Financial Advice- Roth IRA or pay student loans

[quote]24Animal7 wrote:
Thanks for the advice here guys, lots of of great information and ideas.

I think I may hold off on the Roth IRA for another year, I’m only 22 years old and I do have a 401K at work that I am matching with my employer. I think that if I hold out on contributing to a Roth IRA for another year or so I’ll be able to pay off my student debt and begin saving money for a better vehicle. And I would never lease a vehicle either, I usually find my cars for sale from private independent mechanics. [/quote]
Wait if your employer has a 401(k) then why the fuck are you worrying about a Roth IRA lol? Just contribute into that! Does your plan document not allow for Roth contributions?

There is good advice here, and its jumbled across multiple posts.

First, having a rainy day fund is a great idea. How much of a rainy day fund is up to you, but first you need to figure out what your monthly expenses are - car, home, food, utilities, phone, internet, etc. If you were to lose your job tomorrow, how quickly can you find a new one that pays the same, or that will tolerate your “required” expenditures? Then decide whether you will be comfortable with a 1 month, 3 month, or even 6 month financial backing. After that, your extra money is best placed elsewhere, not in a savings account - it will depreciate due to current interest and inflation of money.

Second, there are many cars available new that are as competitive as used cars in price. Look not only at initial up front investment, but in money spent over time. Do you travel far to/from work, or do you travel often? Do you need to travel in bad/inclement weather (snow, ice, etc.)? Yes, every vehicle takes a hit off the lot new, but you also don’t buy someone else’s problems. This is a tough choice and one that both a calculator, some patience, and common sense can solve. Do the math.

Third, since you have a 401k, be aware that you won’t be getting a “tax break” for having a Roth IRA as you’ll already be getting that savings from your company 401k plan. Unfortunate but true, though its not to say it isn’t worth it to still invest your funds. Match your company’s contributions at the very least, its free money, can’t beat that.

Fourth, how you invest your money after the above is entirely up to you. There are two schools of thought: 1) pay off all debt and rake in pure equity as opposed to stringing out debt over time; 2) invest and pay off the debt over time (assuming said interest rate is fixed, not variable). You can consider consolidating your debt to a single loan for option 2 and get it on a fixed rate.

Now, to decide on item 4, you should make the decision as informed as possible - as you are currently doing. IF you can make more money/return by investing funds than you are currently paying to interest, put the extra funds to interest. Say you are paying 4% interest, but on a firm stock (like blue chip) you can get an annual 7% return. You will be paying off the loan interest plus profitting 3% for the year on the money that otherwise would have been gone. Plus consider that the stock you now own today will appreciate for the future and “grow”. The sooner you get into the market the better. If you can not get returns at a higher rate than the interest you have, pay it off first, then step into the market free of debt.

Some cameo’s to the above. Yes, there are always bits of bits of bits of cameos, such is the way of financial life.

  1. Many feel the market is currently in a bubble. With QE from the government, the market is currently being held up by a false economy. Jobs are not improving, interest rates are being kept low by the government’s buying, and the moment this stop, the bubble could pop/burst. Its up to you to buy in now and risk it, or wait for the pop, which could never happen or not happen any time in the next year/few years, it is unknown to people at our level.
  2. Playing with stock is like playing roullette. I assume that since you don’t want to contribute additionally to your work 401k, its because you want to control/influence specifically where you funds go - plus its good to now have all your eggs in one nest. Realize that if you “play the market” you run great risk of losing big - also chance of winning big. If you invest in solid stocks (like blue chip) that is a great investment plan for the future - especially for retirement in 25 - 30 years. If you want to buy in to dividend stock, to combat the potential for a market swing, its best to buy-in over time. Ie, instead of buying stock today with $5000, but it over the next 10 months at $500/month. This way if the stock dips tomorrow, you didn’t just lose out on a big chunk of money. Instead, your money spent on stock will be “cost averaged” over 10 months. Its easier to avoid “big swings” doing this type of investing.
  3. I highly suggest you find an online calculator to evaluate your current loan payoff. Many times a small extra payment each month on top of your current payment will shrink your loan quickly in interest pay and in the life of the loan. For example, if I pay an extra $400/month on my home loan, I can pay it off 8 years sooner and save over $75000 in interest - yes this is a real world example. You will eventually note that at a certain amount the “value” of return is smaller per the extra finances invested. You need to find the sweet spot.

