Help with priorities

brennaflyJune 21, 2006

Is is better to put more money into a retirement account or put it into an account to be used for emergencies? Also, should I be focusing on paying off my student loans or my credit cards?

I'm 21, have $32,000 in student loans, $2,000 in CC, no savings and am trying to come up with the best division of my (very) limited income. Right now I'm paying 200/mo to loans, 150/mo to CC, 100/mo towards retirement accounts, 100/mo towards a savings account that I can't readily access (for big purchases later on/lose my job emergencies) and 150/mo for my emergency/"oh crap, the car needs new tires" savings. That 700/mo is just about the most I can afford to sock away and still pay rent, food, transportation, etc. So, my question is, should I be dividing that $700 differently? Or am I on the right track? As my income goes up, I'm going to increase each of the amounts, and any one-time bonuses go into my can't touch savings.

In addition, if my income goes down/rent or other bills go up, and I can't afford $700/mo anymore, what areas can I cut back on and still be safe? I'm just a little overwhelmed by how much debt I've got and how much I have to plan for. I don't want to focus so much on the future that I can't enjoy being 21, but I certainly don't want to borrow against it either. Any advice would be greatly appreciated!

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I know your debt load seems scarey to you. That's a GOOD thing, lol, but it's not that great an amount. You haven't told us what your "limited" income is and you don't have to !

You need to "lose" the credit card debt, asap; but you know that. Credit card debt is EXPENSIVE; what rate are you paying on the amount of money you are paying back? I'll be willing to bet it's more than your student loans. You must pay more than the minimum payment every month to knock down the principal in a meaningful way and retire the debt quickly. And keep the credit cards in your wallet! DON'T USE THEM until you have the balance paid off and are in a position to pay your bill in full every month. Use cash and put the "change" (coins) in a jar on your bureau. Roll them and deposit them into your checking account and then include that amount when you make your credit card payment. I knocked nearly a year off a car payment doing just that... . This will help you understand compounding interest. Every time you knock down the principal you save yourself interest charges.

Speaking of student loans... I caught a little bit of a story on NPR's Marketplace about consolidating student loans before the rates increase. I wasn't paying attention, but go the National Public Radio website and look for Marketplace... you might be one of the people that will benefit from such a consolidation.

I am 47 and I wish I'd been more dedicated when I was 21. I know everyone says that to you, right? ;) it's true. I have been shovelling as much money as I'm allowed/can afford into retirement accounts for several years now. But had I been savvier about COMPOUNDING interest earlier in my life I might not be as uneasy about my retirement savings as I am. And I'm in a better position than many I know. If you have matching funds available through your employer... max out your option, or come as close as you can. Only a dummy turns up their nose at "free" money or deludes themselves into thinking they "can't afford it".

Keep plugging away on the emergency fund. Frugal living and dedication to the long term goal will get you to it. Emergency funds are important.

So, how much do you budget for "fun"? do you have a room-mate to split the rent/utilities (one with whom you don't share a bed ;) )? would you consider having one? (We had one for years... he paid our mortgage for us!).

    Bookmark   June 21, 2006 at 2:14PM
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I agree that the first thing to do is to pay down that CC debt. I would do that before anything else.

Whatever you do, it is going to take a long, long time to pay off your student loans. I think building an emergency cash reserve right now is more important than paying as much as you can on the student loans. Financial emergencies happen and that will devastate all your accounts if you aren't prepared.

I would make the minimum payment on the student loans, put everything I could to pay off the CC debt and then I would start working on an emergency savings that would cover 6 months of unemployment and then I would put all I could afford to the student loans.

As soon as your savings account reaches 1k, I would buy a short term CD to maximize interest. Do this every time you reach 1k and you will have staggered maturity rates which I think is the best thing for you. If you have to tap a CD early, the penalties are really pretty minimal and you will be out little or nothing if you have had the CD for at least 3 months

    Bookmark   June 21, 2006 at 3:12PM
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I agree with the above, brennafly.

Do you know the rates of interest that operate on your credit card debt? If the accounts are on store-issued cards and you have regular cards as well, it's likely that the rates there are quite a bit lower.

And on your student loan? That'll be a lot lower, I'm pretty sure.

Another good thing about those certificates of deposit is that they can be used as collateral for a short-term loan to help with emergency.

Sounds as though you're on a sensible track - keep at it.

Learning how money works is an interesting hobby - that pays well.

ole joyful

    Bookmark   June 21, 2006 at 4:56PM
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If you are a recent graduate, your student loan probably has a low interest rate. Pay the minimum on that.

Get rid of the credit card debt.

Your savings accounts, stop putting half toward each... figure out what you really need in your emergency account. "Loss of job" counts as an emergency. You should have enough to live off of for at least 3 months (maybe 6) in an easily accessible account. Figure out what you need in this account and put as much as you can towards it until you meet that goal. Then stop.

