Financial Future

[RobbyZ5001]

As the title reads I am looking for financial help from some of you experienced guys.

First I would like to give you my background. I am currently a Senior at Penn State. I owe a good amount of money through student loans. I am looking into beginning an online retail store (Learning stages). I am also very interesting in making my money work for me. I currently do not have a large amount of money in which I could invest. If the amount of money I currently have affects some decisions in the matter please PM me. I am looking for advice of what would be best for my future.

Option 1: Save up money to pay off my student loans.

Option 2: Invest a good portion of my money.

Option 3: Do a little bit of both.

To be honest I am getting toward the end of my college years, and am starting to face the hard reality of the real world. I know ... let me stress this KNOW there are more ways to make money then to work for someone all my life. I truly love learning from experienced people whether it be life or business. I am also the kind of person that has the belief that you can learn from everyone in this world. Well that is enough about me! I am all ears fellas!

[Tin]

You mean your days of selling plasma for beer money and tourney fee's are over?

[RobbyZ5001]

I can't believe you remember that. Those were some good times. lol

[Tin]

I can't believe you remember that. Those were some good times. lol

I'm not surprised that you don't.... ....

[cart7t]

I used to have a chart that showed a graphic example of how a young person could set aside very little money in his younger years and wind up a millionaire by the time he hit age 65.

Basically, it showed an 18 year old, investing just $2000 a year for just 8 years until he was 26, into funds that returned around 10% each year, would grow to $1,000,000 by the time he was 65. That's just $16,000 total invested for 8 years and then nothing else after that. It also showed how someone who waited to start investing until he was 30 but set aside twice the amount of money in the same funds until he retired could never catch up to the 18 year old investor.

While 10% is a stretch, $16k isn't a lot of money either. The sooner you start the better chance you're not having to worry about whether Social Security will be around when you get that age. I wish I had.

[flechero]

Pay off the debt first.

For what it's worth, I would look up "financial peace university" and find a class near you.  It's the Dave Ramsey course that will teach you not only which decisions to make, but also the why's behind those decisions.  if you follow his guidelines, you will be financially fit and recession proof.

It's easily the best $100 I have ever spent.

[flechero]

I forgot to mention this-

buy a copy of Dan Miller's book, "48 Days to the work you love"    

[RobbyZ5001]

Cart do you have any idea where I could possibly find something like that or what keywords I would use in a search on google?

Flechero thanks for the advice on Dave Ramsey. I never know who to trust so many of those guys have bad seminars and charge a bundle. Good to  know this one is legit.

[Siebert Outdoors]

I would do a little of both with the main focus of the loans. Just from reading your post your loans are probably high. Something you cant pay off in a couple years. I'd focus on paying those off but also save some. This way you will have some money to fall back on if something happens.  

I am one of those people who hates debt.  I hate the intrest rates.  To me intrest is a waste of money.  I buy something for 500+ intrest and pay 700 for it.  Not my style.  I'd rather save and pay 500 for it later.  Just how I work.  Always have.  

[fishinfiend]

I wish you the best of luck but remeber that no matter what you do you will be working for someone else. Even though you will work for yourself, the customers will still be your boss. If your rate of return on your investment is lower than your interest rate on your loan, I would pay off your student loan first. I think most small businesses take 5 years to become profitable.

[tyrius.]

The answer completely depends upon the interest rate of your debt.  If it's really low then you may be able to make more money on savings that it costs you in interest.  Plus, having a savings cushion is ALWAYS a good thing, especially if you want to start your own business.

My student loan interest is less than 4%.  With tax deductions that amount is even lower.  I'm in no hurry to pay that off.  However, I had other loans that had higher rates and I paid them off early.

I don't necessarily agree with the eliminate all debt at all costs crowd.  Real life isn't that simple and one needs to weigh the interest rates vs. other rates of return to see if one will come out ahead or not.  

[RobbyZ5001]

All good advice. Another question I have is what kind of investing would be suited best for someone like me. Whether it be mutual funds, Cd's, Bonds, Stock (aggressive/safe).

[flechero]

Cart do you have any idea where I could possibly find something like that or what keywords I would use in a search on google?

Flechero thanks for the advice on Dave Ramsey. I never know who to trust so many of those guys have bad seminars and charge a bundle. Good to  know this one is legit.

all those charts are a part of the course.  You can find him on the radio or listen online to get a feel for who he is.

There are a number of members here who have followed Dave's plan and all have only good to say last time he was discussed in the forum.

[flechero]

The answer completely depends upon the interest rate of your debt.  If it's really low then you may be able to make more money on savings that it costs you in interest.  Plus, having a savings cushion is ALWAYS a good thing, especially if you want to start your own business.

