For once, the radio silence over at Mrs. M&M hasn’t been due to my lack of motivation or crazy work hours. Instead, I found out some very sad news last Wednesday and have been spending a lot of time with family since then. I’m very lucky to have my parents and husband close by, and think taking a break from the blog, Twitter, and Facebook has been helpful to unwind, decompress, and reflect on what matters most to me right now.
Since this blog isn’t a lifestyle blog, and I don’t want to get too depress-fest on here, let’s talk about money. As I mentioned previously, the 60-40 rule is working great for us and I now feel like I can focus on bigger goals such as retirement savings or putting money towards a downpayment on a house. Currently I’m struggling to decide if we should start up a Roth IRA, put our extra savings in an ETF or mutual fund to grow, or continue paying off loans and sticking our savings in our Capital One account. Below is a pros and cons list – perhaps that will help to decide what our next step should be?
Plan #1 – Set up a Roth IRA & contribute $100/month each. Continue trying to save and pay down loans.
- “Pay yourself first” is the golden rule of personal finance, and even though we aren’t making much and have a crap ton of loans to deal with, I’m thinking this is true.
- Compound interest. In 10, 20, 30, and 40 years from now we’ll be happy we started contributing while we were still young.
- We can choose the same plan we had with our previous employer, and that seems to be working pretty well for us. Currently we’re both set up with Fidelity accounts and were enrolled in the Fidelity Freedom 2050 Fund and it would be easy for us to choose the same fund after opening a Roth IRA
- Tax breaks. We can each contribute up to $5,500 each year and would receive a tax credit on our 2015 returns if we start contributing now. Even if we don’t reach the $5,500 goal, any amount will still help.
- The Roth IRA is being funded by taxable income, so when we pull that money out we won’t be taxed on it. Another bonus: we can possibly use $10,000 of our IRA for buying our first home.
- We have A LOT of student loans to pay off. Right now our interest is still accumulating but we’re going to try and pay that off before we graduate. We’ve got about $13,000 of interest to go, and if we don’t pay that off before we’re done the remaining amount will be used to calculate the interest going forward (along with the large principle we still have). Plus, if we pay off the interest we can start attacking our principle and bring those loans down.
- Savings is a priority of ours. $200 a month isn’t a lot to contribute, but it still feels like a lot to us. Right now we’re saving about $300 and the rest are going towards loans. Unless we change our 60-40 rule, I don’t know how much more we’ll be able to save for a house or the honeymoon I’d love to eventually go on.
Plan #2 – Put savings funds into an exchange traded fund (ETF) and into loans
- Our money will grow a lot faster than if it were to stay in our Capital One account….supposedly. Over time we should expect a 7% return from the stock market, but that’s only after 5 years or more.
- We will continue to put most of our extra money towards loans, and slowly chip away at that burdensome debt.
- Currently we have about $6,000 that is not in our emergency fund sitting in our savings account. That money could grow a lot over 5-10 years, and we can also split it up into an ETF and a mutual fund if we want to take less risk with it.
- If we want to access our money from the ETF in the next 3-5 years, we could suffer a loss due to fluctuations in the market and I would frankly be pissed about that.
- Student loans aren’t the worst debt to have. Yes, they suck, but I don’t consider them as much of a debt emergency as credit card debt or a car loan. However, I still want to get the number down and re-directing our money would only elongate that process. We could add the $6,000 to our loans right now and wipe out the interest on one of the loans immediately.
Plan #3 – Continue to pay off loans, save money in Capital One
- We are paying down loans! Hooray! The mental burden that loans carry with them is large, and I would love to be rid of that sooner rather than later. Focusing on paying down our loans means we will be paying less in interest in the long run, and could start saving for a house once they are mostly gone.
- Our savings is growing and we have no risk involved. We have about $2500 in the stock market right now and about $15,000 between the two of us in our 401k’s – that’s it. I like the safety of knowing our money is sitting in a bank (although accruing interest very slowly) and that if we needed to we could access it quickly.
- Our money could be working much harder for us. Investing is a smart idea, and we could potentially get better returns than the interest we’re paying on loans (around 6% & 7%). The sooner we invest, the sooner we can watch our money grow and start thinking about buying a house or having kids.
- Student loans shouldn’t dictate our life or take away from future goals. It’s easy to get wrapped up in how much debt we have, and forget that overall our net worth continues to slowly climb and will eventually reach a positive number.
So…what do you think? Plan 1, 2, or 3….or a combination of the two?
I’m debating between plans #1 and #2, but would like to hear your thoughts and what you would do in our situation!