Pay off my debt or save?

Question

Hello, I'm a 24 year old recent college graduate who is $63,000 in debt. I owe $37,000 in student loans and $26,000 for my car. I've been working as a Software Developer for 6 months and have a salary of $66,000/year or $5,500/month. I currently have $20,000 in my checking account, a combined total of $70,000 in available credit with my credit cards, and my take-home pay (net income), after taxes, 401k, and insurance is deducted, is $3,900/month. I live with my parents and pay about $550/month. After all expenses, I'm left with about $2,100/month. I know my situation could be worse since my salary is about how much I owe in debt.

I'd like to be debt free and a homeowner within the next 5-10 years and I need some advice on the best approach.

My current plan is to deposit $15,000 into a Amex Savings account with a 1.75 percent APY and then I'll deposit $1,000/month into the account to save for a down-payment. For my car note, I'd just pay the minimum amount of $422/month since the interest rate is only 3.39 percent. Then for my student loans, I'd pay the minimum amount and then apply my income tax refund each year to the loans with the highest interest rate. The interest rates of my loans are between 3-6.5 percent with an average of 4.3 percent.

I would rather deposit most of my net income into a savings account because of the cash flow. Otherwise, I would be basically broke due to paying off the $63,000 in debt.

What do you all recommend?

Answer 1

If your debts are as high as 6.5% then why put money into a savings account that only pays 1.75% - saves a fair amount of money just to reduce the debt by 15K and not even open the savings account. I would make sure I had some money saved away for emergencies and if you will need the money soon for anything then maybe don't go this route but otherwise just pay down the debt now and start saving after the debt is paid off. Beyond that your plan seems decent, just don't buy anything more than you have to and get those debts paid off ASAP.

Answer 2

My opinion is that you pay off your student loan ASAP—2-3 years top. Take advantage that you are young and live with your parents now and send as much possible you can towards the principal. Later life will get more complicated the older you get. It’s better to get rid of that debt now. And the property you want to buy can wait a couple of years from now.



As to your car, keep paying what you are paying as to everyone needs a car and everyone pays a monthly car loan.

Answer 3

debt is bad always is

there is no such thing as good debt



lots of good advice here

FIRST stop using credit cards





Agree #1 not become delinquent on payments'yes setting aside $1000.00 emergency fund

But I would pay the smaller debt first while making minimum payment on the other With $2100.00 keep $100.00 a month to live on ,, then pay $2000.00 on the smaller debt,,, when that is paid off roll over pay the $2000.00 on the next debt



your $3900.00 to $2100.00 makes no sense where is that other $1800.00 going?



401K until no debt ,, only put away the amount they match



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I agree the car should not be a debt you have,,, I would say you can afford to pay it off in 10 months DO SO



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never get involved with how much are the payments again -- FYI on real estate never borrow more than 15 years loan



save before buying after all the debt is killed to have no less than 25% down



debt is bad always is











ONE MORE THING NEVER EVER DO ANYTHING JUST BECAUSE IT SAVES ON TAXES

if someone tells you it is a "write off" run



if you would do it anyway without tax advantage OK but not because it has a tax savings as the reason



ONCE YOU GET OUT OF DEBT.... change your 401K to a Roth 401K max it out after you max out a ROTH IRA

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the $1800.00 and $2100.00 is $3900.00 what "bills" do you have ? this entire $3800.00 less your pocket money of $100.00 should be paid on the debt



YES no more fun of any kind until the debt is gone

Answer 4

My priorities would be as follows:



1) Not going delinquent on any payments.

2) Building an emergency fund. That's already done, and it seems that you get along with your parents, besides, so check this one off.

3) Pay off highest interest debts first. If you are carrying a month-to-month balance on any credit card, pay that off first. Next would be the student loans. Instead of putting $1k into savings, I'd put it toward the student loans. Do you have any shot at paying even more aggressively?

4) When you manage to pay off all the student loans, then attack the car loan if it isn't paid off by then. Actually, if it were me, I wouldn't have borrowed money to get a car. In your situation, I'd consider whether the car could be paid off completely (if it's almost done), or sold without loss. In the latter case, I'd pay cash for an economical used car.

5) The house will follow naturally if you are frugal with your spending now.

Answer 5

This is really simple math.

Any debt you have is money upon which you are paying RENT.

Get rid of the car,and buy a decent used car- because you are paying more in interest, as well as insurance and excise tax than you need to be, all the time. The faster you get ridof those payments, the better.



Pay off the monthly payments, but pay off as much of the debt as you can while reserving a backup fund for emergencies. That should be a static amount that is socked away in an account just for that purpose. Assess which loans you have the highest interest on, check to see if there is a prepayment penalty, and get rid of them as soon as you can.



