Tales from the Wallet: When to Save, When to Pay Down Debt

debt payoff vs savingThis started out as a post about how to pay off debt, and I realized as writing it that the huge question is thus:  When should you pay off debt? So let’s talk about it.

As I’ve mentioned before, I generally led a charmed life (as far as debt is concerned) in my 20s — my parents paid for my education (thank you!) and I never had any credit card debt. In the past few years, though, I’ve gotten better acquainted with debt. First, my husband and I got married — when we met, he was finishing his master’s degree at NYU, and he took out some loans to pay for the education; they are now my responsibility as well. Then, we bought an apartment in NYC — we kept our loan in the “non-jumbo” category, but we still now owe six figures to dear old Wells Fargo.  (Pictured above: Lodis ‘Cairo Diva’ Clutch Wallet, available at Nordstrom for $68.90 (was $138).)

I think there are three cardinal rules for debt.
1. Do what you can to avoid accumulating it.
2. REALLY do your best to avoid credit card debt. Live within your means, and spend less than you earn. Pay off what your balance every month.
3. For all your other loans, pay at least the minimum every month, on time — your credit card report will be severely affected if you don’t.

Easy peasy, right? Questions still remain — how much should you be saving versus trying to pay down debt? If you’re paying down debt, which ones should you pay off first?

Save For Your Emergency Fund. Life has a funny way of taking you by surprise, and you need to protect yourself — you could get laid off, or get in a car accident, or your roof could start leaking.  The emergency fund is for all of this. In general, keep your emergency fund in a “you can get the money tomorrow” kind of account, not an investment vehicle like a CD (even the shortest are 6 months). As I’ve mentioned before, I use Mint to keep track of finances — one of the fun things about it is that it can tell you which banks are currently offering the highest interest rates.  (We keep the majority of our emergency fund in a Capital One account.  It takes a few days to transfer the money, but we also keep a small amount in our checking and savings account.)

Contribute to your 401K. I didn’t start until I was around 27, and I kick myself for that — the effects of compound interest are so great that those first few years are crucial.  There are some important, basic things to know about a 401K: Your 401K is a retirement savings fund — the money is taken out of your paycheck before you’re taxed on it, meaning that if you think you’re contributing $100 to your 401K each month, it would be more like trying to save $140 in after-tax money (or whatever rate your income is taxed at).  (Um, don’t quote me on those numbers.)  Your employer may match your contribution, up to a certain point — figure out what that is and contribute at least that amount, because it’s basically free money.  (You contribute $100, your employer contributes another $100.)  A few other fun points about the 401K: You can’t touch the money until you’re 59.5 65 (you can, but you’ll be taxed on it and pay a 10% penalty before then), and you’re only allowed to contribute a certain amount every year — right now the maximum is $16,500 (unless you’re over 50, when you’re allowed to contribute a bit more in “catch-up” money).

Next, automate debt payment. I read a great article on Simple Dollar a few months ago about how one of the easiest ways to pay down debt is to simply round up the minimum each month that you pay.  Say your student loans are $754.85 per month.  Pay $800 instead, and have the extra go to the principal.  You won’t miss the extra money, and it can make a big difference in the long run, as illustrated in the Simple Dollar examples.  Do what you can here — for example, if you can round up that payment to $1000 every month, do it.  We do this with our mortgage and the student loan payments.  (I also like it because I frequently schedule payments a few weeks in advance, and I can easily remember how much money will be taken out.)

If after all that, you still have money left, then you have a few big questions:

  1. Should I contribute more to my 401K?
  2. Should I pay down more debt?
  3. Should I be saving even more money?
  4. Should I be investing my money in the stock market?

These are difficult questions, and I’m curious to see how you readers balance these questions and answer them yourselves. The answer for most people, I suspect, will be “all of the above” — if you have an extra $1000 a month, you may want to put another $250 towards your 401K, another $250 towards one particular loan, another $250 to your cash savings account, and another $250 to your investments.  Factors you may want to consider here include what your long-term goals are (retirement? savings for a child’s education? marriage? house?) as well as what your short-term goals are.  If you have a short-term goal — I’d define it as being 1-2 years away — like a downpayment, or a desire to quit your job to launch a business or have a baby, you may keep accessible money in a savings account and lower your monthly debt load while you can by paying off specific loans so your monthly minimum is reduced.  (In fact, many lenders will look at your debt-to-income ratio, and if it’s higher than 28%-36%, you may have problems borrowing money for a mortgage or loan.)  Taxes are also a consideration — you can take a tax deduction on some things (like the interest you pay on your mortgage and student loans) but not on others (credit card debt); meanwhile you don’t pay any taxes on what you contribute to your 401K until later. Another big factor is interest rates — what you’re paying on your various loans, as well as what you’re getting in interest on your various savings.

Readers, what factors do you consider when trying to determine whether to save or pay down debt with extra money?

Comments

  1. I have a question about rounding up your debt.

    I tried to do this with my student loans. My monthly loan payment is around $740, I pay online, and I try to pay $800, with a note to apply excess to principal. But sure enough, all I am doing is prepaying my next month’s interest rate so that next month my balance is $680. When I called about this, I seemed to get no good answer. Basically it seems like I would have to pay the $740 and then call them to take another $60 to apply amongst my loans. While I know this is still smart, it is a huge pain in my tuchus!! For the record, my lender is Access. Any advice on how to streamline this process?

    • Anonymous :

      I have the same issue. There is no way for me to apply the extra to principal when I pay online (I have AES). They specifically say that when you pay extra they will apply to accrued interest first before applying to principal.

      • Same issue here. I have had repeated arguments with the Access customer service representatives about this. I finally have resigned myself to paying the montly minimum then making a large separate payment every few months to the principal only. It’s so frustrating. It only makes me hate them more.

        • Do you make the large separate payment on line? Or over the phone?

          • Ballerina girl :

            I’ve done it online–I usually wait until the day after my loan payment went through (so no accrued interest so far). This actually works well if you have loans with different interest rates because then you can concentrate on the higher rate loans first.

        • Can I be terrible and say that their online payment system is probably purposely designed this way so as to make payment on the principal difficult and to maximize the amount of money they can make off you?

          It would *so* not be hard to add functionality that allows the loan-holder to select where to apply any payment above the balance.

          • I strongly suspect that this is accurate, although I hate Access Group with what may be an unfair passion, so I may be a teensy bit biased.

            I ran into the same problem, and had been making extra payments for about 9 months before I realized what was happening. After talking to customer service several times (and being told that certain courses of action would fix the problem, trying those courses of action, and having them not work either), I couldn’t help but feel robbed.

    • My loans are the same way and any additional payment has to be made separately. It is a pain so I lump a few months together and make a bigger payment every few months.

      Hope that helps!

    • Yikes – I have Access also and have been doing the same. But didn’t realize my extra was not going to principal as instructed. Thanks for the heads up.

      • I believe you need to write in the “notes” section: “apply excess to principal and do not advance due date.”

        • I was told by the Access representative that it didn’t matter what was written in the note section (when the monthly and excess payment were lumped in together). The default application would be applied – much to my annoyance.

    • Anonymous :

      Pay the $740 per month and set the $60 aside. Once per year, make a separate payment of $720 ($60 x 12 months) applied to the principal. That way you get the result you want, without the pain of having to make separate payments monthly.

      • That won’t be the same result though because the balance will grow more each month. I was able to sort things out with my lender by setting up automatic drafts from my checking account.

    • I don’t know why paying loans is such a hassle, but it is. Every month I make an extra payment on my gov’t loan. The payment is automatically applied to any outstanding interest, so I always schedule the payment for 1 day after autopay, before interest has a chance to accumulate again. Every month I have to write a note that I want the payment applied to principal. Every month it takes 7-10 business days to do so. Thinking about the interest that accrues daily on my loans makes me want to cry.

      • I have the same problem. I do the same thing you do, that is pay it the day after my regular scheduled loans are due. It’s very annoying, but worth it to get my extra $$ applied to the principal on my highest interest rate loan.

    • I have Access Group as well and I “round up” to pay extra every month online. Unfortunately, I’ve had the same problem. To circumvent, I have Access Group automatically deduct the minimum payment, which they do on the 15th of every month. Signing up for the automatic deduction also saves a quarter percentage of interest – I like to think it all adds up!

      I pay the “extra” amount separately online under the My Account section. Go to the “Payments” tab and click “Make an online payment.” It will bring you to a page that shows your interest for next month. Click on “Pay” and in the next screen you will be able to change the payment amount to your desired number. Then, in the special instructions box (below all the payment infor), type in “Apply principal only. Do not advance due date.” You can also indicate a specific loan group that you want the payment to apply to. (I apply it towards my group with the largest interest rate – so I type “Apply principal only, Loan Group E. Do not advance due date.”)

      It sounds complicated, but I’ve been doing it for about 6 months now. Admittedly, it’s not as easy as them just applying extra towards principal, but it’s way faster than calling them. It literally takes a minute and makes me feel a bit better about making a (tiny) extra dent in my loans each month. Hope this helps!

    • I have Citibank so I don’t know if the other lenders allow this, but I figured out that I could change the date my payment is due for each loan. So, I made my highest interest loans all due the day after one of my monthly paychecks and the payment for rest of my loans due one day after the day of my other monthly paycheck. This way I just pay the minimum on the lower interst loans and through everything I can spare at the high interest loans. It made it really convenient for me. Although Citibank has a box I can check to apply any extra towards principle so that helps…

      • This!

        After Citibank royally screwed up in applying an additional payment towards principle (then they didn’t properly apply the next month’s payment, so when they properly allocated, suddenly I was deficient on all loans) they changes the payment dates for my highest interest loans. Now paying down the higher interest loans is a *lot* less hassle.

  2. South of Houston :

    Kat – Great post! I think this is a really important topic.

    Not to nitpick, but I wanted to let you know that for 401(k)s, I believe you can begin withdrawing the money at age 59 1/2 (not 65) without the 10% penalty (though there are exceptions that allow you to withdraw earlier without penalty for certain hardships). This 10% penalty is on top of ordinary income taxes, which you have to pay on any withdrawals, regardless of whether it is before or after you turn 59 1/2.

    • thanks — I’ll correct it! In my mind I remember that I can’t touch the money until I am Very Old, and for some reason 65 seems way older than 59.

      • South of Houston :

        Haha, that totally makes sense – 65 feels like the official ‘retirement age’ that you can start drawing pensions, etc. so it’s understandable.

