Christmas Miracle!

December 27, 2006 1:36 PM

Christmas Money: I just got a modest check for Christmas, and am actually considering a responsible way to spend it. What should I do?

So, it's $1000 - I didn't win the lottery, but it's not chump change to someone like me. Generally, I'd use it to fund the trip to Argentina that's been in my head for a few years, or I'd just fold it into my bank account and use it slowly on groceries, laundry and such...

But I'm wondering if it'd be better served for some sort of "investment" puspose. Here are relevent details:

+ I'm 26, in grad school, don't really have any savings to speak of.

+ I do have a TIAA-CREFF account from a couple years of teaching - it currently stands at around $3600

+ I've got TONS of loans. Old loans from my undergrad years; new loans from grad school. I'm silly with loans, but they are currently in deferrment.

So, should I just throw the $1000 at my loans so that the principle balance is smaller when I'm out of grad school? Can I pop it into TIAA? Should I just throw it in my savings account? Or invest it in something new entirely (what's out there)?

My inclination is to find a long-term investment since I'm pretty used to regular loan payments by this point, and I often find a way to fund random trips and such by doing odd jobs.

Or should I go to Argentina?

posted by jtajta to work & money (13 comments total)

Do you have any credit card or other high-interest debt?
posted by occhiblu at 1:38 PM on December 27, 2006

I left TIAA about 25 years ago, with around 7K$ in the fund. (Disclaimer: I put it all in the most conservative fund I could find, and in those 25 years, it has done about 5% a year, averaged, even or better with every other fund they had available at the time.) Now it's worth about 100K$.
I am not sure if you are still eligible to add to that fund, but if so, and given that you are used to the loan payments from college, I'd be tempted to tuck it in there.
posted by unrepentanthippie at 1:46 PM on December 27, 2006

Aha! Yes, I do have a credit card with a $3500 balance sitting on it. I've stopped using the card and am chipping away with small monthly payments... Is that where I should put it?
posted by jtajta at 1:48 PM on December 27, 2006

don't really have any savings to speak of

My recommendation is to simply sock the $1000 for use as an emergency fund. DON'T TOUCH IT except for in the case of an emergency. You'll get a lot of advice to pay down high-interest debt, and that's not a bad choice, but I believe you should have $1000 in savings before you begin debt reduction. Without the emergency fund, you're at the mercy of fate. (I would make debt-elimination your next priority, though.)
posted by jdroth at 1:49 PM on December 27, 2006

If you didn't have the credit card, I'd say put it in a CD (Certificate of Deposit) for the length of the time until your loans come due. But since you have the credit card, yeah, pay it off first.
posted by matildaben at 1:51 PM on December 27, 2006

Yeah, I'd pay it onto the credit card, to avoid interest. The credit will be there if needed for a rainy day.
posted by theora55 at 1:55 PM on December 27, 2006

do the math: compare the interest earned on your investment scheme versus the interest you owe on your loans. if the investments have higher rates, invest. you'll still net an earning when you pay off the loans.

even if not, i think if this isn't going to significantly reduce your debt load, put it into emergency savings.
posted by thinkingwoman at 2:13 PM on December 27, 2006

If the emergency fund makes sense to you, then you can do that; otherwise, yeah, the credit card is presumably eating up more money than you'd earn by investing it, so if it were me, I'd pay off the high-interest debt rather than investing it for less return.
posted by occhiblu at 2:21 PM on December 27, 2006

Nthing the emergency fund Open a separate savings account, such as a high interest ING or HSBC account, put the money in it, and DO NOT TOUCH IT unless your car dies, you get fired, or some other real emergency comes up. Then, sit back knowing that no matter how much debt you're racking up in school, you won't have to borrow from Visa at 20 percent interest if you have an emergency.

And pay off that credit card debt as soon as possible! Even an extra $20 or $50 a month will help. If you have to take out student loans, you'll appreciate not having any other debt to worry about when they come due.
posted by decathecting at 2:41 PM on December 27, 2006

I'd normally say put it in an emergency fund. However, if you use it to pay down your credit card, you'll reduce your debtload on a very high interest account. Assuming you still have available credit, you could always use the credit card in an emergency. You should look at structuring your life such that you won't have an emergency, of course. But putting it toward the card will have a big impact and help you get on the right track. Incidentally, keep your payments at or above the existing level, even though the balloon payment will reduce your monthly minimum.
posted by acoutu at 2:43 PM on December 27, 2006

I inherited about that amount a year and a half ago, and I am in much the same place in life as you (26, in grad school), though I don't have any debt. The advice so far is undoubtedly all the financially correct advice, but I did something different. What I did (eventually, it took me a while to decide) was spend this money to further a relatively expensive hobby I've wanted to pursue for years but never had the cash for (making electronic music). I have to say that this has been one of the best decisions I've ever made. So you might want to consider if there's something like that you could spend at least part of it on. Argentina might fit the bill.

But if I had that much credit card debt I probably wouldn't have done as I did, though I probably would be a fair bit less happy now. Good luck with your decision!
posted by advil at 2:45 PM on December 27, 2006

Is that [credit card with $3500 balance] where I should put it?

Yes.
posted by ikkyu2 at 2:59 PM on December 27, 2006

If your credit card has more than about 5.25% APR, pay it off, unless you are in a position to move that debt onto another card at a very low interest rate.

Otherwise, look at a savings account like Amboy Direct to house your emergency fund. (or just make a small amount of interest while you figure out something better to do)

CDs are overrated at the moment, given that there are a fair number of banks with online savings accounts offering over 5% APY (one is at 5.5%, but has a fairly large opening balance requirement, although it has a low minimum balance)

Unless your credit is poor, there's little downside to paying off the credit card, since you can always borrow the money again later if you really need it.
posted by wierdo at 12:55 AM on December 28, 2006