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I've got about $5000 saved up in my savings account.

At the same time, I've got about $8500 left to pay off on my student loan, with all the interest that includes (6%/year, compounded monthly).

I want to pay my student loan off as fast as possible, and I have been considering just dumping my savings into the loan, either once the two equal each other, or immediately.

I'm not currently putting any money into my savings because I'm trying to pay off that loan first.

Alternately, I could dump some of my savings into the loan so that I'm not left without a safety net in case of emergencies - but I'm not sure how much I should reasonably keep in Savings for such emergencies.

FTR: Breakdown of my income/expenses. I have no other debt besides my student loan, and while I use a credit card, I use it only to make purchases I can pay for, and always pay off the full balance.

Income: $2900/mo

$1400/fortnight my income(ususally $2800/mo, steady job).

~$100 Wife's income/mo (Not consistent - based on commissions)

Expenses: $2160/mo

$975 Rent/mo

$110 Elec/mo (higher in the summer due to air conditioning needs)

$75 Internet/mo

$160 Phone /mo

$500-600 Food/mo (2 people)

~$100 set aside for luxuries/mo

$250 Student Loan Payment /mo

So, in short, should I dump some or all of my savings into my student loan, should I do it now or when I've paid off a bigger portion of that loan, or is this an entirely unreasonable plan?

Side Note: Since it's getting mentioned a lot, there are a few 'hidden' expenses that aren't being shown here because they get taken out of my paycheck pre-tax. There's $100/mo for 2 month-long bus passes, $185 for health insurance including dental (going independent right now would be insanely expensive, so we're planning to switch once my company's open enrollment starts) and 3% of my pre-tax paycheck going into a deferred compensation plan.

Zibbobz
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    Depends on the Interest Rate (IR) of the loan. Also, summary of income and expenses if you could please include those in the question you might get a better answer. – Ross Aug 17 '16 at 14:37
  • @Ross Added as per requested. Food is based on roughly a $150/week grocery bill, luxuries are an approximate what we spend per month on non-essentials, some months it's more, some months it's less. – Zibbobz Aug 17 '16 at 16:16
  • Thanks this should help people give you a better answer, not having any credit card debt is the main thing a lot of people would want to look at before answering. – Ross Aug 17 '16 at 18:37
  • @Ross Good point, I added in a little extra data - that I have no debt other than this, and that I do not ever carry a credit balance into interest buildup. – Zibbobz Aug 17 '16 at 18:40
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    By "6% interest monthly" do you mean a 6% annual rate that is compounded monthly? – BrenBarn Aug 17 '16 at 19:07
  • @BrenBarn Not sure, but I think so. Currently it accrues ~$42 of interest each month (12x42=504, which is about 6% of the remaining loan. I'm rounding things off a bit here and there). – Zibbobz Aug 17 '16 at 19:18
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    @Zibbobz Right, that's 6% p.a.. 6% p.m. would be insanely high. – user253751 Aug 17 '16 at 21:08
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    Call your phone carrier and tell them to give you a better deal. $160/mo for 2 lines is very high unless it includes a device lease. Same with internet. – MooseBoys Aug 17 '16 at 22:59
  • Contrary to the group I would suggest to do some additional research and evaluate your priorities.

    Under certain circumstances, student loans can be forgiven which lowers the effective interest rate. Additionally, there are tax deductions for student loan interest. Further still, you may be able to consolidate/refinance your existing student loans so that your interest rate is lower.

