Porforis
12 years ago
One thing that's always bugged me...

If you follow the standard American cycle of High School -> College -> Work -> Obtain House -> Retire, is there really any reason to invest more than what one's employer would match in a 401k considering the fact that student loan interest and a mortgage would generate far more (compounding) interest against you than what is reasonable to expect in return from a 401k? In addition, your fixed rate loan is going to stay where it is - you never know when the market might tank. Yet, everyone (admittedly, in the business of retirement accounts) always tells you to save a lot, save early.

So, some more specifics. I'm 25 going on 26, the wife is 23. My previous employer had a matching 401k, up to 4%. I threw 4% into the 401k and 4% into a roth to mix up my tax burden a bit. I'm not yet eligible for my new employer's 401k but it's comparable. After digging into the wife's student loans (~$17,000), I realized that we were accumulating roughly $100 a month in interest. Tossing a grand at this saved us $10 a month in interest. I'm getting a fair amount more money in my new job and my wife's been working more hours, so I've been thinking a bit more about long term goals like getting a house, and eventually retirement. Which brings me back to my original question. If I have a 6.5% interest rate on student loans which will never go down, and when it comes time for a house, probably a 3.5% - 4% interest rate on a large principal... Is there something I'm just not getting about how traditional retirement accounts compound interest vs loans compounding interest, or is there absolutely zero reason to invest more than what your company matches until you've gotten out of debt?
dhazer
12 years ago
When your young like you I would just go with what the company would match and go in higher risk stocks. When I was young I was always told young you go high risk because you have time to make your money back if you do lose some. As you hit middle age you go to a safer stock and when you get old like me you take your safest stock. I really couldn't even tell you I have in my 401k because I don't follow it and won't need it for atleast another 25 years.
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DakotaT
12 years ago
Porforis - I would just do the matching 4% for now, try and pay off those fricken school loans (my wife and I still have 9K ourselves). But most importantly, try and have 20% down when going into a mortgage. Otherwise you'll have to pay mortgage interest insurance, which isn't principal or interest - just a method to screw young people.

As for 401K's - I'm not sold on them. Look at the ass beating people have taken in the market over the last decade. People have lost half of their retirement. There's no money in government bonds anymore so really the only sure fire investment is in property - but then you have taxes eating into your appreciating asset.

Did you take some finance classes in college? My rule of thumb though is to pay down debt if you are paying more interest than what your investments are earning. Also, try and stay away from financing your vehicles. That is just money down the toilet. Mrs. D and I don't have vehicle payments, but a healthy mortgage.
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Porforis
12 years ago

Porforis - I would just do the matching 4% for now, try and pay off those fricken school loans (my wife and I still have 9K ourselves). But most importantly, try and have 20% down when going into a mortgage. Otherwise you'll have to pay mortgage interest insurance, which isn't principal or interest - just a method to screw young people.

As for 401K's - I'm not sold on them. Look at the ass beating people have taken in the market over the last decade. People have lost half of their retirement. There's no money in government bonds anymore so really the only sure fire investment is in property - but then you have taxes eating into your appreciating asset.

Did you take some finance classes in college? My rule of thumb though is to pay down debt if you are paying more interest than what your investments are earning. Also, try and stay away from financing your vehicles. That is just money down the toilet. Mrs. D and I don't have vehicle payments, but a healthy mortgage.

Originally Posted by: Dakotat 



Only reason why I'm investing soley in a 401k is because of the matching - can't beat a ~100% return up to 4% of my income. If the account loses enough money to where I'm losing money in the end, I've got bigger things to worry about (see: total economic collapse).

As far as cars go, I'm "lucky" that some teenage asshole decided to turn left in front of me at an intersection in that I was able to get a car with 50k less miles for about $1000 when you factor in what the insurance payment was, and I've had no problems with my new car in the last 30k miles. The wife's jeep is getting older and while it's not been a huge money hole or anything I'm always concerned about the potential for it to up and die... Guess that's what an emergency fund is for, so I don't need to take a hit to my credit rating to open a new car loan and get killed by interest.

But, thank you both for weighing in, hearing someone confirm my line of thought puts me at ease... Everyone always loves to stress the importance of investing early so your interest can compound, but yeah it makes sense to kill off the higher-interest loans first.
zombieslayer
12 years ago
Take your 401k match. Always.

DakotaT is right about financing vehicles. Buy something really cheap, and used. My wife goes by some saying that's something like use it up and wear it out or go without or something like that. Goes for cars too. Don't finance a car. You might as well burn money. Pay for it in cash, and that usually means buying a used vehicle.

Learn investing too. Sorry DakotaT, but you're wrong about the market. We made a small fortune in the past 3 years. When everyone else gets out, that's when it's time to get in. Goes for everything. Real estate is your best bet now because everyone else is afraid to touch it. If you bought the DOW in 2009, you would have doubled your money. I told everyone I knew to buy Ford and very few listened. Well, it went from under $2 a share to over $10 a share. It recently dropped down to $9 a share.

