I (23M) am on track to save ~$15,500/yr above and beyond what's required to max out my 4% 401(k) match, Roth IRA, and Health Savings Account (HSA) - budget pic below. I'm not sure what to do with the money. I could:
Dump it into my 401(k) - regular or Roth - to get ahead on retirement savings; or
Keep it liquid (HYSA, money market) for flexibility in the future (graduate school, wedding expenses, downpayment on an apartment/home); or
Lump sum payoff ~$8000 in 4% interest student loans; or
Some combination of all three?
Grad school isn't a certainty and homeownership/marriage are years away, but they're all such large outlays that I'm torn up on whether or not it's too soon to worry about them.
Edit: I have a $12,000 emergency fund (~6 months of necessary expenses).
@michaeldavis Up your 401k contributions. Compound interest is your friend especially with you being so young. You’re already building a great foundation with money. The more you build great habits now, the easier it is to build off those as you get older and make more money.
Once you get used to putting away 10% at $80K it’ll be easier to put away 10% at $120k or $150k in 5 years because you’re already used to not seeing it and having it at your disposal.
Pounding away at the student loans and getting rid of them is great. Opens you up to being able to do more with your money as well.
@tara5509 It seems like that's the consensus. Two years of higher 401(k) payments and the tax deductions save me enough to cover the student loans.
Although I'll have to pay taxes later and with all this time to compound... maybe forking over the cash for the student loans and contributing to a Roth 401(k) instead is better
@michaeldavis Wouldn’t be a bad idea to do the match in pre tax and then everything else in Roth401k as you’re young and make a great salary. Chances are you’re going to hit the maximum income allowed to contribute to a Roth IRA in the years coming directly.
@michaeldavis Personally I’m skipping paying off the loans and getting as close to the max contributions for your 401k that I can. At least that’s what I did when I was your age with loans
@michaeldavis At this point in your life I would argue the absolute best course of action in your situation is to dump it all into retirement. The biggest asset you have right now is time. The more you can put into retirement, the more monumental it will eventually be. At 4%, paying off your student loan would provide a lower effective return than what you should expect from investing in retirement making that a less optimal choice (from a financial perspective). I’m also assuming in this scenario you already have a healthy enough emergency fund to cover basic unexpected expenses. With that in mind there is no need to further build liquid savings. You can always start saving for things (wedding, grad school, etc) down the road when such expenses begin to materialize. Until then the greatest financial benefit to you is to max out your retirement savings.
@saskia Hadn't thought about the tax reduction. $15k more to a traditional 401(k) and my tax burden goes down ~$4k. Throw that at the student loans for two years and they'd be gone. Thanks!
They've calculated what a dollar saved at xx age will be worth at 65 years old.
At 23 years old, they say ur wealth multiplier is 57.84x. So if you pushed an extra 10k into your retirement savings, at 65, that 10k would be worth just over a half million, on its own.
If you want to retire 5 or 10 years before 65, just add that 5 or 10 years to your age and check what that wealth multiplier is. It's a great tool. And I bet it'll light the fire to save some of that extra cash!
@michaeldavis Welcome. I'm a big fan of the guys. They are great for people that want a big retirement and don't struggle with debt. Also really good at encouraging young people before they get indebted.
@michaeldavis I'm surprised not more recs to get rid of the debt. That's what I would focus on doing first. Maybe a little more into the emergency fund. $12K is a little low - if your fund is meant to fund 3-6 months of expenses, it probably should be closer to $14-20K no?
@inquirer2016 It’s a low interest debt. Better avenues to make the money work better. As for the EF, that’s purely based on expenses. If 12k is enough to cover 6 months of expenses, then that’s all you need.