     – Dean MacGregor Aug 18 '16 at 05:34
  • Damn, $75/month for internet? That's how much I pay for a year in my locale (50mbps full duplex). – Sergio Tulentsev Aug 18 '16 at 13:25
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    Based on your numbers, you should be able to put $500 again the loan every month. That gets you paid off in 18 months. Leave the 5000 where it is. – JimmyJames Aug 18 '16 at 18:19
  • Another thing possibly to consider is that there are various proposals floating around for the US government to forgive all student loan debt. The likelihood it will come to pass is unclear right now. – Mark Plotnick Aug 18 '16 at 22:02
  • @MarkPlotnick There are many proposals to allow student dept to be forgiven by bankrupcy, but there are no serious proposals for jubilee. – Chuu Aug 18 '16 at 22:59
  • @MooseBoys I appreciate the concern, but it actually does include a payment plan on two devices. – Zibbobz Aug 19 '16 at 12:49
  • @SergioTulentsev I'm guessing you're not in the US. $75/month is on the low end for most major US ISPs (and that would be for less than 50mbps). – JAB May 21 '17 at 22:13
  • @JAB: yeah, you guys are getting owned pretty hard by the telecom cartel :) – Sergio Tulentsev May 22 '17 at 05:53
  • @JAB No, I am actually located in the US. I can't look up my rates right this moment, but I'm getting decent connection speed. Keep in mind, this is just for wired internet connection, not for a Data Plan on a cell phone. – Zibbobz May 22 '17 at 13:11
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    @JAB I very much disagree that $75 is "on the low end". It's on the low end if you want the ultimate, premium tier at most ISPs, but most people don't need that. I've always paid around $50 for Comcast's "one step up from basic" tier (and recently called and got it down to $23). You're probably thinking of packages that include cable TV and internet. – user91988 Jul 31 '20 at 19:39
  • What phones do you have that they require payment plans of over $100 per month? And concerning food: do you often eat outside? – glglgl Sep 29 '20 at 14:34

5 Answers5

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Keep 3-6 months (or more if you need to, for me the number is 9 months) worth of expenses in an emergency fund. Put the rest against the student loan.

The length of time depends on your situation. I have family, and work in IT. Changing jobs takes me longer, because ... reasons. Having less than 6-9 months of buffer means that I have to rush and possibly take a position that is not a good fit, or get behind on payments.

So, set aside your emergency fund, add to it if you need to. Once it is fully funded, take the money you were using to fund the emergency fund and budget that to clearing student loans. Also, don't start new credit cards, and be sure to never carry a balance on them.

I know it seems like a lot, but keep in mind that yours is small, and you'll likely be able to knock it out in a very short time.

Edit (after OP listed expenses): Taking into account the expenses you listed, it looks like you have about 2000 per month in expenses (if you're in emergency fund mode, luxuries can wait, and you can tighten the belt on food, so go with the lower end of your estimate.) Lets say you have 600 a month to work with. My suggestion would be bring savings up to $6000. That will take you two months. Then pay 850 a month to student loans. You'll be paid off in a year, and still have 6000 for emergencies.

Once you're done, you will have 850 a month to save and invest. With patience, persistence and care, you can start a nest egg that will allow you to remain financially independent. Search around for FIRE (financial independence, retire early) and other strategies for retirement savings and investing. Be sure to save for retirement. The worst inheritance to leave your loved ones would be to become financially dependent upon them in your later years. And watch out for credit, it's a trap.

