I’m in a pickle. Should I pay off my student loans ASAP to save on interest, or should I throw all that cash into investments and just make the regular loan payments? I’m 22 and just graduated in May. I work in accounting and will be crashing at my parents’ place for the next 12-18 months. With my low expenses and fat wallet, should I go all out on investments like a Roth IRA? I mean, money is king right now with time-value-of-money on my side. But my dad is wary because the stock market is soaring and could crash just like the dot com bubble (ouch). Will the big bucks I make from investing and letting it marinate for 45 years trump the interest saved by paying off my loans in the next decade?
Some deets:
– After taxes and 401k contributions, I bring home around $4k a month
– Living at Hotel Mom and Dad means I can drop around 75% ($3k) on loans or investments
– Student loans add up to $40k, 5% interest rate, and I start repaying in November for a 10-year term
– If I pay off all loans in year one, I’d save about $10k in interest over 10 years
– Assuming a 10% annual return on investments (6% with inflation) but gotta factor in the market being on steroids right now
Can you crunch some numbers on the best balance between investing and loan payments, given that killer return on investments over the next 40 years?
Shoot me your thoughts, Money Minder!
Peace out,
Future Billionaire
Response from THE MONEY MINDER:
Hello There,
Congratulations on graduating and embarking on your career in accounting! It’s great that you are already exploring ways to make the most of your finances at such a young age. Based on your situation, living with your parents and having a sizable portion of your income available for either loan payments or investments, you have a good opportunity to set yourself up for financial success.
Considering your student loans have a relatively low interest rate of around 5% and the potential for your investments to grow at an average rate of 10% over the long term, it could be financially beneficial to allocate some of your funds towards investments like a Roth IRA. By investing early, you take advantage of the power of compounding and time value of money, which can yield significant returns over the years.
However, it’s essential to strike a balance between investing and paying off your student loans. While the stock market may be at record highs, it’s crucial to have a diversified investment strategy to mitigate risk. You may want to consider a conservative approach, such as dollar-cost averaging, to gradually invest your funds over time. This can help reduce the impact of market fluctuations and provide a more stable growth trajectory for your investments.
As for optimizing the amount to invest versus making accelerated loan payments, you could consider a hybrid approach. You may allocate a portion of your income towards investments while also making higher-than-minimum payments towards your student loans. By doing so, you can benefit from the potential investment growth while also reducing the overall interest paid on your loans.
In conclusion, it’s essential to weigh the potential returns from investments against the interest saved on loan payments. A balanced approach that takes into account your risk tolerance, financial goals, and market conditions can help you make informed decisions. Remember, financial planning is a journey, and it’s okay to adjust your strategy as needed. All the best from THE MONEY MINDER as you navigate your financial future!
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