On Friday I had a free financial consultation at work to assess my personal financial situation. The result: I’m way behind where I should be as far as retirement and personal savings.
For the past few years I’ve been putting almost all my extra money toward paying down my student loans. I’ve always seen debt as bad, almost a moral failing. But the thing is: while credit card debt (which I tackled first and paid off a few years ago) is bad, student loan debt isn’t so bad, because it’s an investment. (Granted, in my case I’m not sure how much of an investment it was. I spend the first year after law school making a pittance and I never went to work for a law firm or made the big bucks.)
Student loan debt also has a lower interest rate than most “bad” loans. Given the low interest rate on my student loans, I should have been investing some of that money these past few years in something with a higher long-term interest rate. I just hate the idea of having thousands of dollars of student loan debt, but if I’ll make more money in the long term if I invest some of it.
I never knew much about my previous job’s pension/retirement plan and never contributed more than the automatic minimum. But now I know more. Since I wasn’t at that job long enough for the pension to vest, I have to take that money out. I might put it into my new 401(k) or into an IRA. I’ve been educating myself about all this stuff today – 401(k)s versus IRAs, traditional IRAs versus Roth IRAs…
I’ve also ordered Personal Finances for Dummies, which should arrive soon.
Maybe this will be my belated New Year’s resolution: to get my finances the healthiest they can be.
Yay.
My personal thing is to fund a 401k to get the maximum matching contribution (it’s like an interest rate of 100%), then fund a Roth IRA to the maximum contribution (because tax exempt earnings are the next best thing to a 100% interest rate), then hit the credit card debt (because the interest rate isn’t going to be higher than the amount you’ll make on your tax exempt IRA income if you’re playing your cards right).
If you’re looking for solid, basic advice that takes nothing for granted, you could try watching Suze Orman on CNBC. Her show’s on at random times in the middle of the night so it’s good TiVo material. A lot of fancypants investment types scoff at her advice but she really does give you the building blocks that everyone else just skips over–the intended audience of every other financial show I’ve seen seems to be people in their 50s who already have a nest egg. Suze never assumes that you’re a boomer trying to pay for your kid’s eduction while still socking some away for a yacht.
She’s also never heterocentric; virtually every section of her books talks is cagey about pronouns and looks at the difference between strategies for married vs unmarried partners, etc.
(NB: She IS a little irritating and she DOES call everybody “girlfriend”)
Unless your student loans are under six percent, you probably were wise in simply paying off the loan rather than worrying about higher interest rate investing.
And if you can afford to pay the taxes now, go with the Roth. No brainer.
You should probably take anything you learned from the consultation with a grain of salt. What was free to you was a chance for someone to try to sell you products you don’t need.
God how I hate this subject. My student loans are consolidated and locked in at 4.25%, but even so I throw away about $1800 a year just paying interest. Considering how poor I am, I feel I’ve done a good job putting money into savings, but that’s about to get spent on my move. I should be able to take away a pension investment of around $1,000 (whee….) from this job and hopefully my next job will pay enough that I could also start a 401(k). But yes, I’m sure I am also wayyyyyy behind.
Andy: Unless you are making too much cash, you should be taking your tax deduction on the student loan interest, and so while it still sucks, you are likely paying well less than that $1800 anyway (since the deduction lowers your total taxes owed, above the line)
Things i’ve done…
[] Get married and share the debt and income power (or join/create an urban commune/multi-family-flat and spread out your living-costs’ overhead amongst the members — tons of over 65’s have already done this, no joke).
[] Take advantage of every tax break/deduction/loop-hole you can find in your research (i make a point of hiring an accountant every two years to even find extra stuff i might have missed)
[] Join “The Compact” and drop-out of the American addiction on making daily-even-weekly purchases of new goods:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/02/13/BAGH3H7DH71.DTL
[] Only use coupons and sales for those items already in your necessary-product list. Never buy just cause it’s a good deal (unless you plan to sell it for a profit to someone else).
[] Roth IRA’s, big-time.
That all said, i am a firm believer that this nation is on the verge of major, major inflationary cycle (lemme just say it one more time: MAJOR). Insulate yourself within a community of others (be it a partner or other cooperative families) and then prepare your fiscal-collective’s portfolio appropriately.
You might think my emphasis on forming cooperative fiscal unions (i.e., collectives) is kinda strange and a little Ecotopia. But, as i said, many retirees are already doing this, especially in the suburbs. Sharing a kitchen and common living space with another family or individuals is just simply fiscally wise. Or, take a small step in this direction: buy your weekly necessities in bulk at warehouses (rent a ZipCar with friends) — always a group with others. ->You still get the discount while not laying out tons of cash for the huge amount of toilet paper, rice/pasta. Buy in bulk and share the costs.
That all said, as i’ve pontificated before, the root cause of American debt is their idolatry of the New. New is not usually good, re-used is safer, stabler, and usually half the cost. We should live to create, not consume.
rob@egoz.org
I always recommend “Personal Finance for Dummies” to friends. It is an easy book, although a bit over the top in certain areas (car loans comes to mind). Another book- now out of print but sometimes you can find it- is the “Wall Street Journal Lifetime Guide to Personal Finance”. Finally, a subscription to “Smart Money” magazine is worth it- a lot of practical stuff in there.
Rob- I’m curious as to what’s going to drive this major inflationary cycle you think is coming. I just don’t see it happening, or even see the forces (outside of a geopolitical shock related to oil) that could make it happen.
Oh, yes, I definitely deduct the interest.
This country has *GOT* to rethink financial aid for college. Honestly, why do they think saddling recent grads with tens of thousands of dollars of interest-accumulating debt is financial aid?