Keep a few months in straight up cash as well. Always. Wife and I right now are both unemployed and neither of us are taking our job searches seriously. It's because we've always been very frugal. We don't spend our money on material things. We'd rather spend our money on TIME with people we like. That's way more important. Besides, material possessions don't give you fond memories. TIME with people you like do. When you're on your death bed, you won't be thinking of how much you should have worked or the crap you should have bought. You'll be thinking of the people you wish you knew better or spent more time with.

As for student loans, don't be in a hurry to pay them off. I went to college back in the 90s and am still paying off my loans. I don't care. The interest is tax deductible. The lessons I learned in college and the friends I made are priceless.

Back to investing - America long-term is still a good investment. We still lead the world in inventions and job creation. Other countries love to cut us down. They make fun of our students, but let's be real - our students beat the shit out of every other country in the world. Our students are the ones who will go on to create the jobs that employ everyone else. Yes, that pothead sitting in the back of the room barely passing his classes - he's gonna start a company that employs 100 people in 10 years. I'm saying this defensively because out here in California, I'm bombarded with Asians (not Americans of Asian descent, but Asians) who think they're better than us. Well, they're employees, not job creators.

Biology (bio-sciences or whatever it's called nowadays. Nobody wants to die and people will spend a fortunate to delay their death) is gonna be a big one for investing. If you can find the next up and coming Biology company, you'll make a mint. Software right now in California is hot. But if you don't have time to look for pre-IPOs (most people don't, so don't feel bad), get yourself a house, put 20% down, and get a FIXED mortgage that is 15 years, NOT 30-years. Pay it off in 12. You'll thank me 12 years from now when you have no mortgage and your property has doubled in value.
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dfosterf
12 years ago
I'd take the whole thing and go buy a bunch of god-damned hookers. This country is t-totally fucked, it really is, this time around. Obama in 2012! Let's double-down on the collective profoundly ignorant and stupid, coupled with the arrogant!

You can always go on the government tit after you get done with the whores.



Porforis
12 years ago

As for student loans, don't be in a hurry to pay them off. I went to college back in the 90s and am still paying off my loans. I don't care. The interest is tax deductible. The lessons I learned in college and the friends I made are priceless.

Originally Posted by: zombieslayer 



College is indeed priceless... and pricey. I think the big problem with student loan interest is that it's tax deductible, but it doesn't benefit me if I don't have enough deductions overall to beat the standard deduction. And even if it were tax-deductible in a real sense in my case, 6.5% interest that's tax deductible still beats out everything but the most insane investment returns, since government not only needs to tax your income, but they need to grab what, 25% nowadays in capital gains taxes, and then again on whatever you spend with what money you have left?

But yeah, I threw 4% in a 401k (which my company matched) and 4% in a Roth at my old company and I'll probably do the same once I'm eligible at my new job, I've got an emergency fund worth about 5 months worth of rent (probably about 3 months of rent, food, gas) which I could probably stand to make larger just in case of a car going out on me, but again that student loan interest is a killer and I'm in a hurry to get to the point of having a house before the interest rates go way up again. I'm not in a hurry to the point of working 60 hours a week and not doing anything for myself though, I absolutely, absolutely agree that you should focus on the PEOPLE that make you happy. I also think it's important in this day and age when everyone is constantly connected and worrying about work and friends and checking their email 24/7 to take even a few hours a week to just sit around and do nothing. Don't check your email, don't dink around on the internet, just find a quiet place and lounge around. But that's just me, some people like to be busy.
zombieslayer
12 years ago

College is indeed priceless... and pricey. I think the big problem with student loan interest is that it's tax deductible, but it doesn't benefit me if I don't have enough deductions overall to beat the standard deduction. And even if it were tax-deductible in a real sense in my case, 6.5% interest that's tax deductible still beats out everything but the most insane investment returns, since government not only needs to tax your income, but they need to grab what, 25% nowadays in capital gains taxes, and then again on whatever you spend with what money you have left?

But yeah, I threw 4% in a 401k (which my company matched) and 4% in a Roth at my old company and I'll probably do the same once I'm eligible at my new job, I've got an emergency fund worth about 5 months worth of rent (probably about 3 months of rent, food, gas) which I could probably stand to make larger just in case of a car going out on me, but again that student loan interest is a killer and I'm in a hurry to get to the point of having a house before the interest rates go way up again. I'm not in a hurry to the point of working 60 hours a week and not doing anything for myself though, I absolutely, absolutely agree that you should focus on the PEOPLE that make you happy. I also think it's important in this day and age when everyone is constantly connected and worrying about work and friends and checking their email 24/7 to take even a few hours a week to just sit around and do nothing. Don't check your email, don't dink around on the internet, just find a quiet place and lounge around. But that's just me, some people like to be busy.

