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Old 09-12-2017, 05:40 AM   #21
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Originally Posted by LI32 View Post
.......Also, the market is pretty high, so the compounding for the next 3-5 years will likely be less than the historical averages.
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Didn't someone (not you) say this each year for the past many years?
Yes, this is why you NEED to change the batteries in the crystal balls.


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Old 09-12-2017, 05:46 AM   #22
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100% agreed.
Start the 401K now. Waiting a couple years may turn into waiting a couple more years because life happens.
BEST thing my father did was making sure I started my 401K the day I was eligible. Looking back those 20 years, best move I made. Pay yourself first ;-)


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Without other pertinent info,

If your son saves $2500 a year for 3 years and the company matches that $2500. With a 7%AAR he would have $210,000 in 40 years. (With no additional contributions)

If he waits three years, same parameters as above, he will have $171,000 in 37 years. Waiting three years will cost him $39,000. Obviously, if he saves more and the company matches more, the $39,000 number could be much bigger.

The power of compounding, if you squander it, it is lost.




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Old 09-12-2017, 05:54 AM   #23
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Borrowing from a 401K should be avoided.

He should also build a six month emergency fund reserve.
I agree but then its money saved, it'll save you from spending it on frivolous things many young people fall into. Since he wont ever see it he cant spend it. If he borrows from it it'll be taken back pretax, that's how mine is set up anyway.

I'm saying in theory obviously get rid of the debt, the likelihood of a mid 20 year old being able to do that is low but not unheard of. My way you use compounding interest and he wont have a chance to use it on nice to have items.
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Old 09-12-2017, 05:57 AM   #24
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Use accurate tax rates for your calculations, you are likely way high. And you'll find that he cannot deduct anything because he won't be itemizing...
I'm sure you're right with that - I was just using rough numbers to make the point, but single with no dependents or other tax-deductible costs, he'd have to be close to the rate table, right?

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Borrowing from a 401K should be avoided.
Avoided but not necessarily bad? If you had built a reserve in the 401-K and needed some cash, would it be better to borrow at market rate or on a credit card than take a short term loan from 401-K?? I did a loan from my 401-K 30 years ago (to buy my 1st boat) and thought it was the best thing I could have done, other than pay cash.

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He should also build a six month emergency fund reserve.
Absolutely agree... that's #3 priority

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I think you are looking at it right but it Also depends on How much he owes and what his earning potential is. What does he do for work?
He's in Computer Science and good... I don't think he'll ever have to worry much about not finding work.

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Assuming he plans on staying with his current company long enough to be vested, I would contribute whatever it takes to get the maximum match. I've never understood people who leave free money on the table.
That's a real question, especially these days. Not sure what his vesting period is, but certainly something to consider.

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If he waits three years, same parameters as above, he will have $171,000 in 37 years. Waiting three years will cost him $39,000. Obviously, if he saves more and the company matches more, the $39,000 number could be much bigger.
Good numbers and that's exactly what I'm thinking. His loan is only 10K, so using that formula you'd delay it 4 years and he'd make back 10x what he'd pay in interest over those 4 years. There's also the 'time-value of money' to consider I guess.

Offhand I don't know what the interest on the loan is... but I was thinking as LI32 said... probably 4-6%. He's about 50K annual and the loan is about 10K. The company does match, but I'm not sure what %.
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Old 09-12-2017, 06:03 AM   #25
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10k with no other debts, single, making 50k?

Pay it off in a year, easily. If he wants to start a 401k up to the match that's not a bad idea...personally for me I'd knock out the loan before messing with it though. You're talking 6-9 month delay. Not gonna make a difference, and with his field that 50k should go up quickly.

And yes borrowing from a 401k for a boat is dumb. 100% of the time.
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Old 09-12-2017, 06:12 AM   #26
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If it were my kid, I'd have him take advantage and start the 401k. At the same time, have him make loan payments of which I would match up to $5k to incentivize savings and tackling debt together.
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Old 09-12-2017, 06:14 AM   #27
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I've always subscribed to the theory you should always work on both sides of your balance sheet. Right now it's lopsided. Paying off the student loans quickly is a great idea.

If he does it while neglecting putting away for a emergency fund and retirement, especially if there is an employer match is not a good idea in my opinion.
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Old 09-12-2017, 06:15 AM   #28
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It seems there are multiple opinions but the general theme here is this:

Start the 401k and pay the debt off as soon as possible. Doesn't matter which order; if he's diligent the debt will be gone soon anyway and then he can pile up cash. If he wants to wait until the debt is gone before starting the 401k it's not gonna make much difference.
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Old 09-12-2017, 06:38 AM   #29
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Very bad idea unless the current payments exceed his ability to pay them back.

Income sensitive equates to negative amortization meaning that 10 year student loan will eventually be paid off when he is in his 40's.
No.

