A little extra cash each month

September 3, 2009 1:35 PM

What would you do with an extra $600 a month?

I'm about to move into a new position where I work, one that comes with more responsibility and more money.

I'm 26 years old with no kids and no mortgage. I've thought about paying down my student loans more, but not sure if that's the best idea in the short run (either it takes me 20 years to pay them off, or 15.. does it really matter?). I don't really know anything about investing (I have a 403b portfolio through work), or saving for that matter! I've thought about opening an ING savings account...

But I'm rambling.

What would YOU do with that extra money each month?

posted by little_c to work & money (33 comments total)

This is what I'd do, in chronological order:

1) Start an emergency fund, building towards 3-6 months of your current salary (an high-interest rate savings account is a good place for this). This is in case something unexpected happens like you get fired or seriously ill.

2) Start paying down loans, even student loans. $600 a month extra NOW will save you thousands of dollars in the future. The only reason you'd want to wait on paying off loans is if the interest rate of the loan is lower than what you could make by investing the money. And right now I don't know if that's the case.

3) Have a little fun! Save up for a big trip or something!
posted by muddgirl at 1:39 PM on September 3 [8 favorites]

You're in luck - I just wrote an article about paying off debt! In short -- yes, it does matter whether you pay off your debt in 15 rather than 20 years; the sooner you stop giving a nebulous entity your money and putting in a bank instead, the sooner you can collect interest on it rather than paying interest to someone else.

But some student loans may come with an early-payment penalty. Check to see whether there's any kind of penalty that comes from paying off your debt sooner than scheduled -- a handful of loan companies DO do this. But even they do, you may still want to do this; there are loan calculators online that let you calculate the savings from paying off certain loans earlier than predicted. You'd just need to plug in some figures - usually the current interest rate, the current payment, and the payments you WANT to start making instead -- and it'll tell you how much you'd save in interest. If your savings in interest are greater than an early payment fee (if you have one), it's worth it to pay off sooner. But if you wouldn't save as much on interest, don't bother; use the money to pay off credit card debt instead, or start savings.
posted by EmpressCallipygos at 1:40 PM on September 3 [2 favorites]

At 26, I'd spend 200 and save 400 to an emergency fund, and when I had a decent emergency fund, I'd sock it away somewhere to save for the down payment on a house.
posted by A Terrible Llama at 1:42 PM on September 3

I'd split it between savings and paying down the student loans (assuming, as mentioned upthread, that there's no early payment penalty involved for you).

For the split, I would either do 50% to student loans/25% to short-term (emergency fund) savings/25% to long-term savings, or split it evenly three ways for each category, depending on which option would give me greater peace of mind.
posted by scody at 1:47 PM on September 3

Roth IRA if you don't already have one. It's a post-tax interest-earning long-term account. Try to put in $2K/year (the current maximum is 5K/year I believe).
Use the rest to pay down your debt and buy yourself something fun and lasting so you can say "oh yes, it is a nice belt, I got it when I got my promotion" and remind yourself of your accomplishments.

Right now CDs and savings accounts have terrible rates. If they bounce back, then those mightbe a good option, but you probably want a longer-term deal since you're 26.
posted by rmless at 1:47 PM on September 3

I've thought about paying down my student loans more, but not sure if that's the best idea in the short run (either it takes me 20 years to pay them off, or 15.. does it really matter?).

It depends. How much debt are you in, and what are your interest rates? Are they subsidized federal loans or private loans?

Because I would use it to pay off my highest interest rate student loans which, at around $20,000 at a ~6% interest rate, with a $230 minimum monthly payment, are a real drain at times when I haven't had extra income. I'd much rather pay them down, or off, then just about anything else in my life right now, although I might sock away about a hundred of that each month into savings.
posted by PhoBWanKenobi at 1:47 PM on September 3

Oh, and I'd actually put aside a bit of it to spend, too -- maybe $50 or $100 a month on something nonessential but enjoyable (entertainment or clothes, say), then do the debt payoff/savings split with the rest.
posted by scody at 1:49 PM on September 3

Just stick most of it in straight savings, you will be glad if you are ever laid off. At the same time, see if you can find a good financial consultant, or just start reading up on investing.

For most student loans, it really won't be to your benefit to pay off stuff early (low rates, penalties, etc.) You should however, look into your loan details to see if this is not the case for you. Considering a "good" savings interest rate right now is like .1% annual, this might not be the case right now even with penalties.
posted by shownomercy at 1:50 PM on September 3

Half into savings, then 2/3 of the remaining cash towards a debt. The last 1/3 I'd spend on myself - meals out, new shoes, whatever.
posted by caveat at 2:17 PM on September 3

The obvious choices are save, spend or pay down debt. And these will be modified by interest rates, current income, amount of debt and future debt expectations. For example, you might have a very low fixed interest rate for student loans, and not bother paying off faster because savings would actually pay more. Or you might make a lot of money and need to look at tax deferred investment avenues. Or you might be looking at taking out a car loan and want to improve your credit rating by paying down debt.

