Money management
September 8, 2014 7:11 AM   Subscribe

My husband and I recently came into $35k. Assume this amount is after taxes. What would be the smartest thing to do with this money given our situation? Details inside.

Here's our financial situation:

* I have $6k in student loans and $4k in auto loans. My husband has no debt. I have enough savings that I could pay off one of these, but I would prefer to just keep making monthly payments so I can build credit.
* I have a small amount in a 401k (just opened it a few years ago). My husband has no 401k or IRA. We have no other investments.
* We are 30 and 28 years old, no kids, no plans to ever have kids.
* Not including this $35k, we have a combined $30k in savings.
* We're renting and probably don't have enough of a credit history to buy a house.
posted by Librarypt to Work & Money (23 answers total) 7 users marked this as a favorite
I would pay off both those loans right away. Get a credit card you use and pay off every month if you want to build credit.

Then put the rest in a retirement account.
posted by something something at 7:15 AM on September 8, 2014 [16 favorites]

1) What is the rate on your loans? Assuming that they are above what you would get if you invested long term (6-8% on average per year), pay them off.
(Also, you don't need to have these loans ongoing to have good credit, as far as I know.)

2) You may have enough of a credit history for a house: talk to a proper financial advisor. They will have more information. However, use a rent vs buy calculator online: it doesn't always make sense to buy.

If I were you, and I didn't need the money in the next 5-10 years, I would pay off any high interest loans, max out my Roth IRA contributions (for both of you), and then put the rest tracker funds (such as ETFs).

TL;DR: It may be worth talking to a proper financial advisor, who can look over your financial situation in depth.
posted by troytroy at 7:17 AM on September 8, 2014

need to know the interest rate on your loans. Unless the car loan is zero percent probably your best bet is to pay that down, and then keep making the payments but into your savings account.

If you want to buy a house in the next few years keep your savings in a money market or something suitably safe.
posted by JPD at 7:18 AM on September 8, 2014

Pay off your loans. Use the cash cushion to allow your husband to set aside money for retirement, either through work or in an IRA. Place the rest of the funds that you will not need in the short term into an equity based fund, to grow for your future needs.

Work on building your assets and credit, with an ultimate goal of buying a home. If that is what you really want.
posted by Midnight Skulker at 7:42 AM on September 8, 2014

1/3 to cover debts
1/3 toward cash savings
1/3 toward something fun.
posted by A Terrible Llama at 7:55 AM on September 8, 2014 [1 favorite]

1. Gain ~= amount*(interest paid to you MINUS interest you're paying). Pay off the loans.

2. Learn more about credit: learn how it is acquired, what your own credit score is, and what helps or hurts it, and exactly what is required to buy a house. Don't make financial decisions based on 'probably' or other feelings or hunches -- learn the facts and compute the numbers.
posted by Dashy at 7:56 AM on September 8, 2014

Response by poster: Student loan interest rate is 6.8%, car loan is 5.89%, so student loan would obviously get paid off first.

Dashy - I have done a lot of reading about how to build and maintain credit, and what I have learned suggests that having MORE open accounts is good for credit, but also that opening new accounts is bad, so my understanding is that just paying off my existing loans rather than opening up a bunch of credit cards would be better overall, but I suppose I could be mistaken in this assumption. I do already have 2 credit cards with a combined credit limit of $31k, would that be sufficient to maintain a good credit score?
posted by Librarypt at 8:09 AM on September 8, 2014

Best answer: I'd pay off the loans (-$10,000), max out IRA contributions for both you and your husband (-$11,000) and stash the rest in a low fee index fund (-$14,000).

You should probably get some advice from a tax professional or financial advisor about the type of retirement account. A Roth might be preferable if you want to withdraw it later to buy a house, but a traditional IRA could be helpful on your taxes.
posted by Ham Snadwich at 8:11 AM on September 8, 2014 [4 favorites]

Best answer: Paying off your loans and saving the 6-7% that you're paying on interest is probably better than the money you could potentially save by having a slightly better credit score when you take out a loan (which you have no current intention to do). People tend to worry too much about the credit score (understandably in my view since it's so opaque) instead of taking the easy money (paying off your loans in this case).
posted by quaking fajita at 8:18 AM on September 8, 2014 [3 favorites]

Best answer: I do already have 2 credit cards with a combined credit limit of $31k, would that be sufficient to maintain a good credit score?

Yes, it absolutely is. Pay off the loans.
posted by rabbitrabbit at 8:20 AM on September 8, 2014 [2 favorites]

Best answer: It seems I end up making this point on every question like this - remember that the interest you earn on any investments you make will be taxed. Hence an answer to the question of whether it is better to invest or pay off a loan is whether you believe the *post-tax*, *risk-adjusted* income you can generate will exceed the interest on the loans.