When you have your emergency account up to speed, figure out what you want in your "big purchases later account" and start putting money there as appropriate. Depends on what you're saving for and how long in the future.

If you have employee matching, put at least that much in your retirement account. Above that, you really need to look at your personal plans; are you saving for a house, think you'll need a new car in a year, that kind of thing, to decide how much to put in the "big purchase" savings, and how much toward retirement. Don't neglect retirement, but also don't forget that what you put in an IRA or 401K can't be used easily if you have other goals, which at your age you certainly do.

So, my advice is get rid of that CC first, then get that emergency account up to where you want it. Those are the most important at your stage. Then figure out your personal goals for how to split between retirement and other savings. Minimum on the student loan (unless I'm wrong about the interest rate).

And, pat yourself on the back for thinking about financial planning and retirement. The debt seems overwhelming (and the student loan is a lot of money, true), but you are actually doing pretty well it sounds like.

    Bookmark   June 21, 2006 at 5:20PM
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First, it's awesome that you're even thinking this way! Good for you!

I guess I mostly agree with the earlier posters that getting rid of CC debt is an extremely high priority.

I like the balance of your other priorities, though I might change if you said something about your retirement savings. Is it a company plan with a match? If so, that
match is just free money and optimizing that as much as possible is important.

You sound like you may already know something about the time value of money, but if you don't know about it there is a website called dinkytown with a bunch of free financial calculators that you can use to see what happens to savings over time, debt over time, etc.

    Bookmark   June 21, 2006 at 6:51PM
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Thanks for all the advice.

To clarify a few things:
I have two credit cards, one from my bank and the other from my CU, the debt is split evenly between the two and rates, while high are not astronomical (like store cards). I've decided to put $100/mo towards each.
The savings that I can't easily get to is for "real" emergencies (like losing my job, car crash, etc.) and the other savings account is for non-everyday expenses (new tires, over on my cell minutes). If the unusual expense money was in checking, I would spend it without even realizing it. I also knocked down the amount to $100/mo so I could increase CC.
I have 2 loans. One is a consolidated Federal loan, about $21,000. The other is a private loan with a much higher interest rate. Right now, the plan is to pay minimum on the federal loan and "overpay" the other by about $40 while I can. Should that extra $40 go somewhere else?
Retirement is into my Roth IRA for now, my company has a 401K, but I am (hopefully!) leaving soon. If my new job offers one, I will start then.

My next big question is, what can I cut back on if I need to? My rent is possibly going up at the end of the summer and I doubt that I will be able to get another job that pays as well as this one does (not that this one is great). Staying is not an option, and leaving will free up about $200/mo in commuting costs. I am planning on getting a second job, but will prob have at least a few months of barely getting by.

Again, thanks for all the advice! It's still overwhelming, but a plan is starting to form . . .

    Bookmark   June 22, 2006 at 11:03AM
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Please consider a room-mate.

I know you probably love living alone. But having someone else in the apartment who is trying to do the same thing you are (attain freedom from debt!) will get you there a lot faster.

Did you check out consolidating your student loans? If you weren't able to do so, then pay off the higher interest one first. AFTER you retire the outstanding credit card debt.

Hang in there, you're doin' great.

    Bookmark   June 22, 2006 at 11:20AM
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I still think you should pay the minimum toward the student loans, but I might be persuaded otherwise. How high really is the interest rate, compared to what you're earning (tax-free, remember) with the Roth? Unless it's outrageous, I think you'd be better off putting more toward the Roth account than toward quick payment of the student loan.

One of the benefits of the Roth is you can take out the money you put in (not the earnings, just what you originally put in) at any time for any reason with no penalty. So it's a little more flexible than other retirement accounts in that respect, and you can be a little more aggressive (imo) towards putting your savings there.

    Bookmark   June 23, 2006 at 10:29AM
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quirk say, first of all, I agree wholeheartedly with chelone, having a roommate is a great savings device. But, regardless, if you are going to hit a spot where things are really tight for a few months, just keep trying to put as much as you can towards CC and emergency savings, and let the retirement account and any extra on the student loans slide. Just don't let the retirement account slide forever, and if your new employer has matching, do take advantage of that "free" money.

    Bookmark   June 23, 2006 at 10:35AM
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Early Roth distributions: I have read several times on these forums that taking money out of a Roth before age 59 1/2 incurs no penalty. However, I think that's not true. According to the IRS explanation of how a Roth works, there is an additional 10% tax on money that does not meet the requirements for qualified distribution:

Part of any distribution that is not a qualified distribution may be taxable as ordinary income and subject to the additional 10% tax on early distributions. Distributions of conversion contributions within a 5Âyear period following a conversion may be subject to the 10% early distribution tax, even if the contributions have been included as income in an earlier year. Refer to Topic 558 , Early Distributions from IRA's, for more information.