        In terms of savings / debt payment / retirement savings, I think it’s really important to always pay at least the minimum on all debt (obviously), but I wouldn’t start going beyond that until I’d built up a reasonable emergency fund (3mo expenses, at least). At the same time as that, I’d also contribute the minimum to a 401(k) needed to get the company match (as Kat said- free money!)… retirement saving starting at a young age are SO important, especially for women as we tend to live longer than men and make less money over our lifetimes (on average), due to time out of workforce, lower pay, etc.

        After building up a 3mos emergency fund (I like Capital One for that too Kat), I’d probably re-direct the money going to that into paying down high interest rate debt (anything over 4-5% or so). If it’s low interest rate student loans (or similar), it doesn’t seem necessary to pay the debt down early (unless you can’t stand having debt, which is totally understandable).

        Then, if you have extra money left over after debt payments, I’d start adding to retirement savings- first, through a Roth IRA if you are eligible based on income (money goes in after tax, but no taxes on the way out as long as you’re older than 59 1/2… you can also withdraw contributions, but not earnings, penalty-free), then more to a 401(k), until retirement savings are at least 10-15% of gross salary. After you are doing that, I would then go back and build up a stronger emergency fund (6mos-1yr of expenses) and start concurrently saving for big medium-term life events (wedding, home purchase, kids, special trips) and/or max out the 401(k). Actually, I might even try to max out the 401(k) before saving for the other stuff, but that could be difficult depending on income.

        Anyway, sorry for the long post, just my two cents :) One reason these questions are so tough is because every single person’s situation is unique. One size rarely fits all.

        • Different Annie :

          “low interest rate student loans”

          Sorry, this made me laugh. For anyone still in school, there is no such thing.

          • South of Houston :

            Very true… but many people who graduated several years ago still have low interest rate loans outstanding and rush to pay them off early. From an economic perspective, it’s not always the most sensible thing to do, that’s all.

          • Different Annie :

            Oh I completely agree with you there. I have a few loans from the beginning of undergrad that I was able to consolidate ~2.5% fixed. I can get 4% just from a rewards checking, so I certainly won’t be in a rush to pay off those 2.5% loans when I can make 4% risk-free (yes, it’s FDIC insured, although I know some reward checking accounts aren’t)

        • Different Annie :

          Can those of you at law firms chime in on 401K matching? I’m a 3L, and my offer letter from my firm doesn’t mention anything about retirement plans, but I know they have one. I’ve heard that it’s hard for firms to meet the non-discrimination requirements because they have so many HCEs, so they can’t offer matching (or more precisely, if they did match, they couldn’t deduct that expense for tax purposes, so they just don’t do it and pay higher salaries instead). Is this true? I know I can ask my firm for details if I need to, but I didn’t want to ask something that I should just know (if what I’ve heard is correct and there’s a standard practice).

          • Different Annie :

            Sorry, I have no idea why this posted as a reply here. I typed it at the bottom of the page. I guess when the server rejected my post about interest rates (and then posted it without my resubmitting), it also decided this was a good place for everything I say ;)

          • My firm doesn’t match for attorneys–only for staff. I don’t think firms typically match but I could be wrong. NY satellite office of a big law firm.

          • SF Bay Associate :

            My national biglaw doesn’t match for attorneys either. Staff only.

          • Different Annie :

            Thanks for the responses. That goes along with what I’d heard.

      • Actually, you can withdraw money from 401ks at age 55 or earlier – earlier if you follow the 72t periodic payment rules (installments at least annually, for the longer of at least 5 years or to age 59 1/2). Or, you can withdraw the $ if you terminate employment in the year you will reach age 55.

    • Also, please note that the tax law offers a “Roth 401(k)” (although not all employers offer this). If you contribute to a Roth 401(k) you are taxed on the amount you contribute, but all withdrawls are tax-free (of both “principal” and “earnings.”)

  3. If I can stress anything, put money into your 401(k), and at minimum, put in the maximum amount that your employer will match. So say your employer only matches the first 5%, put in at least 5% (but preferably more).

    Also, I suggest signing up for the automatic increases every year – for instance, my company has step-ahead check box where I can tell it to on January 1 to increase my percentage point by x number of points. Go ahead and sign up for at least one extra point each year. You won’t miss that one point. Your bottom line – when you retire – will thank you.

    • We do not have a 401K where I work. I put $5k in an IRA every year. Any other suggestions?

      • IRAs are good. Do you have a Roth or a Traditional? Roth is after-tax (you’re not taxed on anything – principle or interest – when you take it out). Traditional is pre-tax (you’re then taxed – on both the principle and interest – when you take it out). Both have their advantages and disadvtanges, both now and in the future.

        • Not sure to be honest. My financial advisor set it up. Though I do wish I could put more in it. I feel like I am at a big disadvantage without a 401k.

          • Nonnymouse :

            I have a 401K but my employer doesn’t match. All it is then is my money invested in a mutual fund. You can do this on your own.

      • Also, have you checked out other tax-free options? Maybe start a 529 (for education)? For yourself for grad school or for a (future) child? You can start a 529 for Child A; s/he doesn’t have to be born or even a concept right now.

  4. Kat, you said you read the article a few months ago. (It’s a great article, by the way). How the heck did you mentally hold on to it? Do you use a system? I see pages all the time I’d like to flag for the future, but not necessarily post-type pieces that I could save in my blog reader. I know there are browser bookmarks… but there’s got to be a better way!

    • I save stuff as docs or pdfs and organize by subject in a documents folder on my work PC. You still lose some things that way, but I also know to look in my “travel” folder before planning trips for articles on how to find the best deals, or the like.

    • I save stuff in a google doc, that way I can access it anywhere. But there must be a better way!

      • Yeah I’ve starting using Google Docs more, it’s quite handy. I have a spreadsheet with passwords to all my accounts, as suggested by Lifehacker I think… just have a super tough Google account password, and keep the rest in one place!

      • Ha! I do use One Note to keep track of some things, but it tends to be articles along the lines of “maybe someday.” Home redesign… parenting… traevl.. MBA. (This lil’ blog started out as a separate category in One Note.) But this one just stayed with me — it was great advice that I implemented as soon as I finished reading it. As to remembering which exact article, I have an odd memory — I’m visual, so I remembered that it was Simple Dollar from the layout of the page and the fonts used (yes, seriously), but I also tend to remember which words authors used. (For example, I keep Googling a story I read years and years ago in the NYT about a woman who loved swimming in Olympic pools — a rare find in NYC. And I remember the article began with something like her “fingering her bathing suit cap” which she always kept in her purse, and her commenting that friends asking if she still swam was like asking her for if she still breathed. So even though I haven’t read the article in a few years I could probably find it inside of 2 minutes.

        I know, I’m an odd one. At least it served me well in school! :)

        • SF Bay Associate :

          I’m the same way – visual. I can see the page, the fonts, and the layout in my mind’s eye if I’m thinking about something I remember. I could “see” my outline when I was talking the Bar – ah, yes, personal jurisdiction – that starts on the bottom of x page. But it’s in one ear and out the other with conversations, which is really frustrating, especially when having an Important Talk in a relationship and not remembering most of it afterwards :(.

          • OMG me too! I am totally scatterbrained during conversations unless I’m taking notes. My husband, best friends, and family have all come to, um, compensate for that failing…

            Sometimes I summarize conversations at the end of them “So we’re going to do A and B, and stop doing Y and Z.” but that gets a bit formal with your besties…

    • Love the google doc recommendation. I’ve started using Remember the Milk (thanks to Kat!). You could tag it in there – even copy the entire text into the notes section.

    • Evernote is amazing for this. It’s free, and you can install a little button on your browser, so that when you see something you want to hang onto, you just click the Evernote button. It saves it, and allows you to tag it with whatever notes or categories you want. Also has apps, so you can access anywhere.

      • Second Evernote! I use it a lot – you can search for key words when you can’t remember the article name or where you saved it.

      • I love Evernote as well! I often use it to keep track of amazing suggestions on blogs like this, books I want to read, recipes, or even grocery lists. I have to say that the app for Android needs some improvement, but it is still useful.

      • I use Evernote all the time. I clip blog articles that I want to come back to, recipes I find that I like, and I’ve been using it to clip the Craigslist ads for jobs that I apply to so I can remember the details if I finally get an interview.

    • I use Delicious bookmarks. There’s a button on my browser that I click to add a bookmark as well as tags and notes. Then I can go to the website and search or browse by tags. I mostly use it for recipes, but I know people who use it for research or general bookmarks.

      • I’ve just started using Delicious too as my bookmarks were getting out of control! I find it great, I just click the link on my bookmark bar on Chrome and I can tag and add notes. It’s been so handy, I wish I’d discovered it sooner.
        It does require a Yahoo user login which I don’t normally use but I did already have set up for using with Flickr.

  5. This is a great post! I have been wrestling with this for a while, would love thoughts from you wise ladies.
    If you have a certain amount of student loans, let’s say around $80K, and you also want to buy a house, and you came into some money that could pay off those loans but without much left over, what is better in y’all’s opinion, to use the money for a downpayment or to pay off the loans? Or to use half for a downpayment and half for the loans, which will result in a bigger mortgage and a smaller house and some smaller and more manageable but still existing student loan debt? Is there a third option I am not considering?

    • Pay off the loans first. You have now freed up a loan payment and can start stashing that for a down payment.

      That way you aren’t accumulating interest on 2 debts at once while also having 2 loan payments that you are responsible for.

      • I have this same issue, and would like to have student debt taken care of pre-house, but it could take a decade to pay off 80k, and you could build up some equity in a house making the same monthly mortgage payment as you pay in rent now….

    • Was in a similar position. Paid off all my grad plus loans, and now only have my staffords and I am going to use the leftovers as a starter for my down payment.

      My reasoning is student debt isn’t horrible esp if your interest rate isn’t that high – it can be put in forbearance in hard times if absolutely necessary – but its prudent to pay down what you can.

      If you have enough to pay down a huge chunk of loans and have a down payment (plus a big emergency fund) big enough to buy a house you will live in for 5+ years then I’d say thats the way to go. If you can’t get a big enough house with the down payment you’ll have, wait and save more.

      • Also if you work for the government – do IBR. Loans forgiven in 10 years and they only take %15 of your paycheck. Depending on what you make, you might be passing up free money.

        • I considered this but ultimately haven’t committed.
          1) I am not certain I will stay in gov’t or public interest for the next 10 years.
          2) I already am at my job 2 years and hate that I won’t get the benefit of that, but must start from right now.

          I have no idea if I am making the correct choice!