Personally, I'd look at fully funding my Roth IRA, which can be used for first-time homebuyer down payments after being open for five years. The extra money I could spend on a real cell phone plan (instead of a $100 a year plan), a new comfy bed, and whatnot. But that's because my loans are all at 2.5 percent or lower, I have low tax burdens, and have substantial money with my banking accounts.
posted by pwnguin at 2:18 PM on September 3

What -would- I do is much different than what -should- I do.

I would...
- buy a new TV
- hire a maid to come every couple of weeks
- buy a Vespa
- contribute more funds to my "house money"
- start an "Australia 2011" vacation fund


I should...
- save for a house
- pay down my car loan (~ $3500)
- pay down student loans (~$11500)
- start an emergency fund other than my "house money."
posted by mrsshotglass at 2:20 PM on September 3 [1 favorite]

I'm actually going to have about the same sum myself, in a couple of months, and I can tell you I'm saving $500 of it, with about $100 put into a "optional but expensive" fund that's earmarked for things like vacations.
posted by Tomorrowful at 2:25 PM on September 3 [1 favorite]

Here's what I would do: Some months, put the full amount toward an emergency fund. Some months, pay down debt. But, as your schedule permits, use it to take a trip. Fly to another city for a concert, or to see the sites. $600 would pay for a frugal flight/hotel combo, and would definitely make for a good road trip. If you don't have vacation time, leave on a Friday after work and come back Sunday night.

(In reality, I would probably personally put less toward responsibility and more toward travel.)
posted by The Deej at 2:31 PM on September 3 [1 favorite]

If I were you?

I'd take a date to a really nice dinner. Then,
I would max out my yearly contributions to the 403(b). After that, 50% would go to an emergency fund (until it reached probably 4 months worth of my expenses. Yes, this is arbitrary.) After that amount was reached, I'd put it all towards the following goals (which would only be 50% while contributing to the EF).

If I had credit card (or other high-interest debt), I'd pay that off. Completely.
If I owned a car, I would pay it off. Completely.
(assuming these debts carry a higher interest rate than your student loans)
I would open another retirement savings account.

Do you have a budget? You need one. (oh, if someone had told me that when I was your age, not so long ago).

Student loans - subsidized ones with super-low (<4>
What are your goals?
Do you want to buy a house some day? You need to save for that downpayment.
Want to get married? Weddings are expensive. Start saving!

You are in an EXCELLENT position to protect yourself from going into debt in the future. Use it wisely!

(and if you can't decide what you want to do right away, SAVE the money - don't start spending it - just set it aside until you make a conscious choice of what you want to do with it. Check out Get Rich Slowly. Check out the Simple Dollar)

(and CONGRATULATIONS!)
posted by pkphy39 at 2:38 PM on September 3

Save it, because you never know when you might get laid off.
posted by anniecat at 3:19 PM on September 3

Everyone else here is very grownup and responsible and sensible and you should absolutely listen to them.

But me, I spend it on the ponies.
posted by rdc at 3:25 PM on September 3 [1 favorite]

Personal order of importance. This was assuming that I wasn't married and didn't have a kid. Extra money with a family is pretty much non-existant.
- Pay off the highest interest loans first. Generally that means Credit Card -> Car Loan -> Student Loan.
-- Specifically on the student loan, since I never consolidated I would pay principal and then pay down a specific stafford loan. Mine was originally broken into 6 separate loans, I paid off the three highest intrest ones first. I now pay extra on one specific loan: when one is completely gone my total monthly loan payment drops.
- I would maximize my retirement contribution (401K in my case).
- After that it would be payoff spread expenses: This means I would contribute up front my auto insurance, as opposed to having it auto deducted.
- Next I would plan for variable expenses: That means establish winter heating fund based on last years cost.
- Planning for next year, I would maximize my additional vacation purchase at work. This would decrease the my weekly overpayment (I'd rather have $500 and four weeks of vacation).
- Planning for next year, I would estimate my yearly medical, dental and vision expenses for my flexible spending account. (I'd rather be out $500 in pay at the beginning of the year and have that deducted from my pay each month, $41 a month tax free which I can apply to co-pays, tylenol, perscriptions, glasses, contacts, teeth cleanings and dental work).
- Now here's where things get neat: Savings gets split into two categories: Savings for emergency and savings for long term projects.
Emergencies: What happens if my car breaks down? What happens if I loose my job? What happens if I get robbed or something I own breaks? Some cash in an checking or savings account is handy. This is where my money goes. I start with a savings, and when it is big enough, I roll it into a money market checking. When that is big enough... then we move into the fun stuff...
Long term savings: When my savings account grows enough I start rolling a portion into CDs. A good 90-day or 180-day rolling CD allows me enough flexibility for consolidating CDs, as well as enough liquidity so that if I have a major purchase ( a car? A house? A wedding? A vacation? etc.) I can get the cash on hand in a reasonable time frame. Personally I don't look much longer than 180 days out because I don't have a savings enough where I can handle the risk associated with the growth of wealth - YMMV.