There is so much more I could type. I’ve been analyzing this situation over the past 6 months for my personal benefit. Its a very arduous, difficult process and anyone claiming otherwise is full of shit. You shouldn’t take your current financial state, or your future lightly. Take your time, think things through, and decide what’s best for you. With all I have told you, I STILL haven’t bought into the market myself - aside from my work 401k - because I honestly am expecting a dip or pop of the market. I’d rather wait until that dip to make my first buy-in of dividend stock. Greater return for initial investment. Just remember, that stock investments are never garaunteed and don’t invest what you can’t afford to lose (ie no one can “afford” to lose money in this day and age, but don’t put your utility funds into stock hoping for a pay out before the bill is due, etc. use common sense).

I’ll try to post more later if I can, but remember that first and foremost, understand where you are today, and then plan for tomorrow.

OP, I think you’ve been given a lot of solid advise in this thread.

To add to the thread in some small way I’d like to tell you that as a kid my Mom would always complain that my Dad was so cheap and would never spend any money. She now extolls the virtues of his ways back then and is so happy he was so “cheap” back.

You would not fricking believe the house they live in now. I don’t have pictures on this laptop but tomorrow at work I’ll see if I’ve got some I can post. My Dad was an engineer who went up to middle management and never even made 70,000. Like I said, their house now is fricking amazing.

[quote]24Animal7 wrote:

[quote]Ripsaw3689 wrote:

[quote]CroatianRage wrote:

[quote]JCMPG wrote:
I am an investment rep for a large insurance and investment company in the US and a strong believer in Dave Ramsey’s principals. If I were in you position I would in this order:

  1. $1000.00 emergency fund (if you already have it skip to #2)
  2. Figure out your monthly cash flow and budget immediately. You dont want to squander your income now. Figure out the minimum you need to live.
  3. Once you have step 3 completed put the rest of your disposable income on debt.
  4. Expand you emergency fund to 3 months expenses.
  5. If you really want a newer car (Brand new cars are for millionaires, they are the only ones who can afford the 50% in deprecation as soon as you drive it off the lot) figure out a how quickly you can save for it if you split what you were paying on debt between a Retirement and buying a car.

Live tight now so you dont have to later.[/quote]

I second this wholeheartedly. You are in a very strong position to build a LOT of wealth. You can not do this if you have student loan, car, or other consumer debt. Once the debt is gone you are free to invest however you want, but in the meantime I would drive your car until it dies while putting a few hundred dollars a month aside to pay for a replacement in cash.

I would advise you not to spend 20k on a car at this point and please don’t lease a car.
[/quote]

I agree. The single thing that can make the rest of your life incredibly difficult is debt. You want to avoid debt at all cost. Get those loans paid off ASAP.

Also, buy a car off of craigslist. You have to be a serious idiot to buy a new car. You can buy some really nice stuff for $5-10k.
[/quote]

Thanks for the advice here guys, lots of of great information and ideas.

I think I may hold off on the Roth IRA for another year, I’m only 22 years old and I do have a 401K at work that I am matching with my employer. I think that if I hold out on contributing to a Roth IRA for another year or so I’ll be able to pay off my student debt and begin saving money for a better vehicle. And I would never lease a vehicle either, I usually find my cars for sale from private independent mechanics. [/quote]

Is your 401K maxed? Why not max that out and reduce your taxable income now instead of a Roth?

[quote]Testy1 wrote:
Is your 401K maxed? Why not max that out and reduce your taxable income now instead of a Roth?
[/quote]
Maxing would be about 30% of his current income lol. If he can manage that then go for it, but that would be pretty nuts.

For someone his age though, Roth will ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.

To clarify a couple of things that have been said that are in error and to expand upon the 401(k) know that I am aware you have that option at work.
Again if I were in your shows knowing what I know now.

  1. Stop contributing to your 401(k) until you have all of your debt paid off, or at least only contribute up to the amount that your employer matches.

  2. Once the debt is paid off only increase the amount invested in your 401(k) to the maximumm amount your employer will match. Everything after the match needs to go into a Roth IRA up to the maximum allowed. The tax advantages of a Roth IRA come down the road at retirement not when you contribute. Every dime you put in as long as you choose solid investments (either educate yourself or seek out an investment professional if that is not your bag) will grow tax free.

So at retirement you can withdraw that money with no tax consequences as opposed to the traditional tax deffered 401(k). If your employer provided 401(k) has a Roth IRA option utilizing it is an option for you depending upon the quality of the investment choices.

[quote]csulli wrote:

For someone his age though, Roth will ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.[/quote]

I don’t know. Are you taking into account the tax deferral and time value of money into account.

What I mean for those that don’t follow:

A Roth is nondeductible. Therefor you put money in post tax. So you pay today’s tax rate (will likely get higher in the future if you bastards keep voting Dem) on today’s dollars.

