July 23, 2024
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THE MONEY MINDER

‘Most of my income is going to my student loans’: I have a net worth of -$20k and $35k in student debt. How can I save for my future and stay in the middle class?

Hi Money Minder,

Hey there Money Minder!

I’m 24 and I’d say I’ve got a pretty good grip on my finances. I’ve got around $10,000 saved up for emergencies in a High-Yield Savings Account (HYSA). Plus, I just finished paying off two big debts: my $8,000 car loan and $5,000 in medical bills. I’ve been adding to my 401k for about a year now, though I’m only putting in 4% because my company only matches 1% (not the best deal, but it’s something). My 401k balance is sitting around $4,000. Planning to start contributing to a Roth Individual Retirement Account (IRA) in the next month or two. I pull in $61,000 a year working in payroll.

Now that those debts are out of the way, my main focus is my student loans for the next year and a half. I figure if I throw $400 a week towards them, plus some annual bonuses, I’ll have them gone by January 2026. Right now, I’ve got about $35,000 in student loan debt, making my net worth roughly -$20,000.

So, what else should I be doing to make sure I keep climbing financially? I’m careful not to overspend. My weekly paycheck is around $900—$100 goes into my emergency fund, $250 covers rent and bills, $400 takes care of various debts (almost done with my credit card!), and I live off the remaining $150. I’ve been sticking to this plan for about a year now and am currently on the step of paying down debts. Can’t think of anything else to add.

Thanks a bunch!

– Financial Greg

Response from THE MONEY MINDER:

Hello There,

Hello,

First off, I want to commend you for taking such proactive steps toward managing your finances. You’ve paid off significant debt, have a good emergency fund, and are already contributing to your 401k. Such financial prudence at 24 is commendable.

Your plan to pay off your student loans aggressively is a sound strategy. If you can indeed pay $400 a week and allocate some of your annual bonuses towards these loans, you should be on track to clear that debt by your target of January 2026. This disciplined approach will save you money on interest in the long run and provide you more financial flexibility in the future.

With your 401k contributions at 4% (and the max company match), you have already established a strong foundation for your retirement savings. Remember, even small consistent contributions can grow significantly over time due to compound interest. Starting a Roth IRA is a great next step since it allows for tax-free growth and withdrawals in retirement. The Roth IRA is especially advantageous for someone in your age bracket, with many working years ahead to maximize its potential.

Given your weekly paycheck breakdown, it’s excellent that you allocate $100 to your emergency savings. If your emergency fund is already substantial (generally three to six months’ worth of expenses), you might consider directing that savings toward your Roth IRA once initiated. This strategy could bolster your retirement savings while continuing to improve your overall net worth.

You’re also close to paying off your credit card debt, which will soon free up another portion of your income. Once this debt is cleared, you could channel those funds towards other financial goals, be it increasing your Roth IRA contributions, building a bigger investment portfolio, or establishing a sinking fund for future large purchases.

It’s great that you live within your means, with only $150 allocated for living expenses after essentials and debts – though the margin is tight. Continually monitoring and adjusting your budget will help ensure you don’t overspend and keep on track toward financial goals.

Consider periodically reviewing your financial plan to adapt to changing circumstances or new opportunities for growth. Tuning in to financial resources, such as podcasts, articles, or even a financial advisor, can also provide insights tailored to your evolving needs.

Keep up the excellent work and stay disciplined. Best wishes on your financial journey.

Warm regards,
THE MONEY MINDER

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