Where is my money best spent?

Question

After I graduate I am going to owe 85k in student loans. I am applying to be an actuary immediately after I graduate and the avg. starting pay in my region is 55K. My parents are letting me come home and eat/sleep for free for one year. I have read numerous articles about how important it is to invest in a 401K plan. At the same time I should be saving up money for a used car and putting some money towards buying a house in a few years. The car is a neccessity, because my current car will be lucky to make it through this year and I'll need to get to work. My question is how should I be spending the rest of my money? Should I be putting the full amount towards a 401K now even though I am so far in debt to start? Should I actually be saving for a house at this point (22 yrs. old) and how much should I save?

Answer 1

Investing in 401k at a young age is definitely a good idea. However, if you have other debt or needs, I wouldn't be putting too much money into the 401k UNLESS your employer would match the contributions.

At 22, and with your debt and other needs, I would put away no more than 5-10% of your monthly pay if you are able to do so. Only you will know what amount you will be comfortable with.

Put the rest of the money in a savings to build an emergency fund and slowly pay off the student loans. Here is a great site to find saving accounts. http://www.bankaround.com.

Answer 2

At a minimum you should invest in your 401k plan up to the full matching amount by your employer.  You'll never get a better return than "free" money.  If you can afford to fully fund your 401k and still meet your other obligations and goals, then do that by all means.  Most experts suggest saving 10% to 15% for retirement.  If you do that, you'll be off to a great start.

After that, pay off any other high interest debt you have like credit cards or personal loans.  Then save up a pile of cash as an emergency fund, moving out of your parents house fund, and a used car fund.  Do not make the same mistake myself and many other new college grads make by buying an expensive new car on credit.  Dumb idea.  Sell your old car and use the proceeds plus some savings for a car in the $5k to $10k range.  Keep saving and you'll be able to eventually buy a nice car as your income increases.

You didn't give your student loan interest rate(s) so its hard to judge how aggressive you should pay those.  If you have any over 5% I would pay them aggressively.

Here's a tenative schedule for your next year:

$55000 income

-$13,000 taxes (welcome to the world)

-$8,200 401k

-$10,000 living expense (?? up to you)

-$7,200 loan payments

-$11,600 savings (for new car, emergency fund, etc)

-$5,000 Roth IRA (can be used for a house if desired)

-------------

$0 all money accounted

Answer 3

Since you can, I'd say max out your 401K...I think its 15% of your income and not more than $15k??? Then decide how much you want to spend on a car and start saving towards that. Its never too early to start saving on a house. If you know at what point you want to buy a house you can put your money in CDs so that they mature right about when you are ready to buy a house. I would also suggest you practise paying "bills" to get a better sense of how your budget will look like once you do move out on yourself. Find out how much you will be paying in rent, car insurance and whathaveyou and pay yourself that much for at least 6 mths....at the end you will have your emergency fund and a better sense of how your money will work for you when the bills start coming.

Definately pay off any high interest debt you have....see if you can consolidate your student loans at a lower interest and start paying down on those loans. The less debt you have when you move out the better. Evaluate and establish good spending and saving habits right now....and definately keep reading!