Someone correct me if I'm wrong ...

So for example, if you withdraw $10,000 from your Roth account without meeting these requirements, you would have to pay $1,000 of that as a penalty?

Here is a link that might be useful: Roth IRA Distribution Requirements

    Bookmark   June 23, 2006 at 1:11PM
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Harriet; You can take out the money you put in with no penalties. You can NOT take out the money your account "earned". That's "money that does not meet the requirements for qualified distribution"

So, if over the years, you've put in $5,000 (which you paid taxes on; roth contributions are not tax-deductable or tax-deferred) and the money has earned another $5,000 so you now have $10,000, you can take out the $5,000 you put in with no penalty (and with no taxes, since you paid taxes on it already the year you earned it). If you take out the entire $10,000, you will have to pay regular taxes and the penalty for early withdrawal on the $5K of earned $. If you leave it in 'til retirement, the earnings are tax-free.

    Bookmark   June 23, 2006 at 3:09PM
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I came across this on June 2, 2006 for my son who has Student Loans. He said he doesn't qualify.

Check this link out:

I don't know your situation, nor if you qualify either, but should read B'C according to THIS, rates on student loans will be going up!

Since time is short, I think you should check this FIRST and IMMEDIATELY.

Next, you haven't stated how much your CC's charge (APR on each), but I agree - pay off the CC's first.

You say you owe about $2000. That may seem like a lot, but if you can apply a minimum of $200/mo, for example, towards those, they will be paid off in approx 12 mos, (I'm including fin chgs "buffer"), as long as you don't charge anything to them!

I also know that 12 months may seem like a long time to a young person - but it really isn't!

I don't have much to say about your savings/retirement, etc. accts at this time - I wanted to pass this info on the student loans to you.

Good for you for recognizing this important topic at an early age! You shall do well!

    Bookmark   June 24, 2006 at 5:19AM
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Well, it's after July 1, but I think everyone can calm down about the consolidation issue anyway. The OP stated that her fed loans are already consolidated; 99% of the consolidation talk pertains to fed loans ONLY. This is definitely true for the "July 1" deadline, as rates on federal consolidated loans change only once per year and it was anticipated that they would jump up this year. OP clearly had taken care of it.

Consolidation on private student loans is not so exciting for banks, so very few of them do it (SunTrust and Wells Fargo do). The interest rate I've seen on private loan consolidation is usually fixed at the prime rate or thereabouts, so it's tough to save any money on monthly payments. In my case, it would not save money to consolidate the private loans.

    Bookmark   July 6, 2006 at 5:19PM
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Thanks again for all the advice! Quick update, I finally cashed my tax return, paid off one CC (which was lower than I thought) and half the other, so now I'm down to about $500 in CC debt! Which is awesome, because my commuting costs just doubled and I now have enough money to get to work in the morning. We (I live with my boyfriend) found a house to move into, and it is actually less than what we had been paying, so that extra money is going straight to savings.

It's amazing how much peace of mind I have with even just a few hundred in savings. My car broke down and I could take it right to the shop instead of waiting to get paid again. It's going to be awesome to watch that grow. :)

Now if only we could find an easy way for both of us to stick to our household budget . . .

    Bookmark   July 13, 2006 at 3:44PM
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You are doing quite well at your age thinking about budgeting money. However, as you think about today's situation, you also need to think about long term goals. Do you want to go to grad school, buy a house, take a year off and travel around the world? These seem like big goals but many people do them. In order to do these, it also takes financial planning!

BTW, if you are moving into a house, often the renter must pay the utilities which could add up quite a bit. Pay attention to your utility bills.

Even if you live with your boyfriend, house sharing situation can save quite a bit of money. It's one of the easiest ways to cut the living cost. Again, consider it in terms of your long term goals. I shared my first place that I bought because it was the only way for me to afford it at the time. For example, my mortgage after the renter paid me was about $500. and the student loan payment was about $500.

    Bookmark   July 17, 2006 at 12:32AM
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We have been sharing an apartment for the past year (2 bedroom apt + 3 adults + occasionally a 5yo = VERY crowded) and now that my boyfriend has joint custody of his son, we felt it was time to get our own place where he can have his own room. Plus, its next to impossible to find a roommate willing to move in with a couple and a young child. I know wouldn't want to. :) I have always paid all utilities in the apartments/townhomes I've lived in, expect trash and water (which in our area run about $20/mo combined), so that has definitely been factored into expenses.

As far as financial planning for the future goes, my two savings accounts are partly to give myself a starting point. I wanted to get a handle on the here and now before I started to focus on the future too heavily. I'll increase my savings as I get the chance, but for now, I'm just happy to feel like I'm steady and not on thin ice!

    Bookmark   July 19, 2006 at 2:35PM
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