        • Does each loan take 15% or is it 15% of your income divided by all your student loans? I make 75K but have about $1200/month in student loans. GATE loan from undergrad, Sub and Unsub stafford from law school and private from law school.

          • From what I recall hearing, you pay 15% total loans but not all loans qualify. Grad Plus loans do; same with Stafford; but private loans do not.

    • @Lucy – it’s really going to come down to interest rates, timing and what you want. If you want a house soon and your student loan insterest rate is lower than your mortgage interest rate would be, then you may be better off using the $ for the downpayment, so that you have less debt at the higher interest rate. But if you can wait for a while on the house, you can pay off your student loans and then each month save the amount you had been paying until you build up a downpayment. There are other scenarios I’m sure, those are just two that come to mind.

      • This. I had this conversation with one of my company’s E&Y financial advisors a few weeks ago. For me, since the interest on my car loan (which, obviously, is different from a student loan) is around the same as what my savings account earns – yay for small bank and good credit – it’s better for me to just save for now. In his words, if I pay extra on my car now, I’ll never get that money back, but I could decide to put it towards a car or a house later.

    • If I were you, i would do loans first – or some split, with majority towards loans (70/30).

      • May I ask why? I am so happy to hear advice! But just worry I am throwing my money away on rent and missing a chance to buy while interest rates are so low. If I paid off all the loans, I would have to more or less start from scratch on the down payment fund.

        • Make sure that buying is a wiser choice than renting in your city, as well. We used to assume that making a mortgage payment was better than rent, because although the mortgage payment was higher, you were building equity. But with a soft real estate market, it’s not clear that it always make sense to tie up your cash in your house. There has actually be some coverage of this recently – maybe google and bit and see if your city is considered a “buy” or “rent” location.

          • YES! Speaking as one stuck with a house I can’t sell and renting a house someone else can’t sell at an amazing low rate, there is nothing wrong with renting. We bought a reasonably priced house with a reasonable mortgage and still have no equity in. Totally upside down. Gah.

          • I think it all really depends on where you live. I have friends in Phoenix who just bought a house and pay less on their mortgage than they did to rent a similarly sized house in the same neighborhood last year.

            I know others stuck with mortgages on $800K properties and the property is maybe worth half that now.

            For me, my Manhattan rent is literally thousands of dollars (thank god for live in boyfriend!) and I have no desire to leave Manhattan. That means that either I continue to “throw my money away” on rent to the tune of a bit over $24K /year (and we have a “great deal”) or I summon the courage to plunk down the downpayment on a reasonably sized apt with a not-impossible maintenance and pay myself. There are no sure things, but now can be a really great time to buy — prices are lower than they have been & interest rates are at historical lows, too. Plus, student loans are not like credit card debt — I think if you can afford both some loans and a mortgage, it may make sense to do both.

          • This! I am in BigLaw, have been for several years, paid off most of my loans, and am only now in the market for a house with my husband. It’s great knowing that we can put down a large enough downpayment that we won’t be underwater if the real estate market dips another 10-20%….or make a smaller downpayment and have the cash for a rainy day, and not worry that we couldn’t make the mortgage if we left BigLaw. Friends who graduated law school around the time I did bought, and now owe more than their homes are worth…not unlike the “throwing money away” scenario people worry about with renting. However, DH and I are more risk averse than most people, and care less where we live. I understand many people have a stronger preferance for owning a place that they can paint, remodel, etc., even if they lose some $ on it. In our case, we don’t feel we were throwing money away b/c we got to live in a great location we can’t afford to buy in, and have the savings to buy when we see the right place and the freedom to take a lower paying job. But hindsight is 20-20. Had we missed buying at the bottom of the market (instead of passing on buying at the top), maybe we’d have regretted it.

        • Rent is not throwing your money away. It provides you a place to live while you figure out what is best for you. Buying isn’t always better.

          • AnonInfinity :

            +1

            I hate that expression, and I have come to hate my house, so I really really really wish that I had the freedom to just pick up and change places right now.

          • +2
            I have rented for years and have thus avoided the whole real estate bubble, while still having a very nice place to live. Plus I spend no money on maintenance (no need for a lawnmower, snowblower, repairing the gutters, plumbing, etc) plus utilities are included in my rent. And I have indoor parking for $35 a month, which is worth every penny as I live somewhere that does get snow and ice. By saving each month the differences between my rent and what a mortgage would be, I have enough for at least a 20% down payment, probably more, should I choose to buy.

            Also, if you want mobility, renting is better. I am not sure of the rule anymore, but shouldn’t you plan on staying at least 5 years if you buy a place? Probably depends on the market.

          • Nobody said that a mortgage has to be higher than rent. The mortgage on our house is cheaper than the rent on a similar place.

          • There was an article in the NYT a couple of years ago that looked at the rent versus own debate. I sent it to my dad because he is of the own, own, own mindset. There are pros and cons to each side and I will say on the plus side to renting are: lack of maintenence (which equals dependable and predictable monthly housing costs versus home ownership where bad plumbing or a roof leak can come at any time) and freedom of mobility. Maybe I have commitment issues but buying (especially in Manhattan where prices are astronomical) feels like one more thing tethering me to my job in BigLaw.

          • For each person the situation is different. It depends on where you are in life, what interest rates you can get, and where you are geographically.

            In SF, in a tough real estate market that has rent control, we thought we were doing the smart thing by renting.

            However after two horrific rental situations that were affecting our ability to sleep, our relationship, and our general well-being (mood at work, etc), buying and being in control of our housing situation was the best thing we could have ever done. And we bought at the height of the market in Winter 2007, but bought a property type and in an area for which values have steadily increased.

          • As someone who has spent upwards of $60K on renovations and necessary repairs of an older house over the last ten years, I can most assuredly say buying is not always better, especially if you lack skills, time, or inclination to do repairs and remodels yourself. I have many nights that I lie awake thinking how nice it would be to be living in a detached rental townhouse somewhere. And we are not even close to upside-down on our mortgage; we bought low and it’s worth way more than we owe on it. But owning is still a huge pain in the tookus sometimes, no two ways about it. It would be nice, when we get a huge snowstorm, to not be the one worrying about a leaky roof or a degrading cement driveway. I would really caution people who lack time and a certain degree of handiness (or a partner with a certain degree of handiness) to think long and hard before buying a house. When you have to call someone to fix things several times a year, the costs really add up.

    • If your student loans are set at a low interest rate, I’d use the extra money for a downpayment on a house because mortgage rates are generally higher than student loan rates. If this is your only debt, I don’t see any reason to delay purchasing a house. Whether it’s a mortgage or rent, you’re going to have to pay housing expenses. Of course, this assumes that buying a house is a good option for you.

  6. After recently paying off my grad school loans, our only debt is our mortgage. Since we will need to move out of our two bedroom in the next year or two, we do not pay extra on our mortgage. If this was our ‘forever house’, we would.

    We currently max out our 401ks and any additional money goes to to college savings for our baby, our down payment fund, and general long term savings. If we were in or forever house, I’d split saving 50:50 btwn paying down our mortgage and long term savings, after putting a little aside for college.

    I know a lot of personal finance experts are against paying down your mortgage early because of the tax deduction, and especially now with mortgage rates so low. However, you have to pay more money in interest than you get in tax reduction. And while you might earn more on your money if it was invested, I’m really looking forward to owning our house. We won’t be buying our next house until we are in our mid to late 30s and I hate the idea of having a mortgage until I’m in my late 60s! As soon as we are into our ‘forever house’ at least 50% of any extra money we have, especially bonus money, will go to paying down our mortgage!

    Thanks for the great post, Kat.

    • AnonyMouse :

      One thing to think about though, is even if you’re not in your “forever” house, it still makes sense to pay down your mortgage if you can as a way to build your equity for when you sell it. Assuming your house value has dropped somewhat, this can be the difference between being underwater at the time of sale and having to pay cash out, and being able to pull even a small downpayment out of your house.

      • I’ve thought about this, but with the housing market being so soft, I decided that it actually doesn’t make sense to pay down the mortgage on my “for-now” house as long as I know it’s not underwater (I put down 10% 2 years ago and probably have 15% equity right now). We’re current on our 30-year fixed rate mortgage, which is good enough for me. I’d prefer to sock the extra money away for a down payment on the next house (which will hopefully be the forever house!), because I know the money in my savings account can only go up. I just don’t trust that extra money I put toward my mortgage will actually produce “equity” in this market.

  7. I put absolutely every spare penny I can, as soon as I can, toward my student loans–at a 8.25% interest rate, every $1000 I can slice off the principal is saving me several dollars per month in interest–it adds up! I will continue to do this until I have my loans down to a more palatable number–say, five figures. Hopefully by 2012…

    • Income based repayment – if your loans are big it caps your payment at %15 of your AGI. Save up the money you aren’t having to pay each month and pay off the entire amounts of loans (starting with highest interest) one at a time.

      Sorry to double post this but IBR is the ONLY good thing to come out of the most recent student loan reform…post 2006 grads got f*cked. no way we should have 8.25% on government loans when the prime rate is so much lower.

      • No sh*t. It’s unbelievable how much the government is making off of my loans.

      • There are a few ways to game the IBR too, esp if you plan to be a stay at home mom and you have a huge amount of loans. They forgive whatever is left after 25 yrs if you make every IBR payment (10 if you work in government). The payment is based solely off your AGI, even if you are married, if you file separately. So theoretically you could be making only a few hundred dollars a year and making small payments when you are a stay at home mom. Uncle Sam will take care of the balance when you’re in your 50s. Depressing, but an option for those who are well into the 6 figures.

        • Not intending to be snarky, but if you are planning to stay home, why take out six figures of debt? I know people don’t always “plan” to stay home, but …

          • Ballerina girl :

            Not everything goes as planned. You could think you’d love working as a lawyer and realize you hate it.

          • To be honest, law is what I want to do with my time until I have babies and stay at home. And even then, I know I will go stir-crazy if I don’t have a little bit of brain-flexing time, so I’ll likely take on consulting projects as I need/ want them. That’s why I did it. No shame in being a lawyer w/ loans, and certainly no shame in being an educated stay-at-home mom/ sometimes lawyer w/ loans. =)

    • Have you thought about consolidating? I know mine were consolidated a year or two after I graduated to something like 4%.