Income based payments DO NOT change the term of the loan - if you had a 10 year loan, you still have a 10 year loan.

The difference is the amount that you pay. I'm oversimplifying here, but if you had a 10 year loan with a $500 a month payment and elected for income based payment you would pay $250 for the first five years and $750 for the last five years.

Again, I'm ignoring the fact that most student loans have a variable interest rate and the effects of holding more principal for longer, but my point stands. A 10 year loan is still a 10 year loan.
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Old 09-12-2017, 06:40 AM   #30
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So, my son started his first real job. We had a discussion today about whether it was financially better to put money into the 401-K or pay down his student loan. My recommendation - without running any numbers - said that you should at least put in the % that the company was going to match, but probably should max out your contribution %. Use whatever else you can to pay down the loan.

My logic:
The 'company match' money is free and outweighs the interest you'd probably pay on the loan for the year.

The 401-K is pretax, whereas paying the loan is post-tax, so if you're talking the same amount of money, then $500 in the 401-K is the same as $400 to pay the loan.

I think student loan interest is tax-deductible, so if you pay $400/year in interest it's actually going to be closer to $300 out of pocket.

Getting $$ into the 401-K early is going to pay off way down the road in compounding. If you delay 2 years then what you're really losing out on is the compounding in years 39 and 40, which is way more than your contributions in year 1 and 2, and that amount you make is going to be way more than the interest you'd pay today on the loan.

What would you recommend? I'm sure it's not really a "all one or all the other", but if you had to make a choice of $$ going to one vs the other what would you think is the best choice?

What else am I missing? I am going to run the numbers so I can prove it to him on paper - any suggestions on the best way to make it accurate?
OP- understand that you don't want to go into numbers, but it is impossible for anyone to give truly useful advice without fully understanding the details - loan amount, interest rate (fixed/variable), federal or private loans, salary and job field.

If your son has $5k in private, variable loans and is in a high paying finance roll I'd give you a totally different answer than if he has $120k in federal, fixed loans and is going into a low paying service job.

Any answer without the facts is just a guess, sorry


EDIT - JUST SAW THE AMOUNT OF THE LOAN.

A couple more thoughts.

I'm 36 and I'm going to tell you what I would tell my son in the same spot - and what I wish someone had told me.

Suck it up and kill it all, fast.

Work with him to build a budget and a plan to stick to the budget. Trust me - helping him understand finances and budgeting will help him immensely later in life. I'm not sure where you live, but someone right out of college should be living cheap:
Rent - $400
Car - $200
Insurance (car/renter) - $200
Food - $200
Fun - $200
Phone - $100

That's $1,300 a month in expenses versus nearly $3,000 a month in take home.

At a minimum, the 401k should be set to get the full employer match - at 5% that's around $200 a month (not taking into account the fact that it is pre-tax) so his expenses are still only around half his take home.

Pay off that loan at $1,000+ a month and be done in less than a year. By that time you'll have a better understanding of where his actual expenses stand.

When the loan is done, max out the 401k and tell him to forget about that money. Take the rest of the un-allocated money and put it to work somewhere so he can buy a house in 10 years. If he's socking away nearly a grand a month, in 10 years he has $100k for a down payment.

You have a legitimate chance to help set your son up for life without putting any real money into the pot. My answers, may not be right, but please take this from someone who did it all wrong on their own, take this chance to give him a bigger picture answer.

Last edited by MattGoose; 09-12-2017 at 07:00 AM. Reason: More information...
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Old 09-12-2017, 06:42 AM   #31
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Only 10k on the line? That's not much. Take the 401k match money while it's here. If he changes jobs or the match changes he may lose that opportunity. Save enough cash in a reserve account to pay this off immediately if necessary as well as ride out any unemployment scenarios.

As mentioned he may not be itemizing. What I would also be looking at is buying a house and starting a little side business to be able to deduct more and bring in some extra cash. Opens you up to a whole new world tax wise.

If he has extra, I would look at (especially if he isn't buying a home) to put that extra to work via an IRA (Roth preferably) or even a taxable trading account but focused on long term investments at that age so he can generate more income and take advantage of the long term capital gains rate.
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Old 09-12-2017, 06:43 AM   #32
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OP- understand that you don't want to go into numbers, but it is impossible for anyone to give truly useful advice without fully understanding the details - loan amount, interest rate (fixed/variable), federal or private loans, salary and job field.

If your son has $5k in private, variable loans and is in a high paying finance roll I'd give you a totally different answer than if he has $120k in federal, fixed loans and is going into a low paying service job.

Any answer without the facts is just a guess, sorry
10k loan, making 50k a year.

Pay it off and be done.

Agree if it was a six figure loan it'd be a much different answer.
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Old 09-12-2017, 06:48 AM   #33
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At his young age (early 20's I assume), I would forego the 401K for the time being and get that loan off of his back. I am a firm believer in no debt although I know none of us have avoided debt at some point in our lives.

