Q: My wife and I recently paid off our car. Should I take the monthly payment that I used to use for the car and put it in our money market savings account or bump up my 401(k) contribution to the maximum $15,500? I’m hesitant to do the latter in this shaky economy, but I know it’s better to buy stocks when they are low and save for a long time. I’m 28 years old and have been contributing to my 401(k) for over three years now.
–Sam Berkes, Peoria Heights, Illinois
A: Before I answered Sam’s question I had a few of my own. So I e-mailed them to him. Here’s what I asked:
- Do you have any credit card debt?
- Do you have any student loan debt?
- Do you have three to six months living expenses saved up?
- Do you have any kids and, if so, do you have a college savings account for them?
Sam answered the following:
“No credit card debt. We pay them off every month.”
Student loan debt: “I have $13,600 left to pay off ($126 payment per month). My wife has around $7,000 (about $70 payment per month).”
“We have a three-month expense fund saved up, and the $300 I used to pay for the car every month now goes into the savings account instead.”
They don’t have any children.
“So the root of the question, I guess, should have been what do I do with that extra $300? It’s a problem I like having, but I don’t have any direction,” Sam said.
Now, with more information, I can answer his question better.
My advice: Aggressively pay down the student loan debt.
You see, Sam and his wife are doing a great job handling their finances. They have the major bases covered. They don’t carry month-to-money credit card debt. They have an emergency fund. He—and I suspect his wife—is saving well for his retirement and at an early stage in his career.
So, next, is to get rid of that pet rock, i.e. the student loan debt.
It never ceases to amaze me how people think nothing of keeping this debt around for years. I don’t care if the debt is at zero percent interest, it’s still bondage.
Just consider, together, they have $20,600 in student loan debt. Why not treat that debt like a car loan and get rid of it just as fast?
I suggest Sam (and you) use the “What Is the Impact of Making Extra Payments on My Debt?” calculator on this site.
By using the calculator, you can find out how much you’ll save by making extra payments. In Sam’s case, that can be thousands of dollars.
So, I would take the extra $300 and pay off the student loans early. In this economy, the less debt you have (coupled with ample savings) the better off you are.