Help with personal finances

[sr82]

Hi everyone,

I am a new member and this is my first post. I have for long been thinking about putting a plan around my personal finances, and have sought help from books, but every book has a different opinion and I am not experienced enough to know what works better than most. So, I have decided to seek help from others who may have had to make some of the same decisions as I.

In brief, here is what my situation is and what I need advice on:

I am a 25 year old guy, with a bachelor's and Master's degree in engineering under my belt.

DEBT: I am around $42K in student loan debt, of which $33K are federal student loans with 4.3% interest, and $9K is a private loan at 11% interest. My monthly student loan payments are a combined $350/mo and I'm on a 20 year repayment plan for both private and federal. I also make monthly payments of $300 on my car, and will continue to do so for the next 2 years - my interest is only 3.9% on the car financing.

INCOME: I work in the Silicon valley, earning $95K annual salary of which close to 40% is taxed! So every month I take home $5000.

401K: Of the $5000, I contribute $300 to my 401K monthly (4% of my salary), which is matched 100% by my employer, effectively depositing $600 in my 401K every month. I am just contributing enough to get the full match from my employer at the moment.

EXPENSES: Of the remaining $4700 from my take home income, I spend $3500 in expenses - rent, food, car, insurance, student loan, utilities, miscellaneous expense.

NET INCOME: Therefore, my current net income going to my checking account every month is $1100 - 1200.

I currently have $10,000 saved up in my checking account. I don't have a Savings account. My 401K balance, not to be touched until retirement is sitting at just $1200, and will grow at $600/mo plus whatever interest I can earn.

My questions are:
1. How much cash should I keep in my checking account at any given time? Keep in mind I am single, and don't have a reckless lifestyle. I look at checking account as an emergency fund that I will have easy access to at all times.

2. Where do I put the remaining money I save on a monthly basis? Should I put more in my 401K account? Right now I'm only putting enough to get the maximum match, just 4% of my salary which is matched 100%. Or, should I put it in stocks? I have never played the stock market and have only basic knowledge of the market. Or, should I put it in a savings account and if so, what is the interest rate I should be looking to get? Or is it a combination of 2 or more of these options?

3. Should I think about paying off some of my debt right now? If yes, which one? The private student loan of $9K has by far the highest interest. Should I be paying it off in lump sums?

In summary, my problem is allocation of cash flow. I am fairly risk tolerant at the moment, and my aim is to make aggressive decisions that will help me retire early. While I know my current savings won't go a long way in earning that first million any time soon, I at least want to organize what I currently have and then focus on what I can do to strike gold.

Any advice that you can provide would greatly help. I would also appreciate any specific sources of information that would help me become ready to play the stock market.

Thank you in advance.

sr.

[kav122]

I am no expert, but I see my own situation in your in many ways. I'm sure others will have great advice, but here are my thoughts:

1. Keep $1000 or so in your checking. Move the rest into a savings account. It will still be very liquid if you have an emergency, but you can at least earn 3% or so on the remaining $9,000.

2. Put yourself on a written budget:
$5000
-$300 retirement
-$350 Student Loans
-$300 Car
- House
- Electric
- Food
- Gas
you get the point. When you write it out you really start to see where you are overspending and where the kinks are in your budget. I follow Dave Ramsey's financial plan, and he advocates using cash only. This means if you say you have $200 for food, then you take out $200 cash from your check, put it in an envelope and everytime you go to buy food, you take out that envelope and pay with your food with that. His logic is that when you use your card you do not have an emotional attachment to it, so you will find ways to spend less with cash.

3. I would use the rest of the $1100-1200 to pay off that $9K SL. 11% Interest is pretty high, and it would be hard to find a return that was more than that if you invested instead. I would think of it as investing, in a way...you will be saving a LOT of money in interest by paying it off quickly--heck, you could have it gone by the end of the year!!

4. Then I would pay off the car.

5. Then the other Student Loan.

6. Then I would save 3-6 months worth of expenses for a fully funded emergency fund.

You will be able to put away a lot of money after you get that $1000/month debt out of your life...and be able to save up for a vacation or downpayment for a house or anything that you want very quickly! Good luck!

[yourbeginnings]

My thoughts are along with Kav's. When I was getting my finances under control, I focused on paying off the smaller balances first then focused those resources on the larger balances. However, I should have looked at interest rates first and paid the higher interest rates off first. This would have saved me a lot in interest that was going into the banks coffers.

[jdp]

Oh good grief. I just had this wonderfully long reply all nicely laid out and did some weird scroll thing and poof its gone.

I'll never get all that out again lol.