A 401k is pretax, as in you defer the tax on those wages until retirement, when your income will be lower and tax rate lower, and given inflation paying a fraction of the tax you would on the dollars…

[quote]JCMPG wrote:

So at retirement you can withdraw that money with no tax consequences [/quote]

You will have paid the tax on the principle when you contribute to the plan. The only tax advantage is on the earnings this principle generates.

Not saying your math is wrong, just making that clear. Because in retirement your income is typical a fraction of what it was when you were working, so the rates you will pay on your 401k withdrawals may actually be better than the tax free earnings over a lifetime.

[quote]countingbeans wrote:

[quote]csulli wrote:

For someone his age though, Roth will ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.[/quote]

I don’t know. Are you taking into account the tax deferral and time value of money into account.

What I mean for those that don’t follow:

A Roth is nondeductible. Therefor you put money in post tax. So you pay today’s tax rate (will likely get higher in the future if you bastards keep voting Dem) on today’s dollars.

A 401k is pretax, as in you defer the tax on those wages until retirement, when your income will be lower and tax rate lower, and given inflation paying a fraction of the tax you would on the dollars…[/quote]
Yes it’s pretty cut and dry. Roth is the better deal unless you’re already in the highest tax bracket you expect to be in; e.g. if you’re already kind of older. There are many calculations out there. For someone in their early 20’s especially it’s like no contest.

Ideally your tax bracket will not be lower at retirement. You don’t really want to reach retirement and have to take 10 steps backwards with your income. The idea is to be able to keep enjoying your quality of life. Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.

[quote]csulli wrote:

Ideally your tax bracket will not be lower at retirement. You don’t really want to reach retirement and have to take 10 steps backwards with your income. The idea is to be able to keep enjoying your quality of life. [/quote]

Ideal and reality are two different things, and if you plan right, you won’t need the same amount of income to lead the same life. If you house is paid, loans are paid, etc…

I’m NOT saying you are wrong, just I see an awful lot of tax returns every year. Income levels typically drop, earned obviously. But unearned as well, as you start to draw on the principle.

Roth allows you to avoid taxation on the earnings of principle. It doesn’t defer taxation on the principle you contribute. It is non deductible contribution.

[quote]countingbeans wrote:

[quote]csulli wrote:
Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.[/quote]

Roth allows you to avoid taxation on the earnings of principle. It doesn’t defer taxation on the principle you contribute. It is non deductible contribution. [/quote]
Right. I didn’t say anything different than that did I…

[quote]csulli wrote:

[quote]countingbeans wrote:

[quote]csulli wrote:
Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.[/quote]

Roth allows you to avoid taxation on the earnings of principle. It doesn’t defer taxation on the principle you contribute. It is non deductible contribution. [/quote]
Right. I didn’t say anything different than that did I…[/quote]

I was unclear on it.

I’m not busting balls for the sake I think you’re math is wrong. You are likely correct. I’m just clarifying really.

[quote]csulli wrote:

[quote]countingbeans wrote:

[quote]csulli wrote:

For someone his age though, Roth will ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.[/quote]

I don’t know. Are you taking into account the tax deferral and time value of money into account.

What I mean for those that don’t follow:

A Roth is nondeductible. Therefor you put money in post tax. So you pay today’s tax rate (will likely get higher in the future if you bastards keep voting Dem) on today’s dollars.

A 401k is pretax, as in you defer the tax on those wages until retirement, when your income will be lower and tax rate lower, and given inflation paying a fraction of the tax you would on the dollars…[/quote]
Yes it’s pretty cut and dry. Roth is the better deal unless you’re already in the highest tax bracket you expect to be in; e.g. if you’re already kind of older. There are many calculations out there. For someone in their early 20’s especially it’s like no contest.

Ideally your tax bracket will not be lower at retirement. You don’t really want to reach retirement and have to take 10 steps backwards with your income. The idea is to be able to keep enjoying your quality of life. Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.[/quote]

I totally disagree. How are you thinking your taxable income is going to be at peak potential when you are no longer working? I ended up disbursing my Roth because year after year it was not making more than I put in after fees.

[quote]Testy1 wrote:

[quote]csulli wrote:

[quote]countingbeans wrote:

[quote]csulli wrote:

For someone his age though, Roth will ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.[/quote]

I don’t know. Are you taking into account the tax deferral and time value of money into account.

What I mean for those that don’t follow:

A Roth is nondeductible. Therefor you put money in post tax. So you pay today’s tax rate (will likely get higher in the future if you bastards keep voting Dem) on today’s dollars.