      • I recently looked into consolidating. I’m 2 years out of law school with about 100K in loans, much of it in the 6.5%-8.5% interest range. Everywhere I inquired about consolidating wanted a cosigner even though I’m in Biglaw and consequently have a really high income for my age. It just seemed really unfair to ask my parents to cosign on my loans at my age (late 20′s). Plus if my job doesn’t last (knock on wood) I wouldn’t want to mess up their financial life when they’re so close to retirement. Sigh, student loans….

      • There was a time a few years ago where consolidation was easy. Almost no bank does it now, at least not without a lot of strings.

        • Yup. And last time I checked, they weren’t offering fixed-rate consolidations anymore – it was all variable.

          • I have IBR and its my understanding that while they forgive the remainder of your debt after 25K, you are imputed that income for tax purposes.

  8. Question about financial advice – I started my actual post-MA career this year (as opposed to part-time jobs/working a gap year between BA and MA), and I’m making not lawyer money, but much more money than my mom, for example, has ever made. I’m also marrying someone from an income bracket quite a bit higher than my own family’s (which has its own ups and downs and challenges!). I consider myself pretty sensible and financially literate, and I’m generally prudent with my money, but I do want to speak to someone about where and when I should be putting different chunks of my salary (e.g. emergency savings, student loan payments, short and long-term savings goal).
    My plan is to speak to someone just at my bank. Is this going to give me decent basic financial advice, or should I be seeking out a fee-based financial adviser or investment professional? I’m not dealing with giant amounts of money yet, so I don’t have, for example, $50k to invest. Thanks for any advice!

    • People at banks usually get a kickback for investing you in certain funds or opening a certain kind of account for you. I recommend paying for financial advice, because at least then it’s less likely there’s something extra in it for them.

      • I would advise you to speak to a financial advisor that you pay for her/his advice. I work at a big bank (though not in a financial advisor position to clients) and I would not recommend trusting those recommendations. Often times those employees make fees off of certain investments that they would recommend to you (this usually is said at some point or in the fine print of agreements/ contracts but at that point you might not realize what that means) so there may be an incentive misalignment.

    • We had a thread about this a few months ago, but you should seek a fee-only advisor, who can give you unbiased information (i.e., not trying to sell you products, like anyone at your bank would be). They can look at your whole financial picture (income, expenses, savings, retirement plan, etc.) and advise you on how to meet your goals.

    • Start by asking your fiance about his (family’s) financial planner. I am in a similar situation as you, and was somehow surprised — though I shouldn’t have been — to find out that my husband’s family has a long-time financial adviser they all use. I bet your husband’s does to. She is a trusted family friend of theirs at this point, so my husband wanted to continue using her. Although she works on load (i.e., commission), she has been extraordinarily proactive and helpful, and has earned the trust of me as well as the rest of the family. Given that you are engaged, it makes sense for you to start talking to the financial adviser together NOW.

      • That is actually a great idea – I know my fiance has done some stuff through just walking into the bank and talking to someone there, but he can be a bit scattered (and doesn’t have the same background of thinking about money and knowing about household budgets that I do). I’ll speak to his mom, who’s pretty on the ball. Thanks!

        • Not all banks are the same. There are “private” banks and there’s your corner Wells Fargo. Private banks have very different and much, much better services. If he used a private bank, I would not expect the same level of service from your regular, old neighborhood branch . . . Just double check before you sign up for anything :)

  9. I hate my loans. They make me feel trapped…..and I get so pissed at the older generation whom shakes their heads at the Gen Y for living with their parents…..um, we have a house payment, but no freaking house…because we went to college/law school….which EVERYONE growing up told us we had to do. The difficulties making payments applied directly to principal makes it even more aggravating.

    I (thank goodness) had a full ride to undergrad and found a good paying job post law school-not market rate, but still ok-and can live on my own with some “wants” and save and service my freaking student loan debt, but if I were making 50k per year, it would be EXTREMELY hard for me to live on my own, save for retirement, have an emergency fund, and service that debt. I get so sad seeing some of my friends, who did not do poorly in law school, and went to a decent state school, working part time at Macy’s in addition to the jobs they were able to scrounge up, and dealing with fairly shady student loan practices….

    I will pay back every damn cent of thoseloans, and regret the law school decision for the next 10-20 years, and bite my tounge when I hear peopleinsisting that college/more education is always an investment….a degree in criminal justice from community college doesn’t make you more marketable to 99% of employers…why we insist on telling 17 year olds otherwise and allowing them to take on tens of thousands of debt to find this out the hard way is beyond me. Rant over.

    • Income based repayment – if your loans are big it caps your payment at %15 of your AGI. Save up the money you aren’t having to pay each month and pay off the entire amounts of loans (starting with highest interest) one at a time.

      • I always heard that IBR results in crazy interest accumulating. Wouldn’t you be putting yourself at risk if you ever expected to actually make some money?

        • Another Sarah :

          The way to get around this is to pay SOMETHING more than what you should be paying each month. So, if you have the cash to do it, pay the IBR payment and then do what they talked about above to apply the difference between (regular payment – IBR payment) to your principle. Then interest will accrue on the smaller amount of money. That way when you do start making money and they start coming at you for extra cash, it won’t be for your entire loan + all that accrued interest. If you don’t have the cash to do it, then obviously don’t. But if you do this and all of a sudden your payments are like $10,000/mo, I would bet that you can call them up and say “ummm, no.” and they would lower it. The key is to always pay SOMETHING, even when they tell you you don’t owe anything.

          • I am not sure that’s right. “Umm-no” would not work with my lender!
            I think a lot of people are going to get themselves into trouble this way, unless they really understand all the nitty gritty, which I can tell you I do not.

          • Another Sarah :

            If you call up your lender and say “I can’t pay your payments, but I want to pay the loan,” more often then not they’ll work with you. That’s what I meant. :-) Although I think it’s important to pay something each month, which will help in terms of negotiations if it gets that far.

      • I don’t think I’d be able to pay the income taxes at the end, since I’d actually owe far more than I do now if I did this….the forgiveness is taxable as income, correct?

        • Is this true? I was planning on doing income based when I graduate and go to the gov, would I be paying a ton of taxes by doing this?

          • They actually don’t know the tax consequences yet. The IBR forgiveness doesn’t kick in until 2017, so Congress is biding their time. Shocking, right?

            It’s assumed something will be done about the discharge of indebtedness income, but no concrete plans as of yet

          • Anonymous :

            As it stands now, I think you would owe taxes on the amount forgiven. My husband had some undergrad loans that we consolidated years ago and there was some deal that if you paid on time for a number of years, AES would take 5% off of your loan. We got that bonus last year (it was something like $600) and we had to pay taxes on it as “forgiven debt”. It was actually quite a hassle to deal with on Turbotax for only $600. Not that I’m complaining about free money, but you know what I mean. I would think the same would apply to any forgiven student loan debt, unless there was a specific rule change put into effect before then.

    • Bah – You must be inside my head. I feel the same way. The return on education is not what it used to be. My parents’ generation (the same as most of the partners in my firm) could pay for college/law school by working a part-time job while in school and during school breaks. They didn’t have to accumulate 5-6 figures worth of debt and don’t understand why my comparable salary doesn’t afford me the same lifestyle they had.

      It infuriates me that the government also makes so much money off of it. Why can I deduct an unlimited amount on my taxes for interest paid on a mortgage but my husband and I can only deduct $2,500 for student loan interest!

      • In fairness, the gov’t also subsidizes a lot of your loans while you’re in school. So, to some degree, it has already enable you to borrow at much less than you would have been able to.
        Sure, some tuition is higher than your stafford caps but that’s private education, not gov’t’s fault.

        • The gov’t still makes a ridiculous profit from student loans with little to no risk. Student loans are non-dischargeable in bankruptcy and there is no statute of limitations on the collection of the debt. If you default on student loans, eventually the gov’t will get the money via garnishments, tax refund offsets, etc. If there is little to no risk, why such high interest?

          Schools have no incentive to lower tuition b/c the gov’t makes it so easy for the unknowning 18-24 yr olds to borrow and pay the higher tuition rates. Society tells 18-24 yr olds they have to go to college or they won’t be successful. It’s an endless cycle that will only stop once folks realize that a college education isn’t what it used to be.

        • It’s not all gov’t money though. The federal loans have the most reasonable rates. Its the private loans that have the huge rates, and also benefit from the non-dischargability issue. So you have a bunch of banks with REALLY safe loans – and require even LESS documentation than the crappy mortgages required.

          • Fed loans arent that great! My private loan with Citi is 1.5 % point lower than the lowest fed loan, and they just lets you check the “apply extra towards principle” box to make an extra payment. Of course it’s variable, but I’m not sure why the govt.’s “investment” in my education couldn’t be variable with a rate cap. I get credit card offers with better rates!

            And, most of the fed loans are not subsidized in school…they capitalizenthe interest that accrues!

          • I apparently cannot type on an iPad!

          • My fed loans are at much higher interest rates than my private loans. Yes, the private rate is variable, but I’ll take that when it’s more than 4% lower than my fed loan rate at the moment.

      • Anonymous :

        The income phaseout for deducting student loan interest is quite low.

    • Everything Bah said. Education is a good investment for some, a great investment for some others, but a terrible investment for far too many.

      • Ignore the first post. I hit stop when I realized that the use of the term “education” was ripe for misinterpretation, and tried to fix it, but it just took it as two separate posts instead. :)

    • Everything Bah said. Super expensivee and long term “education” during what could otherwise be prime earning years is a good investment for some and a great investment for some others, but its a terrible investment for far too many.

  10. Anonymous :

    Threadjack.

    Today in my city we are experiencing heavy snow and negative temperatures. My kid’s school is closed, and our backup childcare person is snowed in where she lives and couldn’t make it to our house. So I called in to work and just said, sorry, I can’t be there, but I’ll be working from home. A number of my coworkers emailed in with the same info.

    We just got an email from our company president fawningly praising the “brave souls who demonstrated their team spirit and came to work this morning” to “keep the business running” (although we all can definitely do what we need to do for our jobs from home, and all have VPNs and remote email access to enable us to do that). She added some admonishments about how while governments and schools may shut down, business keeps going. So I guess I should have bundled up my five-year-old and dragged him through an hour and a half commute (or probably longer because of road closures), risking both our lives so that I could get to work (where I would be glared at for bringing my kid to work rather than leaving him home with the TV on and a bowl of Cheerios to eat for the day) and be a team player. Or something.

    Just venting, but it makes me mad. Law enforcement in our area actually issued a general alert asking people to stay off the roads unless it was absolutely necessary. I guess actually putting face time in at the office – even though I can basically do my entire job from home – is considered “absolutely necessary” in the company president’s book. It irritates me that people think like this.