The details vary by investment class & location, so YMMV but if you pay 20% interest on dividend income (say) then you need to earn a risk-free 8+% on your investment to make it a better deal than paying down the loan. That's a tall order - I don't believe any such investment opportunities exist in the current market, which makes paying down the loan a no-brainer. (Obviously your circumstances might include opportunities to increase your own income which are specific to you, so adjust accodingly.)
posted by pharm at 8:52 AM on September 8, 2014 [4 favorites]

Pay off both of those loans ASAP. Also, if you've got any credit card debt, use some of the remaining money to pay it off or at least pay it down. Your credit rating will improve by having those credit cards open AND paying them off in full each month (if you can afford that). It's not just about open accounts but about credit utilization ratio. Your credit score is better, all other things being equal, if you've got a $30k credit limit and are using $3k of it than if you're using $25k of it.

If you want to buy a house someday, stick the rest in a brokerage account and play with some mutual funds.

If you don't want to buy a house someday, stick the rest in an IRA.
posted by tckma at 8:55 AM on September 8, 2014

your student loan may be tax deductible depending on how much money you make. If that's the case the car loan is probably about the same price.
posted by JPD at 9:13 AM on September 8, 2014

Pay off the loans for sure, and put the rest away in an emergent-only type savings account with a credit union. This way, when you DO decide to buy, you have a great downpayment.
posted by Sara_NOT_Sarah at 9:19 AM on September 8, 2014

Also, 5.89% is high for an auto loan these days, you can find 1.5-3% right now, so if you decide not to pay it off, you should at least look into refinancing that debt. A lot of people don't know that you can refinance cars.
posted by rabbitrabbit at 9:32 AM on September 8, 2014

Best answer: Neither my husband nor I have ever had any kind of loan, only credit cards that we pay off in full each month, and we both have excellent credit. And this is with only a couple years of having any credit history at all. Don't waste your money paying interest when you can be done with these loans now. Your credit will be fine. In any case you don't have any need for good credit at the moment in any case.
posted by peacheater at 9:52 AM on September 8, 2014 [2 favorites]

It is marginally helpful to your credit score to have undrawn credit lines, but I wouldn't pay a fee on a card for them
posted by JPD at 10:00 AM on September 8, 2014

You did not mention any credit card debt, and so much of the above advice assumed you don't have any (that is, that you don't carry a balance or pay any interest on your credit cards). If that is not the case, then paying off those balances is higher priority than either the student or the car loan - credit cards seldom charge less than 12% interest, and often much more. Then try to keep the credit cards on a pay-as-you-go basis. After you've taken care of credit card debt, pay off the other loans. Finally, if there's anything left, I'd put it in some sort of retirement account, and I think given your circumstances I'd opt for a Roth IRA instead of a conventional IRA, since you might need to tap into the principal at some point for a down payment on a house, and you can do so penalty-free with a Roth. I think the flexibility outweighs any potential tax savings.
posted by mr vino at 10:09 AM on September 8, 2014

Response by poster: Thanks everyone! I just paid off the student loans, will do the car loan next. Also, no credit card debt at all, I pay my cards in full every month.

No more threadsitting!
posted by Librarypt at 10:38 AM on September 8, 2014 [1 favorite]

Best answer: After the loans, you have $25K left. You already have a healthy emergency fund at $30K. I'd invest $22K in an index fund and take a nice vacation with the rest, or treat yourself to a new mattress, or something else you've been wanting to do.
posted by chickenmagazine at 11:15 AM on September 8, 2014 [1 favorite]

Best answer: The other thing to consider is that paying off the loans will free up some of your monthly income! I would redirect at least some of that into the savings (with the rest of your windfall) every month. Since you're accustomed to living on a smaller amount of income, it won't be painful to save that money, and your future down payment will be even more comfortable.
posted by Blue Jello Elf at 11:43 AM on September 8, 2014 [3 favorites]

Best answer: Also, I meant to say this before -- donate some to charity. And I would suggest giving large chunks instead of spreading it out. If there's some organization you really like and you usually give them $25 a year or something, give them $1000 or some amount that would be really meaningful to them. Get into their "angel" tier. If you usually give to large national/international organizations, consider giving locally too.
posted by chickenmagazine at 12:11 PM on September 8, 2014

My feeling is, lump sums should always be used to pay off any extant debt.

My second feeling is, fun now, or pointless and overpriced medical treatment later? I'd be inclined towards the fun now.
posted by turbid dahlia at 4:36 PM on September 8, 2014

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