So i'm frugal, but what's next ?

August 26, 2008 12:28 PM

I am a frugal person entering his senior year in college [age 21]. I have been following advice like the stuff in thread 84915and thread 99852 and living below my means. I sought advice in Financial books for college kids my age [for example, generation debt], but left feeling wanting more because they focus primarily on how to cut expenses [skipping the latte, etc]. So, I have some student loans already, but will need more for my senior year. I also have some money set aside, but I should I use this money to lower the loan amount that I'll take out or use this money for an investment (Roth IRA, index fund), and take out more for my student loans ?

Here's my scenario:

- I have NO debt - EXCEPT from my Student Loan Debt

($46,025.40 for undergrad so far, heading into my senior year).
($27,519.40 are government loans - fixed rates, ),
the rest is from a private company, at variable rate -
A combination of federal and private loans
I am getting VERY Scared about affording this (right now, I have
estimated payments of $ 541.34, given the current interest rates and a normal payment schedule that is not income contingent).

- I have NO credit cards.

- I do have a checking account (with a debit card).

- I have a saving account (only 1.05% APR) of $ 800 (a 6 month
emergency reserve).

- In the past 5 months or so, I have saved 40 % of my income to a
general savings and a checking account

(it's only 1.05 APR, and I know there's better ones (ING, etc) but
both my [savings and checking]
banks charge a rather large fee (of $30 or so) for transactions from
one bank account to another,
for retirement.

My most important question is THAT I have received conflicting advice
regarding the following
situation:

This fall, I'll need to take out an additional $5,500 (estimated) for
living expenses (this is living frugally, rent, utilities, etc) (I am aware that I could work off campus more hours, but I have tentatively decided not to do that.
(I decided not to work more than 12-15 hours a week, while in school,
which can be for metatalk if you want to discuss that).


Should I take that 40% [which I saved - $650] and my federal work study job income ($2220) towards my expenses and take out a smaller loan (the advice from a counselor at the school financial aid office) ?
(Because any rate that I get on investing wouldn't be higher than my loan rate)
(I have not applied for the loan yet, so not sure of the rates that I'd be getting. This loan would be a private loan, because I am already taking out the maximum from Stafford and Perkins loans. I am looking at PLUS Loans - another govt loan, but that may not work, because my parents do not want a loan in their name).

Should I take that money and put it into certain investments for retirement (Roth IRA, Index Fund,etc) ?

Should I put that into something more safer like a money market account (Andrew Tobias' advice for those with less than $5,000) ?

posted by fizzix to Work & Money (11 answers total)

I'd save the money for when you graduate college. You'll need some money to get started (unless you're able to live at home). You only have so long before you have to start repaying loans, and it'll be a lot more expensive if you default on your loans in the long-run, so having a safety buffer when you graduate would be important to me.
posted by ejaned8 at 12:39 PM on August 26, 2008

Unless you can find an investment that will pay you more in interest than the cost of the interest on a loan, it is a wiser investment to use that money to avoid getting deeper in debt. I also think it is a wee bit premature for you to be saving for retirement-again, it is better to use that money now to avoid interest payments in future-which will mean you can use money that is not going to interest payments to build back up that retirement account.

I do commend you on how you have managed what you do have-at least you are thinking about it!
posted by konolia at 12:44 PM on August 26, 2008

Pay down your student loan debts as much as possible. All your payments now will go to your principal, which will lead to serious savings down the road.

I had a good job during college, but blew most of the $ on stupid shit, never understanding that if I had made a $100/mo payment on my loans I'd be close to paying them off now.
posted by downing street memo at 12:47 PM on August 26, 2008

I'm sure you've seen Get Rich Slowly and this issue is kind of addressed over there.

My thoughts are that it comes down to what you feel better about doing. I personally would rather keep a chunk of money in savings/investments than putting all my money towards paying off my debt as I like knowing that I have a good emergency fund should I ever need it. If it were purely a numbers game it would make more financial sense to put all my money towards debt (based on interest rates) but psychologically, when I see my savings build up, it makes more motivated to save even more. So I "pay myself first" every month by having money directly debit from my account on payday and then I use as much as I possibly can to pay off my debt. It works pretty well for me.