    • My boss has a similar attitude towards any sort of teleworking. If he can’t physically locate someone, he assumes the person isn’t working. Sigh.

    • Anonymous :

      I’ve been working at home for two days now, same exact situation with day care closed and babysitter snowed-in, and the governor has asked all non-essential personnel to stay home but the fools who spend 4 hours driving to work only to turn around and spend 4 hours driving home again get all of the credit. You made a wise choice and did the right things all around. You were probably far more productive than they were. This business machismo, in this context and many others, is absurd.

    • Just commenting to leave you some sympathy — I’m in SE Wisconsin and we’re in the exact same {weather-related} boat as you. I realize how lucky {so lucky} I am to have flexibility in my work/child care situation, part of which is a perk of being near the top of the totem pole {and having a boss w/4 kids and a working spouse — he understands the juggle!}. But ugh, this is so yucky for you — I’m sorry. I feel like most of the world {at least, where we live} was totally shut down today, so it’s not like business suffered that much. Ridiculous for someone to think that way — try to let it roll. Virtual hug!

    • I just want to know if she or any other “dedicated team members” got in accidents or stuck in their cars for 24 hrs on the drive home…. poetic justice. Does she also admonish the use of “wire hangers” at work?

  11. Student Loan Q :

    Hi everyone,

    I am a 2L and I am trying to figure out what to do with my summer earnings (as a summer associate). I took out the full amount of loans my 1L year, but “saved” some of that amount. This year, I only took out about $30,000 — so I now have $40K in the “lower interest” ~ 6.8% loans and $60K in the 8% interest category. I don’t think I’ll need to take out any loans next year to pay tuition, but I can’t figure out how to best handle this:
    1. Should I take out 20K in the lower interest loans (this is the max you can take out) and “save” the rest?
    2. Can I start paying off my loans now? How do I do that?

    I don’t have any other debt.

    Thanks in Advance!

    • Student Loan Q :

      Also, apparently I suck at filling out boxes and put my email in the ‘Website’ box…so I think it takes you to gmail?

    • I would not take a penny more in extra loans than you need to.
      The exception being that you will need “bar” study money, and you should not take a separate bar loan, if possible, but use your “tuition” money for that if you can. That you can deal with 3rd year, though.
      Figure out what you need to live, pay your tuition and don’t take out more than is necessary.

      My advice would be somewhat different if you were a third year and weren’t sure where you were going to work after graduation. Then, I would say it might make a bit of sense to take more than you need and “save” some of that money for your expenses post-bar exam. Note, I am not talking a fun bar trip! But it’s a rough market, and you need to live on something while you search for a job!!

      As for what to do with your money, now, find the highest interest rate account and put that there.

      My first day of law school, our dean told us if you live like a lawyer as a student, you’ll be likely living as a student as a lawyer! It’s very good advice. Heed it.

    • lawyerette :

      What kind of job can you expect after graduation? Is there any reason you’re saving all this money?

      Right now by holding on to this money you’re losing $ on the interest you could be saving by pre-paying your loans (I imagine you’re earning at most 1.5 or 2% on this money). However, it could make sense to do this if you’re not sure what your financial situation will be after graduation. If you have an offer at a big firm though, I would keep a small cushion (3 months of living expenses say), and use the rest to pay off as much as possible the highest interest loans. As to how to do this, contact your lender (google for their phone number or ask your financial aid office). They’ll be happy to take your money and you can get a tax deduction for paying some of the interest now (I think it’s for paying up to 2k in interest but don’t quote me on that).

    • I ended up saving all my summer associate money, even though my original plan was to use it to pay part of 3L tuition and take out less loans. I put the money in a nine-month CD so it could earn a little interest during my 3L year until I needed it. It turned out to be a good idea since my firm didn’t give offers to a ridiculous percentage of our class and I wasn’t employed at graduation and needed the money to live off of/pay barbri. I worked on the theory that the loans could be paid off over a longer period, whereas I might need a large chunk of money immediately after graduation to live on. Then when I started a job in August, I still saved what was left even though I wanted to use it to pay back principal because I knew there was a chance my job could end in January (which it did–politics. Elections, as they say, have consequences). So I’m unemployed again and still living on and paying loans off with my summer associate money. As soon as I get a job that looks permanent, anything leftover is going to pay my loan principal. So I would consider what your employment situation may be post-graduation.

      • Why are you worried about the amount of loans for your 3L already? If at the end of the summer, you have been offered and accepted a position, you can assess your financial position and decide how much to take. Federal loans can actually be refunded after they have been disbursed (it is usually for a week or so), but there may be some charges associated with it. You can always decline the remainder of the loans prior to the spring semester.

        Please look closely at the terms of your loans before paying off principal of loans while still in school. My recollection (No guarantees) is that if you pay a portion of the principal it takes the loan out of deferment.

    • I’d look into whether your school/loan company allows this, but I remember my school’s financial aid office frequently mentioned that you could “give back” excess tuition money. I’m not sure exactly how this worked as I never did (looking back, God I wish I had been even just a littl bit more frugal in those days), but my it sounded like whatever amount you gave back was canceled.

    • Student Loan Q :

      Thanks for all the feedback — I am thinking about this because I am pretty sure I will have an offer after this summer (technically, I already have one, and I am splitting between two firms). However, I was also considering clerking, and I know that is a lower paycheck where I might not be able to pay off my loans as quickly.

  12. I sometimes feel like there’s so much I “should” be saving for/paying off that each thing accumulates soooo slowly. I am in my last semester of school, so I know that I will be making somewhat more money soon, but it all seems so daunting.

    I also have accumulated a little credit card debt that needs to be paid down (am I the only one here?!), but tightening up the finances enough to do that makes me feel deprived, especially because most of the people I am friends with enjoy eating out, seeing plays, etc., so it’s hard to be part of the group and not spend any money on fun stuff like that.

    Sorry for the little raincloud.

    • I feel like I might get flamed for saying this, but you have to enjoy life a little – it’s all about balance. I bring my lunch at least 3 days a week, but I also have a weakness for designer heels… I dunno if the savings from bringing a lunch truly balances out my splurges, but at least I try!

      • I won’t flame you at all. I know that it costs me money to enjoy life a little. I cook at home instead of eat out – but I cook kickass meals. I drink wine at home on the evenings and weekends – but it’s out of a box. I go out with friends for happy hour once a week. I can tell you right now that if I forced myself to eat rice and beans, drink tap water every night to save $50 a week… I’d be a miserable little lady.

      • There’s being conservative and smart and there’s being parsimonious and paranoid; the goal should be to find the middle ground between the two. We believe in saving for our future but we also believe in trying to enjoy our life now, as much as possible. People very often put off things they want to do – buying a boat, taking a big trip, etc. saying that they’ll do it when they get older – but a fair percentage of us won’t actually live to get older, and some of us who do will be disabled/debilitated and not able to live it up. Sad but true. I am not going to live on ramen noodles and never travel because I am afraid of living on cat food when I get older; there is a way to live well now and live well later, you just have to be smart about it. So there’s no need for guilt about small indulgences here and there. It’s all about balance.

      • Agree with anon. I have to save for so many things but I have to treat myself every now and then. If you want to enjoy a play, try to get a discount rate or something like that but by all means enjoy it because life is too short.
        We have a local saying “there is only one death” so you’d better enjoy life.

    • Tough love: I think you need to get your spending on fun with friends in check. You can’t afford it if you have credit card debt. Invite your friends over, suggest free events (I bet there are plenty of school sponsored things), and turn down expensive dinners, plays, etc. $5-10 here and there for an occasional quick meal at a local burrito joint or student production? Okay, maybe worth it from time to time. But $50 nights out? That shouldn’t be in your budget right now.

      • I know this is true :( Most of my friends are not students and haven’t been for a long time, so I guess it’s sometimes just hard to feel like the only one who wants to do things on the cheap.

        But! That is my own issue, and I know I need to reign it in.

        Does anyone have any tips for dealing with such feelings?

        • You know what’s really weird? In my various friend circles, whenever someone (or even I) mention opting out of something because saving/not “wasting” money is an issue, other people chime in with relief that they need to reprioritize their own spending habits and the whole thing gets cancelled. It’s like everyone is afraid to be the first to mention money as a concern. Maybe you need to be the first one that says, “Hey guys, that sounds like fun but I can only go out once a month. I really need to cut back,” or you can keep that as a goal for yourself without even mentioning it. Also, when you limit your interactions with friends, the time you do wind up spending together becomes that much more precious and it really does become quality time. Good luck =).

        • Remember that spending money doesn’t equal friendship. When I started my first job out of school, I was around several others my age and we were all living very comfortably. What I noticed, however, is that friendship increasingly became equated with “doing something.” In college, I could happily stop by a friend’s apartment, have a glass of wine, and be perfectly content with an evening of catching up. With my co-workers, we needed an event in order to get together.

          In my case, “doing something” was a way to feel comfortable around people who, frankly, weren’t as close of friends. I’m not saying you are in the same situation by any means, but it’s something to ask yourself.

          Yes, it’s fun to go out to nice dinners and see interesting plays. It’s great to take advantage of the things your city has to offer. I’m not suggesting that you stop doing these things, but rather that you do them in moderation. You can spend money on doing fun things, but you should be intentional about it.

          If I were in your shoes, I would look at it this way: you’re not depriving yourself, you’re just living within your means. Maybe that means you nurse your drink instead of having a second (or third, or fourth, etc.) one. Or, you go out to dinner/happy hour during the week and order specials, catch up with friends by going on a walk, grab coffee sometimes instead of a drink. Maybe you don’t go to a play that’s only moderately of interest to you and wait for the one you’re really excited to see.

          You don’t have to go cold turkey on spending money and time with your friends, you just need to be smart about it. Agree, though, that it’s easier said than done, especially when you are in school and they are not.

        • downtowner :

          @Anon 5:26 p.m.: I apologize in advance for the long, rambling nature of this comment. Its objective is part cheerleading and part advice. Here we go:

          You talked about feeling like you have so many demands financially that nothing really makes a dent in your goals. I really sympathize with you because when I first started working, I felt like there were so many things I was SUPPOSED to do with my money: I was supposed to max out my 401k; on top of that, I’ve read that maxing out your 401k is not enough– you need to save even more for retirement; I was supposed to pay down credit card debt; I was supposed to save for an emergency fund; I was supposed to save for big expenses or vacations; I was supposed to save for a mortgage; and on top of that, I had my ordinary living expenses. I felt like I should just give up because nothing I could do would make a difference. I felt really overwhelmed and frustrated and like I should just give up. So, at first, I focused on short-term goals. What I recommend to you: build up a small emergency fund if you don’t have one already. Set a goal of $500. Once you hit it, turn your attention full blast to your credit card debt. Pay that down. Once you pay that down, snowball what you had been putting toward your credit card debt toward something else–whether it’s strengthening your emergency fund, 401k, downpayment, etc. Five years later, credit card debt is gone, I’ve paid off multiple student loans, the amount in my 401k astonishes me, I have a healthy emergency fund, and I can save for other stuff, too.