Xalorous
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    Why would you suggest not starting new credit cards? One of the indicators used for credit score is age of accounts. If OP never starts accounts then that indicator can't help the score. Similarly one of the indicators is utilization of credit and the denominator of that is available credit. If OP never gets new cards then that will also suffer. – Dean MacGregor Aug 18 '16 at 05:25
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    OP should establish good habits, so as not to end up much further down the road, deep in debt and full of regret. Once all the debts are settled, if OP wants to buy a house, then using a card to build credit history is certainly an option. The concept of making your money work for you instead of paying others to use their money should be ingrained though. This will ensure OP always pays CC in full, on time, every month. – Xalorous Aug 18 '16 at 13:56
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    OP didn't say anything that should lead you to the conclusion that they have a reasonable likelihood of being deep in debt in the future. Given that, telling OP not to get additional credit cards is off topic with respect to the question. – Dean MacGregor Aug 18 '16 at 16:43
  • @DeanMacGregor I never said OP would end up deep in debt. I said, and you can read it above, that establishing good habits prevents it. Beyond that, we obviously have widely separate philosophies regarding debt. – Xalorous Aug 18 '16 at 19:29
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    "OP should establish good habits, so as not to end up much further down the road, deep in debt and full of regret." That was your answer to my question " Why would you suggest not starting new credit cards?" While you didn't explicitly say OP would definitely end up in debt, you did insinuate that if OP opens anymore credit card accounts they could end up "deep in debt and full of regret" which is unsubstantiated. – Dean MacGregor Aug 18 '16 at 20:08
  • if you con't like my answer, click the downvote button I'm done arguing with you. My stance is clear. I'd rather be building wealth than repaying debt. – Xalorous Aug 18 '16 at 20:33
  • This is probably the answer I'm going to go with - I'm about to get a raise at work, and once I can bring my savings up to 6000, I will probably start using the extra earnings to wipe my student debt out entirely. And from there, our next goal - actual personal transportation. – Zibbobz Aug 22 '16 at 13:14
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Liquidity. That's the issue. You rent, and that's not bad. No new roof, boiler, etc. But, you have a car? Your savings is a guarantee that you'll not have to charge a $2000 transmission on an 18% credit card. You job may be secure, but employment (aside from self employment) is never 100% guaranteed. With $3000 income per month, I'd not prepay the student loan until I had at least $9000 in savings.

We don't know your country, although we don't have fortnights in the US, so if you are in the US, you have a non-US background. Either way, if your employer offers any kind of matching retirement deposits, I'd prioritize that. Never leave that matched money on the table.

You are off to a great start, this relatively low student loan debt shouldn't keep you awake at night.