That could mean consolidating trips in the car for errands, packing your own lunch, and the biggest offender of all, don't darken the door at Starbucks. You can actually save a lot, if you cut everyday costs. Get out mom's crockpot and cook yourself some stuff you can microwave at work. Nothing prepackaged. Learn to buy things when they are on sale, not ten minutes before you need them.



Get rid of the debt right now. Every time you are able to cut down the principle, you ARE saving money. There is no return on putting money you don't really own into an account that pays you less than what you are paying interest on, because you will never make more in interest than they are charging. That's how banks work, and why they are the ones issuing the loans.



You can make iced tea with one tea bag and a huge jar in the sun. A lemon costs a buck,if that. Make yourself a vat of that, and take it to work, and figure out how much you would otherwise pay for your sodas or drinks. Then put that directly towards your car loan. Earmark things like that- you'll be surprised how fast you are paying them down. It seems silly, but it's not. You don't even realize how much you fritter away every week, but you will of you look for ways to not pay on the fly. Ask your mom- she can probably help you. When you see the housepainters hook up a microwave outside a house, or bring out their coolers- this is exactly why. They dn't line up at the sub shop- they cook at home,and bring it, and every day they save about $6. That's well over $2000 if you don't count holidays.



So- any time you are about to spend money on anything, think about a cheaper way to do it, and pay off your debt. There is only "good debt, if you actually can afford it, and you cannot. Good debt is the stuff on the credit card that you pay off completely at the end of the month, because you actually have the money. You don't, so pay it off as much as you can, as fast as you can. because when you buy a house, you're going to have massive bills you didn't expect.

Answer 6

reverse course and rethink the savings, start paying off the debt as it will impede your credit score when you try to buy a place of your own. focus on paying off your debts. take your excess cash and devote 75% to paying off the debt and 25% into an investment account at a discount broker and diversify into SPY (S&P 500) or a growth fund like FBGRX.

Answer 7

pay off debt

Answer 8

Put some money aside each month to build up a safety net equivalent to 3 months of expenses.



Then put as much as possible towards your debt to pay it off quickly. Target the student loans first, starting with the highest interest rate loan. When that one is paid off, take that payment and apply it to the next highest interest rate, etc.

Answer 9

Student loans are a very onerous burden, and need to be paid off as fast as possible to get free of that burden. Also, your total debt is nearly a year's income, which is horrible for your credit rating. You fail to mention your additional expenses such as health insurance, and car insurance, car operating expenses, repairs & maintenance, etc.



Yes, you need to save at least 10% of gross income every month. But you need to get real about your monthly budget and paying off your debts. You bought a too-expensive car, for one thing. Get real fast or get into some big time trouble faster.

Answer 10

Saving is useless if you owe money because you never get as much interest as you are paying. Pay the car off first and then never buy a car again unless you can pay cash for it. I have only bought one car with payments in my life and my present cars cost about $120,000 when new.

Answer 11

Both.

Answer 12

Minority here save debt is overrated

Answer 13

When you are that much in debt, Id be very aggressive in paying it off. Live below standard right now. Get rid of your student loan the quickest way possible. The car was a mistake but the ink is dry, so it is what it is. Does "After all expenses" include the car payment? If so thats great. Add that $300 or $400 to your student loan payment each month. You are still very young with plenty time in your life to recoup 15k, so bite the bullet and and use $15k toward the student loan. That drops the student loan to $22k. Can you get by on $1k a month? Many people do and its best to live below your means for 2 or 3 years in order to pay your debt off or at least greatly reduce it. Hopefully your parents will have your back for a few more years. The ideas that you have extend your debt out to possibly 20 years. Who wants a huge debt hanging over their heads for that long? Good luck to you.

Answer 14

pay off debt

Answer 15

According to Dave Ramsey step 1 is to get $1,000 in savings then do the debt snowball which is pay the lowest debt first

Answer 16

You have to pay off your debt, because it is only going to get worse while the debt is there.

You already have 20k saved up for emergency anyway by the sounds of it

Answer 17

You need to get rid of that debt first. If I were you I'd be matching what I put into savings with how much you're putting towards your loans every month

Answer 18

See if your company will let you work remotely from southeast Asia or Mexico City or maybe Colombia or Eastern Europe. Things are cheaper there.

Answer 19

Food water shelter first. Then payoff debt. Keep 2 months money wage as back up money. Debt cost you. Unless you can find a investment that pays back more than the interest on the debt. Never take out a car loan. Or small loans for other things. Save & pay cash. I am 68 & never had a car loan. House loans yes. It is normally to expensive to buy your first house with out one. Pay off the high intrest loans first.

Answer 20

If you want to be a homeowner, don't you need a cash deposit? In that case it would be better to have savings and debt rather than no savings and no debt... which is kind of crazy, but that's the world we live in. Especially as savings pay almost no interest nowadays ~ so the rest of us can get into debt even more cheaply!