My student loan interest is less than 4%.  With tax deductions that amount is even lower.  I'm in no hurry to pay that off.  However, I had other loans that had higher rates and I paid them off early.

I don't necessarily agree with the eliminate all debt at all costs crowd.  Real life isn't that simple and one needs to weigh the interest rates vs. other rates of return to see if one will come out ahead or not.  

You haven't adjusted for risk.  When something happens or you have to dip into those investments for cover a layoff or something, you'll get hit with about a 40% tax and penalty....  in the end, the debt free guy usually comes out ahead.  Plus, the extra money freed up each month from payments, can be added to any investments- which will usually make up for any short term missed investment while getting out of debt.

If you get laid off, how easy are the mortgage, auto, boat, credit cards, etc. payments to make?  If I get laid off, I can work at home depot and be just fine...  

Besides, trucks and boats with no payments do ride a little nicer.  ...lol

[tyrius.]

You haven't adjusted for risk. When something happens or you have to dip into those investments for cover a layoff or something, you'll get hit with about a 40% tax and penalty.... in the end, the debt free guy usually comes out ahead.

That's assuming that one's savings are only placed in an IRA/401k type of vehicle. Money market accounts can be used with no penalty and they can pay more than the cost of interest.

To turn your question around on you, what happens when in the middle of rushing to pay off your debt you get laid off. You'll probably wish that you had set up a good amount of savings first.

If you get laid off, how easy are the mortgage, auto, boat, credit cards, etc. payments to make? If I get laid off, I can work at home depot and be just fine...

That is a risk, but if one has substantial liquid savings then they will be able to make those payments.

Besides, trucks and boats with no payments do ride a little nicer. ...lol

I hear you there. No car payments for me! No boat either so I better not be paying for one! I'm not saying that debt is good. Car loans are typically going to be expensive and provide one with no other benefits. Credit card debt should be paid off immediately!

I'm only saying that not all debt is bad.

For example, let's say my student loan interest rate is 4%. That interest is tax deductible so the effective rate drops to probably something like 3.5%. Ingdirect is currently paying 3.75% for a 12 month cd (that's a zero risk investment and it's an abnormally low amount). So, by paying off my student loan early, I'm actually losing out on a higher return on my investment.

[Siebert Outdoors]

The answer completely depends upon the interest rate of your debt. If it's really low then you may be able to make more money on savings that it costs you in interest. Plus, having a savings cushion is ALWAYS a good thing, especially if you want to start your own business.

My student loan interest is less than 4%. With tax deductions that amount is even lower. I'm in no hurry to pay that off. However, I had other loans that had higher rates and I paid them off early.

I don't necessarily agree with the eliminate all debt at all costs crowd. Real life isn't that simple and one needs to weigh the interest rates vs. other rates of return to see if one will come out ahead or not.

You haven't adjusted for risk. When something happens or you have to dip into those investments for cover a layoff or something, you'll get hit with about a 40% tax and penalty.... in the end, the debt free guy usually comes out ahead. Plus, the extra money freed up each month from payments, can be added to any investments- which will usually make up for any short term missed investment while getting out of debt.

To be a hypocrite I see both these views and they both make perfect sense.  If I sink 1k into a bond making more then that 1k on my payment its money well made.  But IMO I'd rather free up that intrest money then invest heavily.

It does all come down to one thing.  Intrest rate of incoming and outgoing debt.  There is a balance.  But if this young man is getting ready to move into the big world of House, car, utilities, etc.  I personally think getting rid of as much debt is the best way for now.  Become riskier as he becomes more stable with payments and job.  

Just my personal opinion I'd still pay off the loan quickly unless there is something you have with a higher intrest in your payments.  Make principle payments if possible.(key)

Always remember,  Make your money work for you.  Look to see where your money will make the highest return.  

Fletchero,  I totally agree.  My boat aint pretty but she doesnt eat anything.  Paid in full.

[tyrius.]

There are a number of members here who have followed Dave's plan and all have only good to say last time he was discussed in the forum.

Being debt free is most certainly better than the alternative.  Dave's plan is solid and better than many of the alternatives.  I just think he goes one step too far (or is missing a step).  

[Siebert Outdoors]

[tyrius.]

I dont know who dave is but what steps?

Dave Ramsey.  He's a nationally syndicated radio host that also writes books and has a course on becoming debt free.

[Siebert Outdoors]

Thanks Tyrius

[flechero]

To turn your question around on you, what happens when in the middle of rushing to pay off your debt you get laid off.  You'll probably wish that you had set up a good amount of savings first.

