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I am able to save $1,100 a month, after all expenses and after paying off my 2.24% and 3.15% student loans. I want to make smart decisions with my money, but am not sure what to do. I currently have a secure job and have about $23,000 in this low interest student loans. I have no credit card debt and I have $5,000 in savings. I am single and 22.

Should I: a) use that $1,100 to pay off debt, even though it is at a low interest rate? b) save it in a "high interest" savings account? c) invest it? d) a combination? e) something else?

I've decided that I'm interested in having quality experiences (sporting events, etc.). What will be the most memorable/worth the money?

edited Dec 22 at 13:07

asked Dec 8 at 20:53

Daniel
315●8

Woohoo! Our first bounty question! ;) How else can we help you? Click on the "edit" link in your question and update if you want more information, clarification, etc. – mbhunter Dec 22 at 5:29

mbhunter · Accepted Answer · 2009-12-09 05:04:07Z UTC

I'd advise throwing as much into your emergency fund as you can until the economy gets back on its feet. Pay only what you need to on the loans.

Here's my reasoning. The $23,000 in loans is still a fairly big balance, and I'm assuming that you have a regular (amortized) payment on that loan. Putting extra money against the debt will reduce the total interest you pay on the loan, but it doesn't do anything to reduce your payment. They'll still come, every month, for quite a while.

An emergency fund buys you time should something bad happen. A bigger emergency fund buys you more time. I think it's more valuable right now to buy time than it is to pay down debt.

Also, my two cents, but I think there's plenty of bottom still to be had in the stock market. Stay in cash.

Dr Dean · Answer 2 · 2009-12-08 21:49:17Z UTC

I would strongly recommend paying off the student loan as quickly as possible. In this day and age, job losses are a real danger, and student loans don't go away.

I would also build up your emergency fund. Maybe put half your extra money in your Emergency Fund until you build up 6 months of expenses, and half against your student loans. Once you build up your emergency fund, pile the money against the student loans.

Use a higher interest money market acct. for the emergency fund, since you should not be removing the money any time soon.

Once that is accomplished, then start your wealth building plan.

Great job.

Cyrus · Answer 3 · 2009-12-09 15:43:45Z UTC

I think $5000 is more than enough for an emergency fund right now, given your stated stable job situation, and I would throw all of this extra money at your student loans and knock them off as soon as possible. I would try to find even more money in your budget by cutting your lifestyle, and be done with these loans in less than 18 months. Once the loans are gone, then you will have even more money to build a larger emergency fund and start investing.

Investing while you still have non-mortgage debt is not a good idea, regardless of any theoretical spread on the interest rates. Once you mathematically factor in taxes on the gains and the increased risk factor, you don't really make much. If I asked you, "Should you borrow money on a student loan or a bank line of credit and invest that money," you would probably say no, because that dramatically increases risk. But by not paying down debt and investing instead, it's as if you are doing exactly that.

Revanche · Answer 4 · 2009-12-11 02:55:56Z UTC

I'm going to give a variation of MBH's answer: Keep the lion's share of your money in cash, and set aside up to $300 for investing per month. I understand the wish to be participating in the market now, but here's another way to look at it.

How long can you go on that $5000 in case of unemployment or emergencies? For at least the next year, I'd feel much more comfortable with cash in hand than putting cash in stocks. Sure, you can always cash out the stocks if you need them, but once I commit to my portfolio, I'd rather cash them out when I want to at a high and not just because I need the cash, risking selling low. Having more ready cash on hand would help stave off that possibility.

I'd slow down the emergency fund savings at around $15,000, probably.

mbhunter · Answer 5 · 2009-12-23 16:30:41Z UTC

Spending on memorable experiences ... hmmmm ...

About the only thing that pops to mind is traveling around Europe for a few weeks. I seem to recall that train passes are pretty reasonable for young adults.

But then again, I don't know what interests you! What's the "etc."?

Update: Based on your comment, friends/family make events memorable, and you don't even really need to leave town or spend a ton of money. One of the best times my I had this year was doing a "group Valentine's Day" with my wife and some other couples from church. We went out to dinner and had a great time, in town.

Daniel · Answer 6 · 2009-12-14 20:20:20Z UTC

Thanks for all of your answers, I honestly can't choose one that I thought was better than the rest. I think I will definitely take all of them into consideration. I will continue to save and built up an emergency fund, invest a little, make extra payments on loans occasionally, but I I wil also spend my money to have some fun. I just booked a ticket to LA for New Year's to with my girlfriend for the weekend/her birthday. It was expensive, but worth it I think. If I won't spend my money on things I want, what's the point of having it? Having said that, I've also made a strong effort to pay for part of the trip using bonus money I get for referrals at work. For a few minutes of work asking people to spend 3 minutes to call and get a free quote for car insurance, I get $15. And most of the time, my friends get significantly lower rates, so it's a win for everyone! (If you're interested in helping me out and getting a great rate, let me know lol!)

Again, I appreciate all of your suggestions and I voted for each of them!

Saving $1,000+ per month…what should I do with it?

6 Answers