‘We do have expenses coming up for our weddings, honeymoon, and hopes to buy a house’: Should I (25m) prioritize $25k student loans or continue on current budget?

Hi Money Minder,

How can I assist you with your financial goals today?

So, I’m a 25-year-old guy making around $125k a year. My only debt is $25k in student loans – $19k of that has an interest rate between 4.2% and 4.8%, and the rest is at 2.5%. I’m also maxing out my Roth IRA, which has a balance of $16.3k, and almost maxing my 401k, sitting at $36k. I’ve got about $90k in a high-yield savings account (HYSA) earning 4.5%. Each month, after all my bills, I save about $1.5k.

Here’s where I need some advice from Money Minder: Should I keep focusing on my retirement accounts and savings since my HYSA gives me a similar return as the interest on my loans? Or should I start paying off my loans more aggressively? We’ve got some big expenses coming up for weddings, a honeymoon, and hopefully buying a house in the next few years. Right now, I’m paying $500 a month on my loans, which is double the minimum payment.

– Wedding Planner in Debt

Response from THE MONEY MINDER:

Sure, here it is:

Hello There

First off, congratulations on your high income and diligent saving habits at such a young age. It’s commendable that you are maxing out your Roth IRA and nearly maxing your 401k. It’s clear that financial security is a priority for you, and you have a solid foundation to build on.

Let’s address your current financial situation with a focus on both short-term goals and long-term financial health. Since your HYSA is earning a similar rate to most of your student loans, it makes sense to evaluate where your money will be most effectively utilized. The key here is balance and prioritization.

Given that you have a wedding, honeymoon, and a potential house purchase on the horizon, maintaining flexibility in your cash flow is crucial. The $90k in your HYSA is a strong emergency fund and can also be earmarked for those upcoming expenses without needing to liquidate investments or incur new debt.

In terms of your student loans, the rates you’re dealing with are relatively modest. The loans at 4.2-4.8% are just slightly above the current earning rate of your HYSA, while the loans at 2.5% are below it. Given this, there is no pressing financial advantage to aggressively paying down your loans compared to the opportunity cost of having liquid cash available for significant life milestones.

However, continuing to pay $500 monthly on your student loans, which is double your minimum payment, is a good strategy. It helps to reduce the principal balance faster without heavily impacting your monthly budget. This way, you ensure you’re chipping away at your debt while still prioritizing other savings goals.

Considering your high income and reasonable monthly net savings of $1.5k, I recommend the following approach:

1. Maintain your current loan repayment pace to avoid the psychological burden of debt while taking advantage of your HYSA’s interest rate.
2. Continue contributing to your retirement accounts as you are, to benefit from compounding growth over time.
3. Keep a close eye on your upcoming wedding and honeymoon expenses to ensure they are well within your budget, minimally impacting your total savings.
4. Plan ahead for your home purchase, maybe diverting a portion of your monthly savings into a dedicated house fund to cover down payment and closing costs.

This balanced approach allows you to remain financially flexible while steadily decreasing your debt. Keep monitoring your financial situation and adjust your strategy as needed, particularly if interest rates or your income change.

Best of luck with your upcoming nuptials and financial goals!

Warm regards,

THE MONEY MINDER