JTP - Apologise to Monica
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    For the record, I don't have a car. Note my expenses - a car was not forgotten, it was not included because I don't have one. Also, I'm in the US, and I just happen to know what a fortnight is. ;) You do have a good point about expenses though, since we are looking into a new mattress for our bed, and a new computer once my current one becomes too obsolete. – Zibbobz Aug 17 '16 at 19:20
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    "dental work that's beyond what the insurance covers." That's what I meant to say. Hopefully you and your wife have teeth and never need expensive work. That's my new go-to unexpected expense for the non-car-owning renter! – JTP - Apologise to Monica Aug 17 '16 at 19:23
  • Yeah, or any medical expense really. We have decent coverage, but these days even decent coverage only seems to get you to the sidewalk. – Zibbobz Aug 17 '16 at 19:39
  • I think we just covered the four major unexpected things, job loss, home, car, health. – JTP - Apologise to Monica Aug 17 '16 at 19:46
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    @Zibbobz "since we are looking into a new mattress for our bed, and a new computer once my current one becomes too obsolete". These are not the expenses for which you're setting aside your emergency fund. That money is for unplanned expenses. The mattress and the computer are planned. I'd get the mattress first, save for 6-12k (3-6 months of expenses), pay off the student loans, then save for a computer. However, JoeTaxpayer makes a great point. Fund any retirement plan where you work up to the full level that your company matches. You should stop what you're doing and do that now. – Xalorous Aug 17 '16 at 22:52
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    Self employment isn't even 100% secure either. – Ben Aubin Aug 17 '16 at 23:36
  • If you're a long way from retiring, then even 100% matching isn't as good as it sounds. Zibbobz hasn't indicated his age at all, but for argument's sake, let's say he's 30 years away from being able to get to that matched money. The 100% matching is equivalent to about 2.3% per annum compounded over 30 years. So unless the matched plan is invested in something that returns over 3.7% per annum in addition to the matching, it's better to pay off the 6% per annum loan than to take the matched plan. – Dawood ibn Kareem Aug 18 '16 at 06:55
  • @DavidWallace - I'm sorry, I don't even know where to start. Your entire comment is full of errors. I can see you've been a member for over 2 years, I hope you continue to visit and read the Q&A regarding 401(k) (In US, of course) and gain understanding of the nature of the different timeframes involved. I would agree that if one had a huge credit card debt, 18% seems common, that's there's a "breakeven" to consider. So, yes, there are 3 variables, time, rate on debt, rate on 401(k). But OP is far from needing to do this math. – JTP - Apologise to Monica Aug 18 '16 at 13:44
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    @DavidWallace Matching is an instant 100% ROR. Put in $100 and you have $200. $100 profit. 100/100*100 = 100%. Plus it is more effective the further you are from retirement, due to the power of compounding. Even if the funds in your 401(k) lose value, it will take years to bring your ROR down to 6%. – Xalorous Aug 18 '16 at 14:00
  • @Xalorous it scares me that there are people who think that way. 100% matching is not 100% return if you have to wait for many years to cash it in. For example, suppose I have a $10k debt at an interest rate of 6% compounded monthly, and I have $10k with which I could pay it off immediately. I put that $10k into a matched plan instead, with a return of 3% compounded monthly. It immediately becomes $20k. Thirty years later, I reach the age where I can withdraw that money. It's now reached $20k x 1.0025 ^ 360 = $49136.84. But now, my debt has also compounded, and it's ... (continued) – Dawood ibn Kareem Aug 18 '16 at 19:23
  • ... reached $10k x 1.005 ^ 360 = $60225.75. Now that the matched plan has matured, I pay off the debt; but I'm short by $11088.91. In other words, following the simplistic advice of investing in the matched plan before paying off the debt has cost me $11088.91. It would have been far better to pay off the debt. Of course, this is predicated on having to wait 30 years to be able to get to the funds in the retirement plan. If I were close to retirement age, then it would be better to use the matched plan. And there are lots of other variables in play. But you should ... (continued) – Dawood ibn Kareem Aug 18 '16 at 19:23
  • ... always do the mathematics. Don't just assume that because 100% > 6%, you should take the 100%. You could lose a lot of money doing that. – Dawood ibn Kareem Aug 18 '16 at 19:23
  • Matched plans work through payroll deduction, by law, no lump sum contribution. 401(k) plans are normally mutual funds which do not accrue interest, but increase in value, which is usually simplified down to a rate of return for comparison. As for the math, you need to use a different cash flow scenario. Present value of zero, monthly contribution of $200, half from employee, half from employer. Set your ROR at 3% and do the TVM calculation to find the future value. Then work it backwards and substitute the payment with $100 and solve for the required ROR to reach the same future value. – Xalorous Aug 18 '16 at 19:39
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    My whole point here is that common practice in debt reduction is to recommend funding 401(k) enough to take advantage of the matching, pay all bills, make minimum payments on all debts, budget expenses (tightly), and use the leftover amount to reduce the highest interest rate debt. That, in a nutshell, is how to pay off debt in the quickest manner. I would never advise someone to invest 10k in a manner that freezes the money for 30 years and allow a 10k debt to balloon over 30 years. That's a completely different scenario. OP is going to be completely done in a short timeframe. (continued) – Xalorous Aug 18 '16 at 19:48
  • Is it worth extending his repayment plan by 2-3 months to capture 15 months of employer matching? Absolutely. – Xalorous Aug 18 '16 at 19:48
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    @DavidWallace You're making a very strange assumption that the debt would compound for as long as the 401k will. Suppose you had a $10000 debt and $350 to spend (with up to $100 going to employer matched 401k contributions, all of which will go to the 401k after the debt is paid off), and then, like you said, do the math. If you spend $250 of it on the debt and $100 (maximum matching) on the 401k you will take 45 months to pay off the loan and will have paid $1815 in interest. You will also have a 401k worth $9,513.21 (assuming only 3% annual growth) at the end of the 45 months. – Paul Aug 18 '16 at 22:12
  • @DavidWallace If, instead, you choose to pay off the loan as fast as possible, putting the entire $350 towards it, you will pay it off in 31 months (over a year less, and you'll have paid $1000 less in interest over it),then if you can spend the next 14 months contributing $350 to your 401k ($100 of which is matched, remember, so really $450 gets contributed each month), it will grow quickly, but not quick enough to make up for what you could have had from matched contributions earlier. You'll end up at the 45 month mark with a 401k worth $6,403.41 and no loan. – Paul Aug 18 '16 at 22:15
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    @DavidWallace So after 45 months, assuming all else equal, you will have paid off the loan regardless, your only choice is whether you have a 401k worth either $9,513 or $6,403, depending on if you took full advantage of employer matching or not. – Paul Aug 18 '16 at 22:18
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    @DavidWallace Suppose the employer actually matches $350/month, so you put the whole amount in your 401k every month and never pay the loan. If you did keep the loan for 30 years, never evening making any payment on it (assuming the lender allowed this), you're correct that the loan would be worth $60,225.75, that would also mean that you have a 401k worth $407,915.82 and can just pay off the whole loan in a lump sum payment and be left with $350k. – Paul Aug 18 '16 at 22:22
  • I'm pleased to see 3 pretty new (to me, anyway) names here. And a level headed discussion. I've added a self answered question, Is it ever logical to pass on the matched 401(k) deposit? to offer a spreadsheet view and further thoughts. – JTP - Apologise to Monica Aug 18 '16 at 23:55
  • @DavidWallace - on reading all these comments, you make good points, but also some strange assumptions, as Paulpro puts it. One should always do the math, I agree. And in the linked post, I show that it takes a combined 18% rate on the debt with a zero or negative return on the 401(k) to negate the benefit of the 100% match. Xalorous put it best, start with trading the last few payments for a year's match. Then adjust from there. What you seem to set aside, is the nature of the analysis, small payments to either be matched or used to pay debt. I agree that a doubled $1 invested at even 8% – JTP - Apologise to Monica Aug 19 '16 at 01:38
  • will be outgunned by compounding at 10 or more percent over time, but those aren't the choices. Please see my other post, and see if we have a closer agreement. – JTP - Apologise to Monica Aug 19 '16 at 01:39
  • @penne12 - you are right. When I started typing 'no job is 100%..', I anticipated a member stating he had a business that had multiple customers, and the chance of them all leaving at once was nil. I should not had added the words about self-employment, as you pointed out. – JTP - Apologise to Monica Aug 19 '16 at 12:32
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Great work so far, and good question. I think a lot of it depends on how risky your financial life is.