My main point - is it possible to have your retirement $ coming out of your pay on a pre-tax basis? Ask your HR or bene's person. Lowers your taxable income! (later lowers your income used to calculate SocialSecurity but eh) Look at (or have someone look at) your tax situation - if you are *so* close to being in a lower tax bracket you can up your pre-tax retirement deductions to have a lower taxable income AND put you in a lower tax bracket. *side note - you should see if any of your pay deductions can be done this way from health ins premiums to dependent care (not you) to commuting plans*

I have:
1 month living $ (all bills and spending money) = checking account
3 month living $ (or more) = HYS
then as money accumulated in the HYS beyond the 3 mos necessary I was wondering what to do with it. As it became big enough of a surplus I was just putting it in CDs. I have chosen not to super-fund my retirement plan at work because I am saving for a down payment on a house and that is what I wanted that money for. After buying the house and ensuring I have enough to cover the associated costs the leftover will be going to start an investment into MMF or some such OR I will be maxing out what I can have taken out of my check for my pre-tax retirement deductions.

That would be a good thing for you to do now since you don't have any dependents to lower your taxes. Then if you ever do have dependents you can slack off on the retirement contributions without hurting your retired self too much because you really funded it a lot now while you can.

For you I'd just keep throwing anything beyond 1mo living $ in checking and 3 mo living $ in savings toward the debt. Paying 11% 4% 3% on anything will negate any gains you get from saving and investing. Make sure extra money paid on those debts is marked "towards principle only". I don't know why, but everyone and their brother told me that when I was paying down debt. Also, I'd pay off the fed student loan last and make sure you are putting your SL interest on your taxes. Did you know if you set up your SL payments with autodeduct from your checking you can save like a 1/2%?

Hopefully some of the very smart investors here will come and help you with your stock market question parts.

For your emergency 3 mos HYS$ you can go online to bankrate.com or a similar site to see what sort of rates you should be looking for.

[sr82]

Thank you all very much for your feedback, I appreciate it.

Looks like paying off my debt, specially the high interest loan seems to be common from your advice. I will put together a budget on paper, and a plan to knock off that high interest loan.

Thanks again for your help, helps me organize my thoughts.

[Xin Lu]

Yup, I agree with the rest of the posters. Getting rid of your high interest debt should be the first priority. Additionally, you can definitely afford to contribute more to your 401k. The tax savings are quite significant. I try to keep as little in my checkings account as possible because it doesn't earn interest. I can transfer money to my checking account from my money market accounts if I do need the money.

[MSMomsmoney]

Good advice given above....

With your income and no dependents...

Keep $1K in your checking.....there are many hys accounts out there wamu, ingdirect, emigrantdirect, hsbc....just to name a few.

Pay off the $9K student loan. You should be able to do that within a year.

Fully fund your emergency fund. 3-6 months of living expenses. Keep in CD's or HYS accounts.

Pay off your car.

Increase your contribution to your 401K.

Interested in buying a home?

[sr82]

Originally Posted by MSMomsmoney

Good advice given above....

With your income and no dependents...

Keep $1K in your checking.....there are many hys accounts out there wamu, ingdirect, emigrantdirect, hsbc....just to name a few.

Pay off the $9K student loan. You should be able to do that within a year.

Fully fund your emergency fund. 3-6 months of living expenses. Keep in CD's or HYS accounts.

Pay off your car.

Increase your contribution to your 401K.

Interested in buying a home?

Yes, I am a little confused about when and whether at all I should be looking to buy a home. I have heard conflicting opinions about whether buying a home is good idea or not. To me, just renting seems like throwing money away.

I live in the bay area, and homes here are expensive and require down payments. I don't think I'll have enough money saved to just put it down as a down payment for a house.

Any tips? Is t advisable to take a loan for that down payment? I don't want to drown in debt though!!

And thank you for your advice

[72Tiger]

A couple of things. Not so long ago, I was 24, and had a BS and MS in Engineering under my belt. Starting out in my career, young Engineers were/are treated like pack mules. I worked a LOT of hours. Dealing with a house and all that it takes to keep one up takes time. When you are working that many hours already, I think it is more valuable to spend your free time on a social life (yes Engineers have one!), hobbies, volunteer work, etc.

Also, the Engineering field is volatile, and the opportunities of today may be lessened tomorrow. It may be tempting to 'overbuy' on a house. If you do decide to buy, I would get rid of your other debt first, build a generous emergency fund, save up for at least a 20% down payment plus closing costs, keep a stable job for several years, up your retirement contributions to 15%, and enjoy your life a little first.

Are you dead set on living in the area you are right now? Or are you there because of your job? A house purchase is a semi long term commitment. If you buy one, then get a great career opportunity 200 miles away, you will more than likely lose money in selling it. Good luck.

[Gootsy]

I'm a little surprised at how much some people keep in their chequing accounts.

I try to keep no more than 100 bucks sitting there for an extended period of time. I know when the monthly expenses come out so, a few days before I pay it (sometimes less, but better to be safe), I transfer the amount from HYSA to the chequing.

It's not a huge difference in savings, but if you can get an extra 2+ bucks a month this way, why not. Also keeps me on my toes .

Another thing I do, is get the grocery stores near me to email me their flyers. Keep an eye out for a good real deal, and go stock up on it.

Add me to the list of people who think you shouldn't rush to buy a house. Pay off debt, save up for a potential down payment, and THEN start asking yourself if you want really buy a house.