          It is true you need to get your spending under control. Dave Ramsey says, “Live like nobody else today so that later you can live like nobody else.” He also says, you must gain control over your money or the lack of it will forever gain control over you. It really sucks not spending money, especially when everybody else around you is spending it left and right. But keep in mind, you have NO idea what their financial situation is. Your friends might not be students, but that doesn’t mean that they are saving properly for retirement, have an emergency fund, or have any idea where all their money goes. For all you know, they could be living paycheck to paycheck. I know tons of lawyers making $160k+ a year who do so. If you really delved into your friends’ finances, you might be shocked at what you find. You may be trying to keep up with the Joneses, but trust me, that doesn’t mean you should. I would think your friends would be particularly sensitive to the fact that you’re a student. They’ll want to hang with you no matter what, even if it means you don’t go to that $30-entree restaurant and you meet up another time.

          In the end, you’re responsible for you. 5-10-15-20 years from now, you will be kicking yourself that you spent so much money on booze, dinners out, purses, clothes, etc. It’ll be even harder to save then because you might have even more fixed expenses–like kids. So it’s really hard, and it can really suck. And it’s not like you won’t fall off the wagon occasionally and splurge on something you really shouldn’t have. But that doesn’t mean you shouldn’t try. You have to save your money and reduce your spending, even if it’s only a little bit every month. You can start small. Find something you know you don’t need but that you spend money on anyway. Cut it from your spending and put the amount you would have spent on it into your savings account (or, in your case, send the money to your credit card company). For example, I recently decided that I didn’t use Netflix enough to justify paying for it. So, I cancelled my Netflix membership. The next thing I did was I sent up an automatic transfer from my checking account to my savings account for $13/month. $13 isn’t a lot of money, so objectively it may not seem like it’s worth it. But if you saw $13 on the sidewalk, would you just leave it there, or would you take it? You would take it! So, cut an expense and put that money towards something else. That is the first, easiest step you can take.

          The next best thing you can do is sign up for Mint.com or another tool that allows you to access all of your financial accounts (savings, checking, loans) in one place. Mint automatically categorizes all transactions that come through your bank accounts. I was beyond shocked when I really understood what I was spending on restaurants and Amazon.com every month. But understanding that allowed me to make informed decisions about where I could cut back my spending without much pain.

          Obviously, these two steps not going to get you totally there, although it will help, and every little bit counts. So, what next? About 6 months ago, I felt like I was spending too much money, I wanted to save more, and I wanted to get control over my finances. So, I went on an “Austerity Plan.” I did it for 30 days because I figured that if it were absolutely miserable, that was a time period that I could bear. I even told my peers where I work that I was on an Austerity Plan, although I tried to make it sound like an experiment/challenge (and it was, to some degree). People never seemed judgmental, and more than a few admitted they should do the same. My Sig O (who is very frugal) and I discussed the parameters beforehand. We decided that the two of us alone would not eat out for the 30 days. When it’s just us, we eat at home, even if that means having a ham sandwich for dinner. However, because we’re lawyers and need to network, we are allowed to go to social functions and out with friends, but no blow-out dinners or $100-dollar bar tabs. Through Mint.com, I determined I was blowing a LOT on lunches while at work. So I told my coworkers that my Austerity Plan limited me to 1 lunch out during the week; otherwise, I had to bring my lunch. My work girlfriends and I ended up scheduling my 1 lunch per week, and I really didn’t miss those random days where I’d end up eating out by myself or with others. I’ve also done “desk lunches” with my friends, where we take our lunches and go eat in a conference room or somebody’s office. I couldn’t believe how much money I saved over that 30 days! And it wasn’t really all that painful. In your case, you could tell your friends that you’re on an Austerity Plan, and you’re only allowed 1 dinner out per month.

          At this point, changing your habits is more about mindset than it is actual knowledge. At this point, you KNOW what you should do: spend less on going out with friends, pay down your credit card debt, save. Now you just have to do it. Like I said, sometimes it is very unfun. On the other hand, I find a lot of satisfaction in knowing that I’m investing in my future–not mortgaging it. If your friends give you crap about trying to spend less / save more, then (1) you DEFINITELY should not be taking any sort of financial advice from them and (2) they’re not being good friends to you.

          Start reading about ways to save money and financial advice. I really like http://www.getrichslowly.org. The advice isn’t always pertinent to me, but it’s given me a lot to think about and has focused me on changing my habits and saving.

          Whew! That was a lot. Try to make some little changes. And keep making them. Eventually, they’ll add up to a lot. Good luck!!!

          • “5-10-15-20 years from now, you will be kicking yourself that you spent so much money on booze, dinners out, purses, clothes, etc.”

            Not necessarily. I look back 10-15 years and I’m glad we spent money traveling to see family, going to dinner with friends, and enjoying our money a little, while we were DINKs (Double Income No Kids). Some of those friends are dead now, ditto the relatives. The thing no one tells you about getting older is that as people get busy with careers and kids and aging parents, etc. the opportunities for wild good times become few and farther between. I don’t have to regret missing out on things because I didn’t miss out on much, even if back then we weren’t maxing out our 401Ks.

            I think it would be a pretty dreary life if we didn’t have things to look forward to. For example, about twice a year my husband and I go out to a really nice dinner with really good wine, total bill $150-$300. It’s expensive but we can afford doing that twice a year, and you know what? When I’m on my tenth day in a row cooking dinner, it’s something I can look back on fondly, and can look forward to doing again. Same with a few of the big trips we took when we were DINKs. Let me tell you, spending 7 days on a beach in Barbados doing nothing but drinking fruity drinks and watching the waves is not going to happen again any time soon. I’m glad I have it to remember.

            I don’t like debt and I don’t like credit cards, and I don’t believe in living above your means. I also don’t believe in living like a miser either. I spend a little money on clothes but right now I’m still young and cute and the clothes look good. When I’m 50, that may not be as much the case. As I said above, there’s a balance to be struck between living for the moment and living in fear of the future. I am not so afraid of ending up broke that I am not going to enjoy myself a little now. I don’t try to put a lot of conditions or terms on what might happen in my future, because I have been shown – in some pretty brutal ways – that the future has a mind of its own, not to be controlled by anyone. And even the most careful saving and planning can’t account for every possible circumstance. Ladies, especially those ladies in their 20s without kids, please don’t be so afraid of the unknown and so eager to follow the “rules” that you don’t enjoy your life a little. Believe me, there are many years ahead of you where you won’t have much choice but to be frugal and save every penny. Live a little.

        • I hear you! When I was a law student and all my friends were working, I always felt like I had to be a hermit because I didn’t have the same money they did. My biggest mistake was not being open about it, and just hiding in my apartment because I couldn’t affort to join in the fun. Be open and honest about your financial goals; it’s no shame to say, “I’m working to pay off a credit card; would you mind if we did a potluck dinner before theater instead of going out?”

          AND, try organizing something yourself that fits your budget – make it a monthly game night, or potluck picnic at a park every Thursday after work, or getting together for a run every Saturday morning. People will either love that it’s free, or will barely notice. And it’s so much fun!

    • You are not the only one. I accumulated a decent amount of credit card debt during law school and have had to put off paying my student loans back until that is wiped out, otherwise, on my crappy salary, I’d literally be starving trying to pay both at once. It sucks, but it’s my reality right now and I’m dealing with it.

      I agree that it is hard not to spend and go and do with friends – my friends are the same way. I made a goal for myself – pay off credit cards by September, then start student loan payment at the maximum I can afford, plus putting the right amount away for retirement, leaving just enough left over to live on.
      When you live on a cash-based system, what you have is what you’ve got and the freak-out that happens when you realize you have “x” money to make it until payday… well. You learn pretty quickly that you have to say no to a few happy hours, no matter how good the half price apps are.

      • downtowner :

        anon @ 10:51 p.m. – Downtowner here. I’m with you. I’m not advocating for total monk-like austerity here. I’m all for life experiences. You need to meet people, develop friendships, experience life. I’ve done that. On the other hand, I do look back and see things that I frittered away my money on, and I regret that. I wish I had thought about my spending choices a little more instead of being so impulsive. I think the best choice is responsible spending. Don’t spend just to spend. Spend on what’s important; don’t on what’s not. It may also be the case that somebody does need to live absolutely austerely for 2 years and that, after that, they can afford to loosen up. It is really obviously difficult to give blanket financial advice because everybody’s financial situation is different. I guess that’s why I try, in my “Austerity Plan,” to allow for some social interaction. I get my one lunch per week out with my coworkers, and that’s enough (for me). My Sig O and I are agreed that, while the two of us don’t need to eat out just because during the week, it’s okay for us to do group stuff. And, because of the nature of my job, I plan a vacation once every 6 months. Otherwise, I’d really want to kill myself. But, the original Anon sounded like she needed some basic beginner’s advice. Everybody has to find what works for them because, ultimately, each individual is responsible for herself. I really hope that she can find a balance that makes her feel like she is being fiscally responsible while allowing for certain things that make her happy (like dinners out).

    • Just because your friends eat out, see plays, etc., doesn’t mean that they can actually afford to do so. Their credit card/student loan debt may be much higher than yours. I was always astonished that so many of my classmates in law school drove nice cars, wore designer clothing, lived in nice apartments and went out a lot, while I worked two part-time jobs and lived frugally. Now that I know how much more they owe in student loans than I do, I’m not jealous anymore! Be your own wind-keeper.

    • I don’t mean to be too harsh, but if you have credit card debt, you can’t afford to do “extras” until it’s gone. If it’s accumulating at 18% interest (or whatever insane rates they charge now) then you have to add that to the price of your meals out, shoes, etc. because that’s what you’re really paying for them every time you choose to pay for them over paying down your debt.

      • I do this all the time when I consider using a department store CC to get an extra 30% off or whatever – considering the awful interest rates those cards have, unless I can afford to pay for my purchase w/in the billing cycle, it’s really not a bargain.