Also, I'm paying about $450/month on my student loans. I was pretty worried about it going into it, but I shouldn't have been. My student loan companies have always been very good about working with me and giving me short deferrments when I needed them.
posted by triggerfinger at 12:51 PM on August 26, 2008 [1 favorite]

You can't look at your investment rate vs. your loan rate. You're not a bank, you'll get eaten alive my fees. I would not invest any money if I were you, beyond putting it in a rainy day savings account. Index funds can fluctuate and with the amounts we're talking about, you might need to exit the market quickly to pay for, say, a root canal. There's also penalties associated with investing less than a year, that combined with whatever fees you'll get hit with, I would be very surprised if your investment rate was lower than your loan rate.

I also think a lot of the "put money away when you're 21 ..." investment advice is bullshit. Well perhaps not bullshit, but a completely naive and platonic way of looking at wealth, retirement and investing. I could go on, but I'd again urge you not to wait until an employer offers a 401k vehicle to match your investment. The markets are much too volatile in the short-term, index fund returns are a good investment over the long term, compared to more conservative vehicles, but I urge you to look at the last 5 year returns for index funds and look at all the ways you can lose money if you have to pull it out to fix a broken car.

This all really depends on what career you are going into and your future pay scales, but if you see any significant appreciation in income, it is best to pay the minimum and let inflation eat away at the debt. If you're going to be a social worker, well you shouldn't be in $50k in debt for college and that might be another problem altogether.
posted by geoff. at 12:54 PM on August 26, 2008 [1 favorite]

Pay down/off your student loans! You'll be happier debt-free than you will be with the extra 0.00x% of cash in your pocket.
posted by wenestvedt at 1:13 PM on August 26, 2008

I am not a financial expert. Double check my reasoning at least.

It probably depends on a lot of things. The biggest one that I know of is whether the interest is deferred. There are also fees to consider that others have mentioned, what type of savings you'd consider, etc.

If the interest is not deferred, and is not very low, it seems to make sense to use the money to lower the loans you take out. My first thought was along the lines of your financial aid counselor, and she's probably more knowledgable. You probably wouldn't make more money back from saving than you'd owe interest on the loan, unless you go with high risk accounts.

Or, saving the money in normal, liquid accounts or investments (not 401K or anything where you'd face penalties for withdrawing, just saving it for the short term) seems to make sense, particularly if the interest is deferred. You may face big expenses when you graduate. It will be handy to have the money available. If you get established quickly, then you can just use the money to pay off your loans early, before much or any interest is accrued, which would have the same basic results as using the money now.
posted by gauchodaspampas at 1:16 PM on August 26, 2008

My reaction is that, even now, your loan payment seems large enough to limit your options when you get out of school -- you might end up opting for one job over another because it pays more now, even if the other job is better for you in the long term, etc. Against that, the difference in your overall loan payment between an 3K loan and a 5.5k loan seems fairly insignificant.

I'd suggest keeping your summer savings and earmarking ~$1K of your workstudy job to build up your savings/emergency fund more to give you more of a buffer once you are out of school, then put the rest of the workstudy towards living expenses so you can take a smaller loan.

Don't "invest."
posted by Good Brain at 1:33 PM on August 26, 2008

Keep an emergency fund for after you get out of college, work on paying down your student loan debts as soon as possible. And it's never "too early" to start investing.

See this chart. (Yes, it's on Dave Ramsey's site. I'm a fan. You may not be, but love him or hate him, the math works either way.)
posted by joshrholloway at 2:15 PM on August 26, 2008

And it's never "too early" to start investing.

Well yes, compound interest is a magical thing, but the charts don't identify a lot of important factors. Namely that we don't live in such a static, non-dynamic world. I don't see $2000, I see near 100% of his income going towards investment. Likewise I don't see $2000 at 45, or 55, etc. being such a hindrance, especially given the giant unknown of inflation over the years. Not to mention that if spends his time going out with friends, networking, the social investment -- while being significan part of his income -- may pay dividends down the road far greater than $1.5mil over a lifetime.

I don't mean to suggest that one should go out and max out credit cards, or not have a rainy day fund, but this kind of early thinking falls prey to the survivorship bias. How many people can we expect to live until 65? Or not have their bank collapse? Not to bash Dave Ramsey, but he seems to live in a world where debt and money run on the precision of bacterial growth rates. I don't like turning personal finance into a science.
posted by geoff. at 3:47 PM on August 26, 2008

Response by poster:
Thank you for all of your perspectives and advice.

Although I'll most likely live at home after I graduate (unless I receive a better job offer elsewhere), I'll maintain my rainy day/savings/emergency account and take out the loan so that I won't have to deplete that account for this school year.
posted by fizzix at 12:01 PM on August 27, 2008