped your maximum annual contribution ($4000 for 2007). Roth IRAs are great - contributions are made after tax, but withdrawals at retirement are tax-free and you can always take your contributions (not earnings) out at any time, for any reason.

Another option besides the Roth is to start saving up for a down-payment on a home. You can do both at once, or concentrate on one first.

Good luck!

Answer 4

If you have really maxed out on the 401k, I’d pay down the debt starting with those with the highest interest rate first. So the student loan might be the last to work on or if it’s only 3+%, carrying it for a while would not be a bad idea. Remember, reducing debt and the interest expenses frees up cash for other things and greatly improves you cash flow which gives you more to invest.

Answer 5

For sure, knock down the debt. Let's put it this way. If you're paying 7% interest on a loan, and meanwhile, you're getting a 12% return in the stock market, you're not very far ahead. If you figure that the cost of living (inflation) goes up 3% per year (+ your 7% interest), you're 10% negative, then you're 12% return on investment--You made 2% on your money. Woop-de-doo. If you're out of debt, it's just a straight 12% return.

Answer 6

always get rid of debt first

Answer 7

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