So you've made it through your undergrad years and, if you're crazy like me, you went back for more edjumacation so you'd have some letters to stick after your name, but FINALLY you've emerged, blinking and confused, into the Real World. Time for your first test:
"Assume you are an average 25 year old with $25,000 debt (on account of your student loan) You have been given a lump sum $10,000 and the following four choices:
1. Invest it for your retirement funds.
2. Save/invest it for your future home.
3. Save/invest it towards your child’s/children’s future college education.
4. Pay part of your student loan debt."
Wow, is there a fifth choice- "Depends on your personal situation?" Take a look at your 20-something yr old buddies; some of them are married, some of them have kids already, and some are still chilling in grad school. Even myself, I don't fit in to the "average 25 year old" as defined since I don't have any student loans.
So how would I answer the question? To quote my parents, "No debt is good debt." I was taught at a young age that the big consequence of borrowing money is you have to pay it back eventually. And with interest rates and late fees, you may end up owing much more than you originally borrowed. Sure, loans such as student loans and mortgages are viewed by some as "good debt," predicting that the ends will justify the means (education will get you a higher paying job, a house will turn out to be an investment that appreciates in value over time) but there's still going to be that negative value hole in your financial balance sheet.
If I had $10,000, then I would definitely use it to repay any outstanding debts; though I have zero student loans, I'd then choose to pay any high credit card balances, since credit card APRs are notoriously high. But in the spirit of this question, I would choose #1. I'd max out my Roth IRA and 401K contributions, then spend the rest balancing my stock portfolio. My reasons? I feel that I should contribute towards my retirement, now, while I have less priorities in my life. I don't have kids and I just started a new job, so for now, to put it bluntly, I only have to take care of my monthly bills/expenses, and the rest can go towards investing towards retirement. Eventually, the time will come when I need to change my financial goals, to pay for my childrens' living, education, housing, etc.
Credits: Much thanks to Golbguru, for hosting the Festival of Under 30 Finances!!! Check out Golbguru's awesomely funny and honest personal finance blog,
Welcome to your "Twenties:" Big Financial Shifts Ahead
January 20th, 2007 at 04:35 pm
January 20th, 2007 at 05:17 pm 1169313455
I guess I am officially too old (just turned 30)but I Will check it out the link!
January 21st, 2007 at 12:21 am 1169338869
my reasoning for not paying back student loan is that the rates are low (2.79%) and the interests are still deductible.
my reasoning for having a big emergency fund is that it makes me feel more comfortable to have 1.5-month in checking account and 3-month in high-yield savings. i can sacrifice some interest earning.
January 21st, 2007 at 04:04 am 1169352278
Now, I'm also in the same boat (with 22k still outstanding right now, but without a 10k windfall), and yes I do agree that it really depends on your situation....
Having said that, I would have most likely stuck it in retirment. Retirement are tax-deferred investment vehicles and, unless you've got seriously high interest rates (above 10%), then your money will go farther and is more versatile in like a Roth IRA for example.
You see, if you just pay off the student loan, yes, you'll shaving off years, which is great, BUT you still have a student loan to contend with. Plus, the money you drop in a relatively benign debt won't protect you in case of an emergency.
Contrast that with, say, a Roth IRA, where you can even use it against a loan or withdraw the principle for specific uses. In case of emergency or for something like a house downpayment. Just more flexibility there.
I realize it's very odd for me to say this because you probably know that my 2007 challenge is to pay down my student loans as fast as humanly possible!
Your parents are right that, of course, being "out of debt is out of danger", but what I am telling you is also the truth. That your better investment option is in a Roth IRA. Because SOMETIMES, you don't want to be so dogmatic that you don't see the forest for the trees.
But please understand that I mean all this in the friendliest of way possible. Whatever you decide on (and it really is up to you), you'll still win out no matter what. Because all of these options are good, and anything is better than blowing it on video games, bars/clubs, or the race tracks.