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Stash for an IRA or for debt, which is wisest?


Cassie
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Hi guys,

 

I'm a full time student on a VERY limited budget, and we're talking Ramen Noodle eating every night. I want to make some wise financial decisions for my future and thought someone could provide some advice. I'll be receiving around $500 back in scholarship and grant money fairly soon. Sooo, should I;

 

1. Put that money in a savings account and wait until I have the minimum needed to open up a money market mutual fund?

 

2. Put that money in a savings account and wait until I have enough to open up a Roth IRA? (

 

3. Put that money toward debt? Right now I'm paying off a new car *groan* and my biggest goal is to have the loan paid off in three years instead of five. I also have student debt which is under $5,000 and currently in deferment.

 

My ultimate goals are to get an IRA opened, have an emergency fund established, start contributing the max to my IRA, get my car paid off, and finally get my student loans paid off. I'm just not sure if I'm approaching them in the right order. Debt sucks, but it makes me nervous the more I prolong opening up an IRA for myself. If I pay my car off first (let's say, in three years) that could be a lot of money lost due to no compound interest.

 

I don't have a lot of money coming in right now, and I want to make sure I'm using the little income stream I have as best as I can.

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You should put that money towards better food!

 

Your financial goals are very admirable and impressive. You are definitely on the right track...

 

For now though, these decisions are a ways off. Put that $500 into savings (not a CD or money market fund) and leave it there as a cushion in case something comes up, e.g., your car breaks down, rent goes up, etc.

 

As far as your list, I would say: 1) emergency fund, 2) pay off car, 3) pay off loans, 4) contribute to IRA. You can always disperse the readily-available funds in the emergency fund elsewhere, the interest rate on your car loan is probably higher than that on your student loans (also include depreciation in the value of your car), and you'll have plenty of time to build a retirement fund. Also, leave yourself some to live it up a little...

 

Once the funds go into the IRA, taking them out is tough. What I've done is put funds into conventional mutual funds. Sure there are taxes and such but if you find a good one, you'll make out better. Look to the energy sector right now, especially with winter on the way...

 

After you get a good job, you can start putting funds into more than one area at once, buy a house, etc.

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As far as your list, I would say: 1) emergency fund, 2) pay off car, 3) pay off loans, 4) contribute to IRA. You can always disperse the readily-available funds in the emergency fund elsewhere, the interest rate on your car loan is probably higher than that on your student loans (also include depreciation in the value of your car), and you'll have plenty of time to build a retirement fund.

 

Yup yup, in complete agreement. Everybody needs a little money cushion in case something goes wrong (which is why you should save a little!), but if you're looking to save money in the long run, the way to do it is to pay off the things in order of decreasing interest. The money you save by paying off your debts as soon as you can is considerably more than the money you'd "earn" by starting your IRA this early...

 

Kudos to you for keeping track of your finances!

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i like what friscodj said except i would change it slightly.

 

1) emergency fund, 2) pay off car (assuming interest > 5.5%), 3) contribute to IRA, 4) pay off loans.

 

student loan interest is tax-deductible and tends to be extremely low (even lower if you consolidate it and lock it at a low rate). mine is locked at 1.9%, i'm never going to pay it off especially when i'm making 5.5% on 6-month cds right now.

 

the thing with retirement accounts is that you want to start as young as possible and try to max out your IRA on an annual basis. i started as a junior in college and put most of my earnings from my part-time job into my IRA. now i have > $20k in my IRA alone. i also have a 401k from work, too much money in cds and my checking account from being financially responsible and being smart with money in general. it definitely makes life easier when you're financially independent and can do whatever the hell you want.

 

good job on thinking ahead. most people in our shoes tend to live for the moment or for people (parents) to bail them out, but it's great to know you earned it, you planned it out and you're living how you want to live.

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And I like what friscodj and now_better said with my own twist:

 

1. Emergency Fund - Real emergencies, notthing more.

 

2. Pay Off Debt - Credit cards first, than vehicle.

(Assuming APY interest is grater than IRA, Roth, etc.)

 

3. Retirement - Conritbute to investment fund.

(You can borrow or use fund with out penalty for future home purchase)

 

4. Student/Home Loans - Interest is tax deductable.

 

5. Discretionary Account - This is for any oppurtunity that presents it's self.

(Short term capital investments in a business dealing)

 

For this to work you will need to adjust to a atandard of living below your means. Since your practically broke this should be an easy non life altering experience for you. You seem to have a good head on your shoulders, so don't give into the consumerism of our society and do thing smart.

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Thank you for the replies. I'll re-prioritize accordingly and use the money to reimburse my emergency fund. Then I'll concentrate on hacking away on my hefty car loan. It shouldn't be too hard to live below my means right now when my idea of splurging is feeding my cat Fancy Feast.

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yeah, definitely LBYM for life. i make pretty good money, but i live like a homeless person. most people who saw my room would probably say "so is this a room for guests?" definitely do worry about cost of living creep. as you earn more, you will feel the urge to spend more. that's where years of living like you were in the trash can will keep you humble and debt free for life.

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yeah, definitely LBYM for life. i make pretty good money, but i live like a homeless person. most people who saw my room would probably say "so is this a room for guests?" definitely do worry about cost of living creep. as you earn more, you will feel the urge to spend more. that's where years of living like you were in the trash can will keep you humble and debt free for life.

 

And give you perspective to truly appreciate the value of the things you earn in the future...

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