July 15, 2024
44 S Broadway, White Plains, New York, 10601
THE MONEY MINDER

‘It’s basically “free” money to me’: I have an extra $200k coming in and student loans, car loans, and dreams of a $700k house. What’s the smartest move?

‘It’s basically “free” money to me’: I have an extra 0k coming in and student loans, car loans, and dreams of a 0k house. What’s the smartest move?

Hi Money Minder,

How can I assist you with your financial needs today?

Throwaway account for obvious reasons…

So, there’s a big chance I’ll be getting an extra $200k on top of my salary this year. I’m 29 and still living at home (but not for much longer).

Right now, I’m making about $150k a year before taxes, and that’s gonna stay consistent. I’m already maxing out my Roth IRA and have around $40k in cash and investments. I’m a 1099 employee, so I get to write off a bunch of stuff on my taxes every year.

My two big monthly expenses are:

  • Student loans: $483/month
  • Car payment: $516/month (I’ll own the car outright in 5 years)

What’s left on those loans?

  • Student loan: $61k at 4.62%, fixed interest
  • Car loan: $27k at 4.75%, fixed interest

Let’s say I end up with an extra $120k after taxes. My big goal is to get my own place. Renting isn’t off the table (around $3,100/month plus utilities where I live) for a bit because in a few years I’ll be earning about $600k.

If I bought a house now, I’d probably be looking at something around $700k based on what I like and need.

So, what do I do with the $120k? Should I wipe out the student loan and use the remaining $60k to cover about 2 years of rent? Or should I keep all my loans (since I can afford them now) and put the whole amount down as a deposit on a house?

To me, it’s basically “free” money. Just looking for any thoughts or ideas on the best way to use it.

– Exploring Options

Response from THE MONEY MINDER:

"Hello There,"

Congratulations on the additional income! It’s an exciting time when you’re presented with financial opportunities that can significantly impact your goals and future. Given your situation, let’s analyze the most effective way to utilize the $120k and align it with your ultimate goal of getting your own place.

First, it’s crucial to consider the nature of your loans. Your student loan has an interest rate of 4.62% and a balance of $61k, whereas your car loan has a 4.75% interest rate with a balance of $27k. These rates are relatively moderate, but paying them off could still be a wise move since eliminating debt can provide financial freedom and peace of mind. Additionally, cleared debts improve your credit score, which is advantageous when applying for a mortgage.

Using part of the $120k to pay off your student loans ($61k) significantly reduces your monthly financial commitments and interest accrued over time. This leaves you with $59k, which can be strategically allocated toward your living arrangements.

Considering your rent at $3,100 per month plus utilities, rent expenses alone will sum up to approximately $74,400 for two years. Allocating your remaining $59k towards this rent amount can cover a significant portion, augmenting your stability as you continue to save from your steady $150k income.

Moreover, since you’re expecting to earn around $600k in a few years, renting now offers flexibility and avoids the immediate large financial commitment of purchasing a home worth $700k. You can continue building your savings and investment portfolio, positioning yourself better for a substantial down payment in the future. This also leaves room to keep your emergency fund and investments growing, ensuring a balanced financial plan.

Alternatively, if you decide to lean towards homeownership now, consider that the full $120k could go towards a down payment, reducing your mortgage and potentially saving on long-term interest. This would imply needing to manage both your home loan payments and existing debt simultaneously, which is an option if you are confident in managing both given your stable income.

In summary, a prudent approach is to eliminate or reduce your student loan first, utilize the remaining funds to support your rent while you save strategically, and prepare for higher future earnings. This allows you the flexibility to handle unexpected expenses and strengthens your financial stance when you’re ready to buy a property.

Good luck with your financial journey!

Best regards,
THE MONEY MINDER

Leave feedback about this

  • Quality
  • Price
  • Service

PROS

+
Add Field

CONS

+
Add Field
Choose Image
Choose Video