35k Student Debt vs. 401k

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 So Guy just graduated and is looking to figure out what the correct balance of funding his 401k program and paying back his student loans is.

Guy’s budget
Income: 4k
Rent: 680
Car: 275 (13k loan 4%)
Utilities: 150
Gas: 100
Food: 400
Alcohol/ Nights out: 150
Cell: 40

Guy has about 5k socked away in savings

In college Guy had to take out 32k in Student loans, all federal and with average interest rate of 4.92% (weighted)
Guy’s Company matches up to 5% of eligible compensation with the 401k plan so he asks himself, is his discretionary income better spent paying down this student debt or investing in retirement.

How aggressively should Guy be paying down these student loans vs. putting money into the 401k?

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1) Employer match 401k
2) Roth IRA max
3) Add to savings to have a 6+ month emergency fund (roth IRA balance can be counted here early on, its basically an emergency fund)
4) Pay down car
5) Pay down student loans (assuming they are federal and can be deferred/forbearance if you get laid off)
6) Max 401k the rest of the way

What is it with talking about yourself in the third person?

I'd switch around # 4 and 5 on jd2010's list. Pay down the highest interest rate loans first. Since 4.92% is weighted, there are student loans > 4.92% that should be paid down first.

scripta said:   I'd switch around # 4 and 5 on jd2010's list. Pay down the highest interest rate loans first. Since 4.92% is weighted, there are student loans > 4.92% that should be paid down first.
  Normally I would agree, but its easier to get forbearance or delay student loans than other loans, and also OP will have opportunity to refinance federal loans to a lower APR once he has established income which will make it a lower priority to pay down.

Basically, I like JD2010's listed suggestions, but where we differ is the 401K should NEVER be considered part of your emergency fund which I agree needs to be about six months or more in real money. You are almost five months short.
The 401K is a sacred cow ... plus depending on the employer plan, you may loose the employer match if you touch the 401K either by 401K loan or outright withdrawal. Make jolly well sure you understand "vesting" in regards to the 401k.

You fail to list allowance for car maintenance and repair. I do not see budget line for "Other Miscellaneous"

Your utility allowance may be low. Many utility companies are raising rates or about to. In my area, the electric company total revised the rate formula. Net result is a $100.00 per month increase. Until that happens, beef up the emergency fund.

I also concur the car load payoff in higher priority than student loan assuming the car loan is reasonable.

JW10 said:   Basically, I like JD2010's listed suggestions, but where we differ is the 401K should NEVER be considered part of your emergency fund which I agree needs to be about six months or more in real money. You are almost five months short.
The 401K is a sacred cow ... plus depending on the employer plan, you may loose the employer match if you touch the 401K either by 401K loan or outright withdrawal. Make jolly well sure you understand "vesting" in regards to the 401k.

You fail to list allowance for car maintenance and repair. I do not see budget line for "Other Miscellaneous"

Your utility allowance may be low. Many utility companies are raising rates or about to. In my area, the electric company total revised the rate formula. Net result is a $100.00 per month increase. Until that happens, beef up the emergency fund.

I also concur the car load payoff in higher priority than student loan assuming the car loan is reasonable.

  
I mentioned roth IRA because you can take a 60 day loan without consequence, and withdrawing from IRA is better than sleeping on the street if it comes down to it.  I would also never touch a 401k.

JW10 said:   In my area, the electric company total revised the rate formula. Net result is a $100.00 per month increase.Sounds steep. How much are you paying per kWh? Looking into solar yet?

New Omaha electric rates. 
1600 KWH bill previous month was $100.00 less.  This was a very BIG cost per KWH compared to previously. Major part of $$ increase was move to summer rates.
Nearby home owner association sued and won to have homeowner REMOVE solar installation.

http://thinkprogress.org/climate/2014/08/21/3471998/homeowners-a... 

So 11.4 c/kWh? That's cheap! How do you get $100/mo increase? You farming bitcoin or herb or something?

Wait, a nearby HOA won a suit? That's fubar. I wouldn't think they had any rights outside their property.

Who did you refi with JD? I have been thinking about a refi but always had the impression the lenders were shady and I have been reading scary reviews (albeit anecdotal).

scripta said:   So 11.4 c/kWh? That's cheap!
You haven't seen Texas prices. Currently, you can get electricity for about 6 c/kWh without fees or minimums. I'm on an older plan that has a variable rate 1-5 c/kWh if use 1000-2000 kWh/m and 11 c/kWh otherwise.

To the OP, the car loan is high. You can refinance with penfed for less than 2% or someone else for even lower.

vquasarv said:   Who did you refi with JD? I have been thinking about a refi but always had the impression the lenders were shady and I have been reading scary reviews (albeit anecdotal).
www.sofi.com is one.

eh, I would do it differently.

1. 401k up to match, preferably Roth since you are young and earning lower.
2. pay down student loans or get a lower rate through SoFi, because only $2k/yr of student loan interest can be deducted and that gets phased out at higher income levels.
3. pay down car
4. save in some brokerage
5. forget being super aggressive with other retirement account unless your income grows to a level where doing before tax contributions makes sense.

This whole over doing retirement savings is getting a little tired here. If you start young enough, just doing enough to get a decent match will set you up right. Save the rest in a brokerage that you can tap earlier at long-term capital gains... unless you have so much that you need to be seriously worried about estate planning.

scripta said:   So 11.4 c/kWh? That's cheap! How do you get $100/mo increase? You farming bitcoin or herb or something?

Wait, a nearby HOA won a suit? That's fubar. I wouldn't think they had any rights outside their property.

  
11c is right around national average.   (though maybe its pricey relative to Nebraska / Texas area?)

The article in question is about a HOA suing one of its own members for breaking the rules.   I think JW10 meant a HOA near him. (?)   The article is refering to an HOA in Omaha.
 

vquasarv said:   Who did you refi with JD? I have been thinking about a refi but always had the impression the lenders were shady and I have been reading scary reviews (albeit anecdotal).
  
I originally did SoFi to get mine from 7.75% weighted to 3.9% variable 10 yr.  However SoFi's customer service was terrible at that time because they were still a startup (may be better now, don't know).  About a year later I refinanced again to commonbond and got it down to a 1.9% varable 5 yr.  Commonbond has had much better customer service and takes care of things in a much more timely manner.

One thing to always keep in mind is that by refinancing to private you are foregoing the IBR/pay as you earn as well as any potential forgiveness down the road from our govt who likes to give free stuff to people.  In my case I made the decision my income was at a level where I would probably never qualify for it so I went thru with taking them private.



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