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Retiring Debt & Making Investments

Should I work aggressively to eliminate my student loans or should I develop an investment strategy?

I've recently become debt free except for my student loans. I'm 28 unmarried and I still have around $60k in student loan debt. 1/2 of which is private loans, and the other half in federal. My interest rates are actually lower on my private, except for one, than my federal (right now). I have a stash in the bank for emergency and I'm not a home owner. Not sure if i want to buy right now. I gross around $70k and considering making a new years resolution to pay off my student loan debt asap. Being in debt bugs the crap out of me, but I want to make the most financially sound decision. Would it be better in the long-run for me to invest the extra money I would be contributing to my debt or to apply it to my loan balance?? Stock market is attractive to me, but never done it before. I don't have any long-term financial goals, I probably should, but I still do put in over my company match in my 401k. What do you think??

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Bill's Answer
(4 Votes) | Find Learn Save

First, congratulations on freeing yourself from debt -- almost. One rule of thumb for retiring debt is to eliminate the debt carrying the highest interest rate first. That rule makes the most sense from an economic perspective. A competing rule of thumb is to eliminate the debt with the smallest balance first -- regardless of interest rate -- because of the psychological lift and positive reinforcement that zeroing a debt causes.

Whichever approach you take, zeroing a student loans as quickly as possible is important for one huge reason -- student debt cannot be eliminated in bankruptcy with the exception of the narrowest of circumstances. If a debtor of a federal student loan defaults the government has reserved the right to garnish the debtor's wages without a hearing, for example. Collectors of private student loans are similarly aggressive and unyielding in their negotiations with debtors.

Therefore, I urge you to retire your student debt as early as reasonable. The trick is to figure out what is "reasonable." Let me add some additional considerations. Financial experts recommend that people have a savings account containing the equivalent of six months of savings in case of emergency, such as a job loss. If you do not have such a reserve now is a good time to start building it. It would be pointless to focus 100% of your spare income on retiring the debt if you have no savings and then have an unexpected expense you do not have the funds to pay for. Therefore, consider a multi-pronged strategy for eliminating your student debt while creating a savings plan and an investment strategy.

You mentioned you are participating in your employer's 401(k) program, and that your employer is matching a certain amount of your contributions. That you have your employer's help in creating your retirement is great news, and is a vital component to creating wealth. Keep contributing 4 percent or more of your income to your 401(k).

Form an investment strategy that is independent from your retirement strategy. Consider mutual funds as a starting point. To learn more about investing, see How Do I Start Investing in the Stock Market? as a guide to get you started. You want to start your investment work as soon as possible to allow the miracle of compound interest to work its magic.

For the sake of argument, let us say that you have $100 per month that you can devote to debt elimination, savings, and investment. Instead of spending all $100 on debt elimination, divide and conquer. Spend $60 on debt elimination, $30 on savings, and the final $10 on investment. Of course, you can change these ratios to suit your temperament and goals. The important thing is to start with a plan now and leverage the self-discipline you used to become debt-free.

I hope this information helps you Find. Learn & Save.



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