For example lets say that you are working a temp or contract job that ends in 3 months. That is also the same month your savings and student loan will be equal. I think most would agree that it would be foolish to empty out your savings in such a risky month.

Now same situation one month later. The company you were working for takes you on as a full time employee. I would go ahead and empty out my savings and make the student loan go away.

There could be other risks to consider like needing a different car, moving to a new place, potential medical bills, or a needing to travel. Anything like that on the horizon I would hold off emptying out my savings. However, once it is smooth sailing GO FOR IT!

Being debt free is wonderful and it is a worthy goal.

Pete B.
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Here's what I'd do. Show these figures to your bank, and ask if they can offer you some type of account with a small overdraft, say up to $2000. Typically this won't pay the same kind of interest as your savings account, but it doesn't matter.

If such an account is available, then yes, dump most of your savings into the student loan, and keep a few hundred in your new account. The overdraft on this account is your emergency fund. This means that in the more likely scenario (no emergencies) you're saving yourself 6% interest on something like $4000 to $4500. In the case of an emergency, you're still covered; but you'll be paying a larger amount of interest. Let's say you have an emergency cost and need to dip into the overdraft for $1000. If the interest is 15%, then you've cost yourself an extra 9% on that $1000 over leaving that debt in the student loan. This seems to me like a really good gamble - more likely to gain 6% of $4000, less likely to lose 9% of $1000.