He has plenty of time in front of him to max out a 401K
Bad advice. The match (assuming $ for $) is a free 100% return. He is also young so the power of compounding is on his side. I would get at least the max match then work on paying off the loan. The loan should be "cheap money" with a rate less than 7%. He also may be able to deduct the interest.

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Old 09-12-2017, 07:00 AM   #34
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Definitely 401K first... The earlier he starts the better off he'll be in 40 years.. I would pay the mininum to the student loan and as much as possible to 401K if I could start all over again at 20 years old.
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Old 09-12-2017, 07:13 AM   #35
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We're not talking about a 10 year delay in starting to invest, we are talking about 1 year at most. It's not gonna make a difference.

I would pay the loan, and then roll the payment directly into a 401k after that.
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Old 09-12-2017, 07:33 AM   #36
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We're not talking about a 10 year delay in starting to invest, we are talking about 1 year at most. It's not gonna make a difference.

I would pay the loan, and then roll the payment directly into a 401k after that.
You would be right, except you're wrong.

He would not get the company match. If the loan is 10k with 7% interest, keeping this simple math, he would pay $700 in interest.(actual interest is far less) If the company match is $2500/year he would be throwing away $1800 dollars, in year one. Or ~$27,000 in future value.



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Old 09-12-2017, 07:47 AM   #37
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Except your wrong. He would not get the company match. If the loan is 10k with 7% interest, keeping this simple math, he would pay $700 in interest. If the company match is $2500/year he would be throwing away $1800 dollars, in year one. Or ~$27,000 in future value.
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This fails to consider risk. Saving money on interest by paying a loan off is a zero risk move other than an opportunity cost based, again, on risk and assumptions. Paying off the loan guarantees a 7% return. Investing in the stock market does not, and get could lose money.

If he had 150k in student loans then yes absolutely start investing because he's gonna be there for a while.

10k? Rip the band and off.

If he wants to invest up to the match (and not a penny more) that's probably a good idea. I still think it's not gonna make a difference. But there's never harm in getting started with investing, I just think he would be prudent to clear the loan and then invest MORE for LONGER.

Same applies to a mortgage. We are paying ours off as soon as we can, putting anything extra after saving 20% in retirement towards the house. I've done the math both ways...and paying it off now and investing MORE each month a few years later comes out better 25 years down the road, with the added benefit of being completely debt free.

Let's assume his match is 4%, or $2,000 a year. The loan minimum payment is gonna cost roughly $120 a month. That's $1440 he could instead be investing per year.

Plus, let's assume he had that $1,800. At 8% interest over 25 years that's only $12,000. More like $7500 in future dollars. It's a pittance, and he only has 25 years for it grow because he's gonna read the millionaire next door, not carry payments, and retire early.

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Old 09-12-2017, 07:51 AM   #38
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This fails to consider risk. Saving money on interest by paying a loan off is a zero risk move other than an opportunity cost based, again, on risk and assumptions. Paying off the loan guarantees a 7% return. Investing in the stock market does not, and get could lose money.

If he had 150k in student loans then yes absolutely start investing because he's gonna be there for a while.

10k? Rip the band and off.

If he wants to invest up to the match (and not a penny more) that's probably a good idea. I still think it's not gonna make a difference. But there's never harm in getting started with investing, I just think he would be prudent to clear the loan and then invest MORE for LONGER.

Same applies to a mortgage. We are paying ours off as soon as we can, putting anything extra after saving 20% in retirement towards the house. I've done the math both ways...and paying it off now and investing MORE each month a few years later comes out better 25 years down the road, with the added benefit of being completely debt free.
You can invest more for longer or save less earlier. I went the invest earlier route. Currently have $6 for every one $1 saved.(no company match)

There is no risk in the company match and infers one can time the market. Historic rates of return are 7%.

If you want to argue risk, does your loan have a death benefit?
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Old 09-12-2017, 07:55 AM   #39
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We're not talking about a 10 year delay in starting to invest, we are talking about 1 year at most. It's not gonna make a difference.

I would pay the loan, and then roll the payment directly into a 401k after that.
Except if you don't start it immediately Life happens. Should start the 401k at max contribution. The money will never be missed. Should pay $500 / month or more on the loan until paid off and then put that away in non-retirement investments for purchasing a house down the road.

If he starts off like this and stays after it then he will be on here in 30 years talking about early retirement.
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Old 09-12-2017, 07:56 AM   #40
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You can invest more for longer or save less earlier. I went the invest earlier route.

There is no risk in the company match and infers one can time the market. Historic rates of return are 7%.

If you want to argue risk, does your loan have a death benefit?
Invest up to the match, and use everything else to clear the loan. 6-12 months later, invest more and have zero student loans.
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