Originally Posted by: Porforis 



I completely agree on the doing nothing. That's why I try to spend an hour a day going on a pointless walk, often alone.

6.5% seems a bit high for student loan interest. See if you can refi it down a lot lower than that. I'm paying 4% and that's probably still too high.

As for this country going to the shitter, people have been saying that since the 1700s. Americans seem to always be able to pull rabbits out of their asses. No matter how bad things get, we always rebound. Will this be the end? I don't think so. I see money to be made in new industries, especially health sciences related. Software is about to rebound big time as well, but I'm convinced health will be > software.

And back to investing, you should be getting 10% returns every year, especially when things go south. Ironically, when things go south is when the good investors make their big money. When the DOW tumbled in 2009, I kept telling people to buy. Wife and I bought heavily at around 8k. It's at 13k today and it was giving us a 3% dividend the whole time.

For the record, I'm NOT a great investor. I got lucky a few times but those few times amounted to enough money that I don't have to worry about money for awhile.

That's all it takes though. You only need a few really big wins. You will lose. Don't get frustrated by investment losses. See them as learning experiences. I told Wade that it took me 10 years to be a good investor and it was all trial and error (and most importantly, not giving up).

Back to deductions, that will change. When you own your home, you'll have tons of deductions. Save up and the best way to save up is to cut your spending way down. Vacation locally, buy food in bulk, buy everything used, etc. Being frugal is an art form.
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Porforis
12 years ago

I completely agree on the doing nothing. That's why I try to spend an hour a day going on a pointless walk, often alone.

6.5% seems a bit high for student loan interest. See if you can refi it down a lot lower than that. I'm paying 4% and that's probably still too high.

Originally Posted by: zombieslayer 



http://www2.ed.gov/offices/OSFAP/DirectLoan/calc.html 

Already looked into consolidation/refi, can't do it, or at least not in a way that I'd get any benefit from it. I'd gladly triple the monthly payments for a couple percentage points off but nope, government says you can't refinance for a term shorter than 10 years. Thank you, noble government for saving me from the evil banks. I could probably take out a loan from a local bank for this but as I understand it, I'll probably take a hit to my credit score. I absolutely love that in order to have a great credit rating, you need to regularly borrow money... But not too much, or too often.

I'm not really sure if I'd qualify as frugal, but I try not to eat out more than about twice a week, maybe three times. I used to limit it to about once a week. I don't have a data plan for my phone and don't text, I have cable internet but no TV, and otherwise try to avoid those things that tend to nickle and dime you to death. Lord knows I could save probably $1500 a year by not eating out at all, but at some point you've got to decide to not be TOO frugal... In my mind, if you don't treat yourself at least a little bit once in a while, that's as bad as working 60 hours a week when you're young because you want to get all sorts of stuff you'll never have time to enjoy. Balance in all things. ๐Ÿ™‚
zombieslayer
12 years ago

http://www2.ed.gov/offices/OSFAP/DirectLoan/calc.html

Already looked into consolidation/refi, can't do it, or at least not in a way that I'd get any benefit from it. I'd gladly triple the monthly payments for a couple percentage points off but nope, government says you can't refinance for a term shorter than 10 years. Thank you, noble government for saving me from the evil banks. I could probably take out a loan from a local bank for this but as I understand it, I'll probably take a hit to my credit score. I absolutely love that in order to have a great credit rating, you need to regularly borrow money... But not too much, or too often.

I'm not really sure if I'd qualify as frugal, but I try not to eat out more than about twice a week, maybe three times. I used to limit it to about once a week. I don't have a data plan for my phone and don't text, I have cable internet but no TV, and otherwise try to avoid those things that tend to nickle and dime you to death. Lord knows I could save probably $1500 a year by not eating out at all, but at some point you've got to decide to not be TOO frugal... In my mind, if you don't treat yourself at least a little bit once in a while, that's as bad as working 60 hours a week when you're young because you want to get all sorts of stuff you'll never have time to enjoy. Balance in all things. :)

Originally Posted by: Porforis 



Bummer about the refi, and yeah, government protected us from ourselves because we know nothing about living our own lives and they're the experts. We all know how well the government manages our money. ๐Ÿคฅ

And agreed about the frugal. We go out to eat about the same as you. Money is pointless if it's just hoarded with no purpose. You gotta live too. Last night, we spent $60 on drinks/dancing and had a great time. (Wade - Bombay Sapphire Martinis. I agree with you that it's a pretty good gin dollar for dollar).

I guess the way to do it is put money for different things. Maybe say 10% for retirement, 5% for investing (pay yourself before your bills, always), then pay your bills, then the rest is for fun. We sort of follow that, sometimes more, sometimes less.
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