If your bank won't give you a low-interest account with a small overdraft, then use your credit card as your emergency fund. The same kind of logic applies; but since credit card interest rates are typically higher than overdraft interest rates, you'll want to keep slightly more in your savings account. About $1200 to $1500 feels right to me; and move the remaining $3500 to $3800 to your student loan.

So yes, pay off the student loan. That 6% interest really is worth having, even if you'd be taking a small gamble.

Edit - Alexander Kosubek has suggested that I should compare this to matched retirement plans. The 100% gain in a matched retirement plan isn't 100% per annum; it's 100% divided across the length of time you have to wait until you can get your hands on that money. Suppose the money is accessible when you turn 60 - a matched plan is a good deal if you're in your 50's, but not so good if you're in your 20's. The 100% matching is equivalent to 6% interest per annum compounded over slightly under 12 years.

So if you're less than 12 years away from retiring, go for the matched plan. Otherwise, pay off your student loan first.

Dawood ibn Kareem
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    +1 because of the good point of evaluating interest rates and likelihood of incurring them against each other. - There are still other things to consider, though, as others have noted, like matched retirement plans, which get you a gain of 100%. ;) – I'm with Monica Aug 18 '16 at 06:28
  • @AlexanderKosubek Don't be fooled into thinking that 100% matching is equivalent to 100% interest. I hope my edit clarifies this. – Dawood ibn Kareem Aug 18 '16 at 06:51
  • Thanks, David, for the clarification! I was aware of the fact and maybe shouldn't have stated it in my comment in the ambiguous way I did. But then it did make your answer better in the end... :) – I'm with Monica Aug 18 '16 at 07:51
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    @DavidWallace the matching is not equivalent to interest. It is equivalent to return. AND it gains further return down the road. It is almost free money. The cost of it is the time that it is not solvent. Since most companies only match the first few percent, it makes sense to put that percent into 401(k) first. Then the remainder of the check goes into the budget. Also, due to that deduction from your check being pre-tax, the actual amount that your check goes down is only about 70-80% of the contribution. Also, your calculations ignore the returns on your contribution and the matching. – Xalorous Aug 18 '16 at 14:09
  • If OP wants to build his financial life around debt and live life leveraged to the hilt, then your plan is sound. That overdraft is an unsecured line of credit. They'll most likely sell him a credit card set up as overdraft protection for the checking account. Credit based emergency fund too easily leads to debt. His goal is to remove debt. – Xalorous Aug 18 '16 at 14:13
  • Your logic at the end is flawed because you'll be gaining interest on that principal and the match during those 12 years... – corsiKa Aug 18 '16 at 19:13
  • @corsiKa Sure, the last sentence isn't quite right. Thanks for pointing it out. My point though is that you can't treat a 100% matching as free money; and that 6% over 12 years is just as good as the matching. I'll add an example to clarify this. – Dawood ibn Kareem Aug 18 '16 at 19:28
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    10k debt @ 6% interest, $200 monthly payment. 0k retirement @3% interest, first 100 matched. You have $400 to work with. If you pay normal payment and invest the rest, the loan takes 5 years to pay and the retirement fund is at $18,700. If you invest 100 and pay 300 to the loan, it takes 3 years to pay and at the end of 5 years, you have $19,200. If you pay 400 to the loan and invest nothing, you pay the loan in 28 months, and at the end of 5 years you have $16,200. The huge drop in the last one shows the power of the matching. Combine that with the power of compounding over 20 years... – Xalorous Aug 18 '16 at 22:16
  • I just don't see how 100% guaranteed instant return is not free money, even if you have to wait to use it. – 17 of 26 Aug 19 '16 at 14:18
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I would not advise you to go entirely broke in order to clear debts. You could use the cash you have to invest, or render some other services other students need in school while you raise cash from doing so.

NL - Apologize to Monica
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