As a family guy? Kid. Kid. Kid. Wife. Kid. Kid. Wife. etc. That's not a complaint - I like being a provider and I'd love to be a better one.
posted by Nanukthedog at 3:37 PM on September 3

I've thought about paying down my student loans more, but not sure if that's the best idea in the short run (either it takes me 20 years to pay them off, or 15.. does it really matter?)

Just some very quick back of the envelope math:

Let's say you have $50,000 in loans, and they grow by 5% every year, and you're scheduled to pay them off in 20 years. You need to pay about $4,000 per year, or $333 per month to accomplish that. You will have paid $80,000 in total at the end of that 20 years - $50,000 in principal, $30,000 in interest.

Now, let's say you put that $600/month toward those loans. Instead of paying $333 per month, you pay $933, for a total of $11,196 per year. But now, your debt is paid off in just over 5 years. Even better, you only pay $55,980 - $50,000 in principal, but only $5,980 in interest.

You save just about $24,000, and your loan is paid off 15 years earlier.

Now I'll reiterate your question: does it really matter?

YES.
posted by NotMyselfRightNow at 4:16 PM on September 3 [4 favorites]

Sorry if I'm reiterating, because I haven't the other comments.

You are 26 years old with no kids and no mortgage. This is a precious and fleeting time in your life that I promise that you will miss once it's gone.

I would buy myself a vacation to somewhere awesome, every other or third month depending on how expensive the airfare is to a given location.
posted by sickinthehead at 4:44 PM on September 3

Save half. Spend the other half on living more fabulously. Dinners out, nice shoes, fancy drinks, good shows.
posted by fiercecupcake at 4:59 PM on September 3

n'thing Roth IRA. It's 90% as good as an "emergency fund", bearing in mind that there'd be a 10% payment repenalty on top of any capital gains tax if you do have to withdraw from it in an emergency. It's 100% as good as saving up for a house down payment, since you'll eventually be able to withdraw $10K penalty-free for a first-time homebuyer. And you're young enough to be able to risk investing it aggressively, buying into a down market, so the odds are good that in the long term you'll get a much better return than you would by paying off a subsidized student loan.
posted by roystgnr at 6:11 PM on September 3

Let's say you have $50,000 in loans, and they grow by 5% every year

This is highly rate dependent. I just got mail from DirectLoan indicating they'd consolidate my student loans at 2.50 percent. Let me offer another scenario: I take the money you suggest should be directed at student loans, and buy a 4 year CD earning 3.00 percent. At the end of the term, I have accrued debt interest at 2.50 percent and earned interest at 3.00, a net .50 percent gain. If the loans were at 5 percent, it'd be a 2 percent loss, hence this is dependent on your interest rates.
posted by pwnguin at 6:13 PM on September 3

n'thing Roth IRA. It's 90% as good as an "emergency fund", bearing in mind that there'd be a 10% payment repenalty on top of any capital gains tax if you do have to withdraw from it in an emergency.

If this is your idea of "90% as good", then I'll claim Roth IRAs are 99% as good as an emergency fund. Roth IRAs only penalize for withdrawing earnings. If you put in $5,000, and that $5000 earns $500, you can take out $5,000 of the total $5,500 account balance penalty free.

But I'd advise against this idea that you can simultaneously save up for a downpayment and invest it aggressively because you're young. Aggressive investment is for retirement; house downpayments are much sooner.
posted by pwnguin at 6:22 PM on September 3 [2 favorites]

This is highly rate dependent.

Sure, but the only people I know who have loans with interest rates in the 2-3% range were those who went to school around five years before I did, which was from 2002-2009 (and it looks, from her website, like OP went to school around the same time). Federal loan rates in 2002 were around 5%, and have gone up since then; I have friends with private Sallie Mae loans with, no joke 9 and 10% interest rates. A 2.5% interest rate is a rare, precious thing.
posted by PhoBWanKenobi at 6:23 PM on September 3

Paying off your loans in 15 years instead of 20 is a huge amount of interest saved. The only reason I would not do this is if I could somehow guarantee investment returns/interest would exceed the interest saved by paying the debt faster. I also tend to prefer the freedom of having little-to-no debt.