Answer 21

It sounds like you already have enough saved. I would recommend that you pay the minimum on your car since the interest is likely very low and you will likely be able to keep that car for the remainder of the term. This will make for good timing. When you need your next car, this loan will be paid off or almost paid off and you should be able to trade out of it easily.



The student loans, on the other hand, should be your priority. Since you have enough saved, I would put as much as you can on your student loans to get those paid off as quick as possible. They may have a decent interest rate but remember, you pay that percentage of the balance each year. Some student loans I've seen had 20 year terms. You don't want to pay that rate for 10-20 years.

Answer 22

Best advice would be in this situation that you divide your salary in three portion

First portion for your monthly expense

2nd portion for saving

3rd portion for paying off your debt

Answer 23

Why on earth would you have a 26K car if you're in debt with student loans? I can promise you'd be out of debt in one year if you sold your car and deposited that 20k extra into your 37k in loans, and put only 5k aside for a good used car. That leaves you with only 22k in debt.



2k * 12(months) = 24k

you only need 11 months to pay the debt comfortably



So basically a better old fashioned question to ask is what is more a priority to you.. What you drive? Or where you live?

Answer 24

Depends on the debt interest rate

Answer 25

With debts like that you will not get a mortgage....... so while your salary is good and your expenses low, get rid of all your debt, cut up your credit cards or ONLY spend on them if you are paying the full amount at the end of each month... you can't earn as much interest on savings so it is more beneficial to use your saving to pay of debts as it will save you another 20k debt interest

Answer 26

Until you pay off your debt, your "saving" is meaningless.

Answer 27

I would be embarrassed to say I worked with computers, but did not know about interest rates. 3.39% IS GREATER THAN 1.75% - especially after you pay 20+% income tax. Do not apply all of your savings to your debt, but do become much more aggressive.



This accountant says: Pay off the highest interest rate loan (which sounds like a 6% student loan) first, and work your way down. [1 or 2 of your debts might disappear immediately.] My view is to pay debt first (leaving a few thousand in savings as an emergency), and then to bank $ for the house down payment - NOT set aside cash money in a retirement account at a young age - because getting into a house before rising house prices and rising interest rates overcome you will save you the difference between mortgage payments for 30 years - and a retirement plan would be hard pressed to beat that. {Then, 30 years from the buy date, your mortgage ends.} - Try running some numbers on your computer.

Answer 28

Pay off your debt. The 1.75% rate you earn on your checking account is much less than rate you pay on your debt. You’re literally throwing money away every month under your plan (ie. Paying extra on your 5% car loan is the economic equivalent of a savings account that pays 5%).

Answer 29

Pay off your debt asap but also pay yourself with saving 10% of your salary every check.

Answer 30

Your plan sounds reasonable. The first thing I would do is to develop an emergency savings of say $5,000. This would be to cover an unbudgeted expense such new tires, or a car repair. Large unexpected expenses that would cause you to go off budget. I'd get quicken or another money tracking software and track my expenses and budget. If your employer is matching your 401K, I would contribute the max that they will match. The 3.9% and 4.3% is a low interest rate, so paying them off is not urgent. However, I would not let that distract me from paying off as much as I can. I would suggest paying off the one that you owe the least on, rather than paying off the highest interest. I know that doesn't sound right, but I would concentrate on reducing the number of loans I have outstanding. It is important to track your expenses and develop a budget. If you discipline yourself at this young age it will pay dividends in the future. I would also get educated about allocating your investment assets. 95% of the difference in the performance of institutional investments is due to allocating assets, only 4% is due to being able to pick superior stocks, and 1% due to market timing. Your allocation will make a huge difference in investment performance over time.

Answer 31

Pay off your debt and then save.

Answer 32

Don’t put money into savings if you owe money on debts.



First pay off the car; and then pay off your student loans.



Take the $18,000 and put it towards your car immediately. Keep $4000 in bank for your emergency fund. Then pay bi weekly towards your car payment (keeping the $4000 emergency fund).



Once that’s paid off, then tackle the student loan debt.



In 2 more years, you will have the student loan debt and car debt completely paid off.



Then you should focus on saving money for a house.



And PERSONALLY........ if you can sell the car for close to what you owe on it, I’d do that, and then buy a $4500 used but fairly low miles Honda to get you around.

Answer 33

Step #1. 6 month emergency fund.



Step #2. Figure out your budget and stick to it. $550 in rent is wonderful. If you lived anywhere else, you would pay over $1000. Don't waste that extra money.



Step #3. Paying interest is different than making interest. 4% sounds like nothing, but it is. Available credit lines are not savings. A tax refund is not magic money.



Guideline, less than 50% on needs. 25%-30% on wants. At least 30% on debt/ savings.