    • Original Anon here — Thanks for the advice (and tough love), everyone! I just had a moment yesterday while reading all of this where I thought, “Wow, everyone else has their stuff more or less in order and I suck.” I have been cutting back on the coffees, nights out, etc., it just wears on me. Anyway, I am going to try some of the suggestions from here all while reminding myself that it is only temporary!

    • Posting way, way late to the game here, but I went back to read some of the comments today.

      One of things I’ve realized about my spending habits is that when I’m on a credit card, it can get out of control. So I’ve put myself on a strict, cash only (for the most part, gas is really my only goal for the card or things like mechanic bills and groceries on the debit card) and it works much better. We’ll see how it goes throughout the upcoming Christmas season, but, fingers crossed, it’ll help me get my spending in check.

  13. Nothing to contribute, but just wanted to say thank you for all the good advice. I’ll be graduating in June and beginning my first full time (dream) job, which is going to mean a fairly serious change to my finances. I’ve been trying to prepare for this transition as best I can, but now there are a few more topics to add to my “to research” list.

  14. There was a time when I didn’t have to worry about money at all, with my income and my husband’s income (and no children) our low loan amounts (40k total for graduate and undergraduate, mine at a 2.75% interest rate, his at 5) a beat up but paid for car, and a predilection for free events, cooking at home, and game nights etc. we had a good cushion saved up.

    But then my parents went into foreclosure. Our cushion disappeared buying them a new house. It makes sense to buy because they are retired and will live in the same place until (well I don’t like to think about until) and mortgage monthly payments are cheaper than rent in their neighborhood. But now we have no savings, because the bank requires a 20% down payment on a second mortgage.

    I’m so scared now. I’ve never lived without a safety net, and worst, I’m now serving as the safety net to my parents (who are not elderly yet, only retired due to disability, so will be around for a while. My mom is only 47 years old!) It’s debilitating. I stopped contributing to my retirement because our savings have been wiped out, and our beat up car has had the check engine light shining for a few weeks. In general, I’m terrified of having a medical or home owner emergency and no money to pay for it. We have excellent credit, but with a second mortgage, we have entirely too much debt. Maybe I’m overreacting and need to be talked off a ledge because things aren’t as bleak as they seem, but this feels like shark infested waters, and I’m at a loss for how to respond to it. Making matters worse, I hate my job, and want to move to a different state to be closer to family.

    • Hugs to you, is all I can say.

    • Wow my heart goes out to you, as I have been in your position of being a safety net to my parents (one disabled) at a young age. I don’t think my parents are headed toward foreclosure, but if they were it would be incumbent upon me to rescue them.

      So, are you paying your parents’ mortage for them now? If this is going to be your relationship going forward, I think you need to become much more involved in your parents’ finances. What is their monthly income? How are they spending it? It is one thing for you to support them, but they need to help you as much as possible by making responsible decisions.

      I’m not sure that buying them a house was the right move…even if renting was more expensive. I hope that you purchased the most modest home that they could be reasonably comfortable in. Did you investigate the possibility of their relocating to your area, and perhaps assisting with things like childcare when you have a family, etc., in order to compensate for your financial support?

      Good luck…and thanks for posting this; it made me feel less alone! All my law school friends were supported BY their parents, where for me it was the other way around, and I just felt so frustrated sometimes to hear them crow about their new condo (that mommy and daddy lent them the down payment for), while I was scrimping and sacrificing to pay my parents’ medical bills.

      • My rents are paying the mortgage on this new property I bought for them, which is about 1500 less than their previous mortgage (and well within their fixed income). And believe me, I thought about having them live with us (too much of a strain and they have too much pride) or rent (too volatile on a fixed income, and we’d end up footing the bill each month). The house thing was the best of a terrible set of options.

        And we definitely did a budget for them. The sad thing is, unlike some people, their situation was truly caused by them both becoming disabled in a terrible car accident, not financial mismanagement. They are trades people who work with their hands and made a decent wage but then could no longer perform their work after the accident and therefore can’t afford their house anymore. Sadly their bank treated them as if they were deadbeats, rather than trying to work out some way for them to stay and afford to pay other bills.

        You are telling the story of my life when it comes to the conversations with friends. What’s worse, because I worked while going to school and saved/didn’t have too many loans, people assume that I got help from my parents because we own our home and live relatively comfortably.

        • What a sad story, AB. Your parents are lucky to have you!

          From the facts you’ve offered, it sounds like this whole situation is under control at least. Now you just have to rebuild your savings, which it sounds like you are in a position to do.

          Look at the bright side: you actually haven’t “lost” your savings from years past to your parents; they are just keeping the money safe for you in their new home. You bought (them) a house at a time when prices had declined, so it is unlikely that your equity is going to evaporate as it might have if this had happened in 2003. Your parents should remain in their/your home for a long time, giving you ample time to realize appreciation at some point. The equity in their house belongs to you, and represents a pretty stable investment.

          Chin up!

          • My heart goes out to the OP, too.
            I would say it sounds like you have the good financial habits needed to get through this. You will rebuild your savings. And you are getting some equity from the house. One thing I would add is to look into the tax consequences of your parents’ home ownership for you. No one like to think about this but make sure that when time comes many years from now you are able to inherit the house with incurring any taxes. Your parents are lucky to have you, and you are lucky to have your husband — not all men would go along with this, sadly.

          • This!

    • AnonInfinity :

      I have no words of wisdom, because I think I would have done the same things that you did and I would feel the same way you do. Just wanted to say *hugs*.

    • If I’m not mistaken, you’ve basically wiped out your savings to pay your parents’ down payment, but going forward, their fixed income should support their cost of living including the mortgage payments.

      So your cash flow picture (assuming your employment situation hasn’t changed) is much the same as it was before – income in, and ongoing expenses for your nuclear family only. I think you’ll be just fine! It will absolutely take time to rebuild your savings, but this is not some unsustainable situation you’re in where your monthly expenses are exceeding your income. And if I read correctly that your credit is still strong, you should be able to put any emergency expenses on a credit card if they occur during your rebuilding period (and pay down as quickly as possible). It’s not fun, but you’ll make it!

      As for wanting to move and wanting a new job, it might make sense to delay these things until you’ve got a bit more of a cushion built up. At the same time, if you can do so without jeopardizing your current job, might not be a bad idea to do some preliminary exploration of the job market in the new city.

    • Not exactly the same situation, but my (still very much working age, and main breadwinner) dad died very suddenly from a heart attack at the end of last year. To say that my parents were not as well financially prepared for this possibility is an understatement, and it made what was already the worst time in my life incredibly stressful in the financial sense, too. Everything ultimately worked out okay (which is to say: my mom can afford to live in her house, eat, etc, without my support), but there were some very sad, scary moments.

      I can relate from going from having my parents as a safety net to being the safety net, and it’s scary stuff.

      It sounds like you handled the situation the best way that you could. I am holding my breath for you that you will get your savings built back up before anything happens to require you to need it.

      You mentioned that you have excellent credit. I know you have a huge amount of debt right now, so the possibility of more probably does not sound too appealing, but can you get an emergency credit card? Just apply, put it in your wallet and don’t touch it unless an emergency arises before you have ample savings built back up? It’s not an ideal solution, but neither is a home owner emergency that you can’t deal with.

    • OP – If you believe in the principle of karma, which I do, and also in the redemptive value of good works, which I do also, I think that you can take some comfort in the idea that you did something for your parents that is going to help them live out their lives in comfort, which is a blessing to them from you and something that is definitely to your moral credit. I understand the fear, believe me, but the fear will dissipate as your cushion grows again. Money is temporal and a construct of this world; sometimes there are higher imperatives at work. Taking care of your parents is a good use of your money, it’s not like you blew it at a casino or something. Hugs to you.

    • downtowner :

      AB, my heart goes out to you. Hang in there. I am a single child with divorced parents, and I have significant student loan debt (as does the Sig O). I am terrified about what happens when our 4 aging parents need our support.

    • I’m so sorry – that sounds like a very difficult situation. One (small) thing I can suggest is looking at dependent life insurance for your and/or your spouse. If you or your husband were to suddenly pass away, the survivor would have two mortgage, no emergency fund, and only one income on which to support the survivor and your parents. Does your work offer life insurance? My work offers incredibly cheap life insurance because I’m so young (less than $200 last year for a benefit of 3x my annual salary). If I were to pass away, my husband would receive enough life insurance to pay off all of our student debt and most of our mortgage, so he could at least maintain his lifestyle.

  15. I am surprised by how conservative everyone is on this board, insofar as advocating for early repayment of loans.

    Personally, until I have at least 200K in CASH in my savings account, I will not feel that I can afford to make any extra payments on my law school loans. In my mind, “3 months of living expenses” comes nowhere near to representing an “emergency fund.” There are people out there who have been unemployed for one or more years in this country, and the economic situation of the US is likely to worsen in future years.

    As for “contributing to your 401(k)” — no thanks. I have it on solid authority from my friends in finance (incl. hedge fund managers, traders, etc.) that a normal person…i.e., one who cannot pay a professional to watch the markets ALL day, EVERY day and trade accordingly…is better off taking their money to the slots in Vegas. The financial markets are RIGGED, ladies.

    Kat, don’t kick yourself for not investing in your 401(k) until you were 27. My 401(k) from my pre-law school job is worth about HALF of the money I put into it between 2003 and 2006. It was quite a sacrifice to save what I managed to save, given my then-income of <25k/year. I was a fool for following all the conventional advice, but no more. My new strategy is to hoard cash. Period.

    If all else fails, you can escape your loans by moving out of the country. This is something a lot of us might be looking to do anyway in the coming years, thanks to this country's economic trajectory.

    • That seems a wee bit (and I mean a tiny bit) end of the world crazy to me to be honest. Although, if you were truly afraid of an apocalypse, I guess you’d be hoarding water and bullets instead of cash. But you are right, I lost a lot of my 401k over the last 5 years. The hope is, of course, that over the next 40 years it will be a net gain greater than the loss to inflation that hoarding that money as cash would amount to. For most people, it does turn out to be a net gain. For the unlucky few who need to retire in a recession, sucks so hard.

      BTW-I never really thought it conservative to want to pay down debt before, I just grew up really poor, and my parents taught me to never owe anyone anything.

      • “For most people, it does turn out to be a net gain.”

        This is based on the last 40 years. Can I see a show of hands from those ladies on this board who think that the NEXT 40 years in the U.S. are going to be anything like the LAST 40 years, as far as economics (and thus the market) goes?