Personally, I would budget my entire income for the month including the new $600 increase -- deducting living expenses and then determining the amounts (or percentages) of the remaining income for emergency funds, investment/retirement funds, debt payments, travel funds, house down-payment funds, and fun money.

If you're that new to saving, I would seriously recommend doing a bit of research even just online.
posted by asciident at 6:49 PM on September 3

I'd put a third of it into an emergency savings fund - and I would make it a money market account (investigate your options here; pick one that doesn't cost anything and that has a high rate of return historically) - so that I could build up at least six months of living expenses. Another third would go into a Roth IRA. And the final third would go towards my student loans. Just because you're making more money doesn't mean that you should change your lifestyle. I don't want to be a negative nelly (you're making more than $7,000 extra a year and I'm essentially saying spend none of it which isn't very fun), but my savings account that I started after getting a raise at work has really come in handy on more than one occasion.
posted by k8lin at 7:04 PM on September 3

Personally, I would...

1. Put $200 in savings
2. Put an extra $100 a month on my student loans
3. Use my extra $300 to take one random road trip a month/see a concert/something. Material things aren't so important, the experiences are.
posted by sporaticgenius at 7:12 PM on September 3

This is from someone 30 years older than you, who wishes I could send a message to myself when I was 26. If I could, I'd be rich by now. But I can't, so I'll just say to you, it's not so important exactly what you do with that money, than that you do three things for the rest of your life:
1) think about money in terms of the effort it took you to get it, and as a resource to accomplish what you want to do (or might need to do) in the future
2) think about debt in terms of how much extra you are paying beyond the purchase price, and how many months/years it will take to retire it (use the "snowball" method to do so)
3) assume that most people around you are being stupid with their money, so do your own homework and ignore what your friends and family are doing, unless you are sure of their skills.
posted by forthright at 8:11 PM on September 3 [1 favorite]

I would split it equally between three things:

1. Roth IRA
2. Cash Savings in a high yield account
3. Pay down student loans

That's your best bet for long term returns. And getting rid of the student loans early really will make you better off - if not financially, then at least mentally.
posted by krisak at 8:12 PM on September 3

Thanks everybody!

Question about Roth IRAs. I'm reading up about them, and am confused on one point. Can you withdraw the amount you put in (not the amount you earn) tax free BEFORE your 59th birthday, or only after?
posted by little_c at 7:00 AM on September 4

re: Roth IRA - Yes, you only get the benefit after the retirement age.

And, you may not see it now, but PAY DOWN THE DEBT. Once you get your student loans cleared, you'll wonder why you ever thought of not doing it faster.
posted by Citrus at 8:09 AM on September 4

Well, if you have any credit card debt, pay that down immediately. Like right now. Like put everything aside and pay it down. Really, not kidding.

Other than that, there are two schools of thought on this: one is that you should pay down your student loans, and the other is that you should max out your retirement fund. The justification for the latter is that over the long term, the returns on your retirement fund are higher than the interest on your loans, so you "make" more money on your retirement fund than you "lose" in interest on your student loans. Add the fact that if you don't max out your retirement fund now, you can't "make up" for it later by exceeding the limits, and I have to say that the "send the money straight to your retirement fund/Roth IRA" argument wins out.

There are also your immediate goals to consider: you may need liquid cash for an emergency fund, the purchase of a car, and/or a downpayment on a house.

Question about Roth IRAs. I'm reading up about them, and am confused on one point. Can you withdraw the amount you put in (not the amount you earn) tax free BEFORE your 59th birthday, or only after?

I Am Not A Financial Advisor, but I believe that Roth IRAs can be withdrawn early to pay for the down payment on your first home. The principal can be withdrawn for this purpose at any time, but the capital gains you made on it can only be withdrawn tax-free after 5 years. That's what I've read. If that isn't true, then I'm in for a rude awakening when I start the homebuying process.
posted by deanc at 9:08 AM on September 4

I don't see why this is so hard for people. Roth IRAs are not traditional IRAs. You can withdraw contributions tax and penalty free from a Roth IRA. This guide has the lowdown, if you don't believe me:

When can I Withdraw Contributions, Tax and Penalty Free?
At any time. You already paid the taxes on them.

When can I Withdraw Earnings Tax and Penalty Free?
Earnings distributions can be made without tax and penalty at age 59 and 1/2 if they have been held in a Roth IRA for a minimum of 5 years.

Contributions are the money you deposit. Earnings is the growth of the value of the account beyond contributions.
posted by pwnguin at 1:37 PM on September 4