A 401k is pretax, as in you defer the tax on those wages until retirement, when your income will be lower and tax rate lower, and given inflation paying a fraction of the tax you would on the dollars…[/quote]
Yes it’s pretty cut and dry. Roth is the better deal unless you’re already in the highest tax bracket you expect to be in; e.g. if you’re already kind of older. There are many calculations out there. For someone in their early 20’s especially it’s like no contest.

Ideally your tax bracket will not be lower at retirement. You don’t really want to reach retirement and have to take 10 steps backwards with your income. The idea is to be able to keep enjoying your quality of life. Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.[/quote]

I totally disagree. How are you thinking your taxable income is going to be at peak potential when you are no longer working? I ended up disbursing my Roth because year after year it was not making more than I put in after fees.
[/quote]

It all depends on what you use as the vehicle for the Roth. Mutuals funds have an up front sales charge but directly chargeable fees after that. A CD does not have any fees either just no return.

[quote]csulli wrote:
ALWAYS get you more money in the end than traditional 401(k). Unless his salary is going to continuously decrease over his lifetime, which would really suck lol.[/quote]

Nothing is for ALWAYS.

[quote]countingbeans wrote:

[quote]JCMPG wrote:

So at retirement you can withdraw that money with no tax consequences [/quote]

You will have paid the tax on the principle when you contribute to the plan. The only tax advantage is on the earnings this principle generates.

Not saying your math is wrong, just making that clear. Because in retirement your income is typical a fraction of what it was when you were working, so the rates you will pay on your 401k withdrawals may actually be better than the tax free earnings over a lifetime. [/quote]

Tax Qualified money has entirely to many strings for my taste. To many issues with non-spousal benificaries and RMD rules. I choose to avoid all of that and suggest the Roth IRA. The funny thing about numbers they can say different things depending upon your perspective.

[quote]JCMPG wrote:

  1. Stop contributing to your 401(k) until you have all of your debt paid off, or at least only contribute up to the amount that your employer matches.

.[/quote]

I disagree entirely. To contribute today rather than 3-5 years from now could be the difference of a million dollars or more.

Bottom line OP…go and talk to someone…go and talk to 2 - 3 people…find out what works for you.

I believe you can divide this advice into 2 camps - the Dave Ramsey camp that wants you to have zero debt before you start saving and the other camp that thinks it’s wiser to invest while carrying a comfortable amount of debt. Both sides have their merit. Find out what it right for you.

There…

Hey…anyone wanna talk about whole life vs. term???

[quote]sen say wrote:

[quote]JCMPG wrote:

  1. Stop contributing to your 401(k) until you have all of your debt paid off, or at least only contribute up to the amount that your employer matches.

.[/quote]

I disagree entirely. To contribute today rather than 3-5 years from now could be the difference of a million dollars or more.[/quote]

Did you read my whole post? It seems you just picked out the part you disagreed with. I do not disagree with you at all on the 3-5 years could be a million dollars. Nor did I say hey take 3-5 years to pay off your debt. I was operating under the assumption that he was going to bust his ass to pay off the debt which to me means under 18 months. It seems we have done alot of splitting hairs in this thread. OP I agree with Sen Say go talk to several professionals in the area and find one that you feel comfortable with.

[quote]countingbeans wrote:

[quote]csulli wrote:

[quote]countingbeans wrote:

[quote]csulli wrote:
Roth allows you to defer for most of your life in a lower tax bracket than you’re going to end up in at your peak income. These earnings are also not taxable, which more than makes up for inflation.[/quote]

Roth allows you to avoid taxation on the earnings of principle. It doesn’t defer taxation on the principle you contribute. It is non deductible contribution. [/quote]
Right. I didn’t say anything different than that did I…[/quote]

I was unclear on it.

I’m not busting balls for the sake I think you’re math is wrong. You are likely correct. I’m just clarifying really. [/quote]

CB has a point here. Census shows that almost 90% of Americans retire at or below poverty income levels. In fact, of 100 Americans that reach age 65, 5 will retire wealthy, 45 will retire in need of government assistance, and the other 50 will be dead.

With that said, statistically you are more likely to be in a lower tax bracket when you retire than when you contribute. Starting at age 22 you are ahead of the game, and more likely to be one of the 5 that retire wealthy though.

I like the Roth, but have stopped contributing, and actually thinking about taking it all out and buying an apartment complex. I am big on buying income producing assets so all IRA’s and 401k’s do not produce any income. Is there anyone here that collects a check monthly from their IRA or 401k who is not retired?

Saving is a great strategy, but where you invest the money is the biggest question to ask.