        But thank you, in all seriousness, for saying I sounded only “a tiny bit” crazy lol. I probably am. Due in part to, like you, growing up in pretty humble circumstances.

    • Wow, good luck with that. Sounds a bit extreme to me.

    • “The financial markets are RIGGED, ladies.”

      Sure, there’s a risk of losing money, but this is a very extreme view and you should perhaps seek some further financial counseling/education. Even if you are not comfortable with equities, there are lower risk places to park your money besides cash and many 401(k) plans allow you to invest in some such vehicles.

      I also work in finance and, while I actually do watch the markets all day, I manage my retirement money like most other people – by and large passively in several index funds. In fact, most people in finance do this, with greater and lesser degrees of active management. I think many will tell you that day trading and average Joe “stock picking” is similar to going to Vegas, but that advice does not extend to the stock market overall (perhaps you misinterpreted their warnings?). I know no one in the industry who believes it’s all rigged and therefore holds just cash.

      Though I do agree that an emergency fund (much) larger than 3 months is in order.

    • Another Sarah :

      The markets are always cyclical, and we happen to be in a down-cycle right now. So I guess here’s my hand for the next 40 years would be kind of like the last 40 years. Hopefully we don’t have that nasty inflation in the 70′s and early 80′s though…

      FWIW, I think it’s very prudent to educate oneself in how the markets work and how to make them work for you. Yes, normal people can’t afford to pay someone to watch their stocks for them. But I don’t think it’s unreasonable to learn something about investments and how the stock market works so you can make some trades yourself, saving a whole lot of money in the process. Not to be snarky, but if you had educated yourself about the nature of the markets and the economy, you could have converted some of your investments into cash before the great crash, saving their value. Inflation hasn’t really gone up, so the value of your money wouldn’t have changed, like it did if you had tried the same thing during the Great Depression. I don’t know much about 401ks, so I’m not sure if they can be cashed in like stocks can. The markets are a bit rigged, but the trick is knowing how and making it work for you.

    • Along these lines, if my highest interest loan is 8% and my employer does not offer 401(k) matching, wouldn’t I be crazy NOT to be paying off that loan as fast as I can instead of investing in my retirement fund? By paying off the loan, I get an immediate, guaranteed 8% return, while with my 401(k) it seems far more variable and uncertain.

      • If it were that simple, yes. But I did the “dumb” thing and invested in my 401(k) instead of paying off my highest interest loan for a few years, and my 401(k) had a 15% return this year (and I think 12% last year — whatever it was, it definitely beat my interest rate on my student loan debt).

        So you’re right: the market is variable and uncertain. But part of that uncertainty means that you might make a much better return. It all depends on your risk tolerance.

      • Also, don’t forget that your 401k contributions are **pre-tax.** Given my tax bracket with biglaw salary, that’s almost an additional 40% “match” from the government when I put money in my 401k –> $100 deducted in my paycheck is $140 into my 401k. Regardless of student loan interest rates, that’s a heck of a return.

        • @anon: But this neglects the fact that you’ll pay taxes on it when you receive a disbursement. It’s not that simple.

          @J: Yes, if you can get 12 to 14%, then 401(k) is the way to go. I guess it is about risk tolerance.

    • Well, you’re not alone on your lack of faith in the US economy. Personally, I’m hoarding RMB.

    • downtowner :

      Everybody differs. My 401k went up 12% this year. Yes, it lost significant value in 2008, but if I examine what I put in 2006-present versus its current value, I can see that I’ve made a TON of money. People have to examine their willingness to take risks. Not willing to take risk? Keep your money in a savings account in a major bank that pays you .1% interest. More willing to take risk? Put in a mutual fund. More? Stocks. And so on. You have to do what you’re most comfortable with.

    • Anonymous :

      I am super conservative as well and have a lot of my assets in cash, primarily because I’m too scared to do much with it. But holding on to cash is actually a very poor strategy. Do you realize that with inflation rising in this country (not sure how they manage to keep saying the cost of living is not rising or rising slowly–prices at the grocery store tell me that inflation is here) and the falling value of the dollar overseas, you are losing money by holding on to cash?

  16. Question re: fee-based financial advisors – how do you pick one? I’ve gone to napfa.org and searched and gotten a huge list and I have no idea who to pick. Can any comment on how they’ve picked someone? Or recommend someone they like in NYC?

    • I’ve gone thru a few financial advisors in the past 15 years and my conclusion on how to get a good one is two things: recommendations from peers who you believe have a comparable financial outlook as a starting place and then INTERVIEW! this person will be handling your financial future and seeing everything (if done properly), you will be asked to show all your financial dirty underwear and you have to like and trust that person. I love my financial person so much that when I moved cross-country from NE Ohio, I kept him and he got the necessary paperwork done so he can advise me in my new state. Also, when you interview, be firm about your expectations – you are the client and the advisor needs to know what is expected/desired.

  17. SF Bay Associate :

    Perhaps in the next financial-theme post, we can gently discuss bonuses – for those who are getting one (and I don’t know yet if I will be), what do you plan to do with it? Debt? Fun things like a vacation? Save for house down payment? I am hoping the Powers That Be throw me a bone to gnaw on after my 2400+ hours last year, but of course, one can’t count on anything until it actually gets deposited.

    • Anon for this one :

      I’m a class of 2007 person who received the market rate bonus (i.e., not a huge chunk of change, but I’m happy to have it). My answer is simple: I am hoarding the whole thing in savings, because I am hoping to have a new, probably lower-paying, but much more fulfilling job by the end of 2011. Until I know what my financial situation will be in said new job, I am saving every little penny.

    • Still holding my breath on a bonus this year, but do expect a totally fabulous tax return (got married this year, ‘inherited’ my DH’s carry-over capital loss) this year. We’re probably going to do a mixed bag. Hope to pay off the highest interest loan (~5k at 8.25%) and put most of the remainder in savings. If I do get a bonus, it will probably be split between loan repayment and a home-improvement project.

      A long weekend vacation is also on my wish list, but we’ll have to see what the dollar numbers look like. I want to get rid of my 1970s bathroom more than I want a vacation right now!

    • Anonymous :

      Buying a new boiler (~$15K) and dealing with the aftermath of a leak from an ice dam ($??). :-( This winter is killing me. As others have said, home ownership is overrated.

  18. I’ve got the Dave Ramsey mindset of debt is bad bad bad. Hubby and I are young (25 and 22), we have zero debt and a six month emergency fund. We are currently saving up for a house and are planning to put at least 50% down. So every extra penny we have now is going in the house fund. Debt is dumb, y’all! No one ever foreclosed on a house without a mortgage.

    • Not advocating for this, but do consider that if you buy a house for, say, $100k and its value goes down 40% to $60k, you might be able to walk away with only a $20k loss if you’d put down 20% whereas if you’d put down 50%, you bear the full $40k decline. So in some instances (particularly in non-recourse states) you can transfer some of the risk of possible declines in your home value to the bank by taking a larger mortgage.

      • E (different E) :

        Do consider that with your suggestion they would, in effect, be trashing their credit for the better part of a decade for your proposed savings of 20K.

        • E (same E) :

          Absolutely true. Also true that many women on here have homes well above the $100k mark. But I don’t expect the housing market to experience such a large shock again anytime soon, so that’s not my base case hypothetical anyway. :)

    • downtowner :

      On the other hand, putting all your liquidity into a house isn’t necessarily the best idea either. You might get a better return on your investment in the market. HOWEVER, mental security is priceless. If it takes you all making a 50% downpayment for you to feel financially secure, and you’ve found the house of your dreams that you love love love, then by all means go for it.

  19. This is an incredibly timely post for me, because I’ve been struggling with how to properly allocate money to paying down debt and saving for retirement.

    The short version is that I have been maxing out my 401(k) (despite no match from my employer) since I started working 3 years ago. Because of this maxing out, I haven’t been able to make much headway on my (six figures of) law school student loan debt. Now that I have a substantial amount of money in my 401(k) (about $60k — I lucked out and didn’t feel the worst of the crash and took advantage of the recovery, and I’m 29) that can take advantage of compounding interest, I’m considering letting it ride for a few years while aggressively paying back my student loans.

    I really, really, really hate the idea of stopping the 401(k) contributions, but I also do not see a light at the end of the student debt tunnel any other way. Also, if I paid off a substantial amount of the loan debt, it would allow me to potentially pursue other (lower paying) job opportunities, and that seems kind of priceless right now.

    (I also have a mortgage, but the interest rate is less than 3.5%, and my monthly payment is about the same as the cost to rent, so paying this back early is not my top priority).

    • I had a similar issue. I opted to split my savings between the two. If I were you, I’d ease up on the 401K contributions a bit but not stop them altogether. I’m trying to leave firm world, too, and agree that it’s good to have some “take this job and shove it” money.

  20. Student loans are not community property, at least for 10 years or so. I’m paying mine off as quickly as possible. I just don’t like my husband enough to know that we’ll still be married 10 years from now. Sad. True.

    Also, I consolidated private loans in 2007 and locked into ridiculously high interest rates so it makes sense on that level as well.

    I can’t wait for the day that these huges law school debts are paid off! That’s what I’m doing with all my extra money and my bonus.

    • I’m not sure what you mean by “not community property” — do you mean that if you divorce, you’ll be responsible for them on your own?

      • That was my understanding – if you incurred the student loans before you got married, and don’t treat them like joint property while you’re married, then they shouldn’t become joint property on divorce (and should die with the spouse, rather than becoming the survivor’s responsibility). But I have no idea where I got that information, so caveat emptor!

        • I’ve had a very unfortunate opportunity to research survivorship of student loans recently. Federal loans are cancelled upon the death of the borrower. Private loans become debts of the estate, and will collect estate assets unless the estate is insolvent. This has nothing to do with whether or not they were treated as joint property.

          Did not research and do not know how loans are treated with divorce.

          On a related note, if anyone had their parents (or anyone else) co-sign for student loans, you need to have some protection set up for the co-signer in the event that something happens to you (life insurance, or whatever vehicle you choose). There are some extremely sad stories about parents of a student who dies during/immediately after school who are working extra jobs and not being able to retire because they have to make $1500/month payments for their child’s student loan debt.

      • Yep, even if you incur them while you are married, they remain your sole property until 10 years or so have passed and the court could find that the “community” benefitted enough from your education such that they can be considered joint property. that means if you divorce, you take those loans with you, alone. Other debt that you incur while married is community property. All of my finances are comingled with my husband but since this is all mine, I’m using every spare penny to pay them off. Even our savings are community property.

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