For starters you'll have fewer things to get repo'd.  ...lol   the first step is a small emergency fund...  but it, like everything Dave teaches is adjusted for risk.  if you are in a high risk position, the greater the emergency fund needs to be.  The fact that you have debt puts you at risk so there is always a little risk until you get out of debt.  Daves plan gets you out from under the risk in short order.

tyrius,  I understand the numbers all too well.  The one thing I mentioned that you didn't do was to mathematically adjust for risk and taxes...  by the time you take the taxes out and adjust for risk, the investment rarely is ahead of the "lower" rate debt.  Not considering risk is naive, not to mention an incomplete formula...  picking up a point or 2 of interest when you risk losing everything isn't worth a few $ more on the upside.  

I think there are about $700 billion worth of people who are wishing they had adjusted for risk about now.

That's as far as I am going to argue this today.  Dave will tell you...  There is a reason that he's been a millionaire twice...  the first time he ignored the debt.  

[tyrius.]

The one thing I mentioned that you didn't do was to mathematically adjust for risk and taxes... by the time you take the taxes out and adjust for risk, the investment rarely is ahead of the "lower" rate debt. Not considering risk is naive, not to mention an incomplete formula... picking up a point or 2 of interest when you risk losing everything isn't worth a few $ more on the upside.

But I did.  I used a CD from a bank so the risk is zero (it is FDIC insured) and the return is guaranteed.  I did forget to take out taxes from the cd so it's currently basically a wash, but as CD rates rise (hopefully, because that will mean that this recession is over) then the CD will outperform paying off the debt.  However, with it being a wash I still think you're better off putting that extra money in the bank because then you have it in case you need it.  If you send it to the bank then you no longer control those funds and if you need it you can't get it.

I'm not trying to argue about this.  Just trying to help the OP in making his decision regarding what to do by providing another viewpoint.  

8-)

[preach4bass]

The one thing I mentioned that you didn't do was to mathematically adjust for risk and taxes... by the time you take the taxes out and adjust for risk, the investment rarely is ahead of the "lower" rate debt. Not considering risk is naive, not to mention an incomplete formula... picking up a point or 2 of interest when you risk losing everything isn't worth a few $ more on the upside.

But I did. I used a CD from a bank so the risk is zero (it is FDIC insured) and the return is guaranteed. I did forget to take out taxes from the cd so it's currently basically a wash, but as CD rates rise (hopefully, because that will mean that this recession is over) then the CD will outperform paying off the debt. However, with it being a wash I still think you're better off putting that extra money in the bank because then you have it in case you need it. If you send it to the bank then you no longer control those funds and if you need it you can't get it.

I'm not trying to argue about this. Just trying to help the OP in making his decision regarding what to do by providing another viewpoint.

8-)

Tyrus,

Why would you invest in a CD instead of paying off debt if the interest rates and taxes would make it a wash?  I see the advantage of paying off the debt faster: Freeing up money to invest with (in something higher yielding than a CD).  But, what would be the advantage of the CD if it's a wash?

[GeneinTX]

Dave Ramsey has free podcasts on itunes. He gives very good advice. One thing that he always recommends is a few months of operating cost to keep you afloat if things go wrong. I have added to my buffer with the economy the way it is.

I don't know what field you are planning on after graduation but stop and think about the prospects are in the near term for your field. This should give you an idea of what you need as far as savings goes. Your tax basis should decide whether you need a tax right off. This is usually not beneficial to anyone and usually cost you in the long run. everyone wants to pay less tax but if you are paying more money than you are saving from the tax incentive then you are gettting no where. if you listen to Dave Ramsey he will explain this once a week to someone.

I would recommend getting enough money into a money market that has a decnt rate for your emergency funds and then get rid of that loan and get debt free ASAP!

[tyrius.]

Tyrus,

Why would you invest in a CD instead of paying off debt if the interest rates and taxes would make it a wash? I see the advantage of paying off the debt faster: Freeing up money to invest with (in something higher yielding than a CD). But, what would be the advantage of the CD if it's a wash?

Given the uncertain times (job market, stock market, bond market, etc) I would rather have control of that money than pay off a loan more quickly.  Let's say something bad happens like getting laid off.  Hopefully, one has an emergency fund, but given the current job market that emergency fund may not be sufficient.  Would the emergency fund be sufficient if you got sick while you were laid off?  What about if you had major car problems, house problems, etc.?  If you put that extra money in a CD then you can get it and use it in an emergency.  If you don't need it, then you didn't lose anything because the interest that you are collecting is the same as the interest that you are paying.  If you used it to pay the loan off faster then it is gone for good.  

In my opinion, it's the LEAST risky thing to do.  There are many, many other options but they all have varying degrees of risk associated with them.  The CD was one simple example of how a guaranteed investment can earn as much, if not more, than the interest that one is paying.  It fit my example perfectly because both the principle and the return are guaranteed (provided you don't withdraw the money early).