Welcome to the 15th edition of the Festival of Under 30 Finances. Let me start with thanking Kira of Penny Foolish for allowing me to host the festival. This one has turned out to be a mega edition and can be divided into two parts: comments on this edition’s question, and the festival entries. 37 entries were submitted, but with a heavy heart I had to reject 8 of them for various reasons.
Part 1: The Question and Some Interesting Answers
I have mentioned this before that, in the spirit of raising and discussing important/interesting issues, there is a tradition of a â€œhost questionâ€ for this festival. This was my question for the current edition:
Assume you are an average 25 year old with $25,000 debt (on account of your student loan) You have been given a lump sum $10,000 and the following four choices:
- Invest it for your retirement funds.
- Save/invest it for your future home.
- Save/invest it towards your childâ€™s/childrenâ€™s future college education.
- Pay part of your student loan debt.
You can pick only one of the above choices towards which you should use the entire $10,000. Which one will you pick? ..and Why? Assume that the rate of return on the three investments choices is the same and the student loan charges you an interest rate that is equal to this rate of return. Would your answer be any different if the amount was $25,000 instead of $10,000? Again, you can pick only one of the choices.
There were a lot of responses to this question, and I intend to quote them all in the following. The purpose of the question was to see how people respond differently to certain financial situations. I don’t think there is a right answer for this (I am sorry if you were expecting one). One answer might be more profitable (in terms of monetary value) than the other, but that doesn’t mean that you should go with that particular answer. Sometimes, peace of mind, and other personal priorities are more important than trying to estimate your compounded interest 30 years from now. In my opinion, young people, especially those who are not yet married and/or don’t have kids, show a greater tendency towards the monetary aspect of an investment than those who are married and/or have kids.
I am hoping that, for some people, the pool of responses below will bring out certain aspects of financial decisions that they tend to overlook or overemphasize. Also, I think you will observe that people who lean more towards calculating monetary values, will have different answers when they are presented with different amounts (in this case $10,000 and $25,000); whereas, people who lean more towards “peace of mind” approach will have the same answer irrespective of whether it is $10K or $25K.
Some blogger friends have written an entire post as an answer; I will highlight those with other carnival entries. Listed below are specific comments on the question, presented without any edits. Some comments are nice, some are entertaining, some are…urgh !, and some will make you worry outright about what’s happening to the under 30 generation…but they are all fun to read.
Burningchrome: Option 1 without a doubt. Pay yourself first, and take advantage of the time value of money. Student loans are cheap debt (4-5%). Retirement investment vehicles can get you 10-15%. You’re already ahead.
Trent: “In both cases, I would pay off the debt. Not much hesitation at all. Being debt free is an incredibly empowering feeling.”
Matthew: “I’d pay it toward my student loan, because I hate debt!”
Ispf: “I dont have any kids, so option 3 is not for me. I contribute a reasonable amount per paycheck to the 401K, so no point putting more there. So the choices left to me are down payment for future home or pay the debt. Irrespective of whether its $10K or $25K, here’s how I would go about it. First decide a ball park figure of how much I want to spend for the down payment and the time horizon. Next check if I can save enough for the down payment, given the time horizon (push myself as much as possible to save that money, instead of using the windfall). If it seems doable, pump the full amount towards debt. If not, save the difference in a high yield saving, and put the rest of it towards debt. With this approach, I run the risk I might have to sleep in the apartment for a little longer, but with all the debt taken care off, I’m sure the sleep will be very peaceful ”
Ellen: “I like this week’s question! My choice would be to pay down the debt. Instantly. Peace of mind over money owed is worth more than any investment.”
Fiscal Responsibility: “I would invest it because you do receive some federal tax breaks for paying your student loans. I wouldn’t invest it towards my retirement because I think I am doing enough now to be safe when I am at the retirement age. Hopefully the investment will grow over the next few years and can be my house downpayment.”
Moneywalks: “I should pick #2 because the way I see it is, the sooner you own a home, the more you would save on paying for rent. True, you would still have to pay for mortgage but at least it’s going to your own house and not some random guy renting out an apartment.”
Will Chen: “Paying off my student loans would improve my credit rating, which in turn will allow me greater leverage when investing in other assets like real estate or stocks.”
Wenchypoo: “I would pick #1 regardless of amount. Compound interest over the years 25-65 would make me a millionaire. Until then, I could reasonably rent, watch expenses, refi and pay down debt, and let the kids find their own college money via scholarships and grants (better yet, why have kids?)”
English Major: “With equal returns, I would put the $10,000 towards my debt. For me, this would be a purely emotional response: I have a really strong aversion to debt. Presumably, paying a substantial sum towards my debt would go a long way towards freeing up future money to put towards retirement, a down payment, and my Hypothetical Children’s educational costs, so I would opt to move towards financial solvency.”
Wanda: ” $10,000 - I’d invest it for retirement funds… I am not looking to buy a home within the next 4-5 years, so I think a more long term approach (retirement) would give my money the biggest compounding power. And student loans are “good debt” - I won’t be in a super hurry to pay it off. $25,000 - I’d still invest for my retirement. But with this extra lump sum, I’d probably take the amount I’ve already investing in my retirement and use it to prepay some student loans. Best of both worlds. ”
Jon Postal: “Being the kind of person I am with money I think that I would put the $10000 aside to be used as a down payment on a starter home. I would do this because I am a firm believer in getting out of the rental trap as early as possible. For people that have poor money management skills I would recommend that they put the $10000 into some kind of retirement fund. I say this because a poor money manager will always find an excuse not to save for money for retirement, but a student loan MUST be payed back. If you have a $25000 student loan I would like to think that you have enough education to get a job that will pay well enough to purchase a homeâ€¦even without using the $10000.”
Ok, now for the stuff that you have been waiting for…or Part 2 of the festival :).
Part 2: Festival Entries
I have tried my best to group the entries according to relevance of subject; accordingly four categories are presented below.
Entries related to the host question:
Living Almost Large presents her views at the $10k question posted on Living Almost Large. When she says “I’m not sure what I would do, because it depends mostly on income and circumstances“…I am pretty sure there are others in the same boat.
Peg presents Welcome to your “Twenties:” Big Financial Shifts Ahead posted at “Ai ya!”. Another interesting perspective: “I don’t have kids and I just started a new job, so for now, to put it bluntly, I only have to take care of my monthly bills/expenses, and the rest can go towards investing towards retirement.“
MoneyFwd encourages just putting it in the bank and serving yourself before you think of the kids. Read his thoughts on Take it to the bank posted at MoneyFwd. “I do know that I would definitely not do #3 (even if I had children). I stick with the idea that you should invest for yourself and do what you can for yourself first.”
Read about how Forojuan plans to spend his $10,000 on Me and $10,000 posted at Millionster. “I am paying off my own student loan debt, therefore, my potential kids will do the same.Your average 25 year old with student loan debt probably does not have a child yet. Itâ€™s pointless to save for something you donâ€™t know you will ever have“.
Entries related to issues of the under 30:
John of Queercents presents Peer Pressure Spending in the Twenty-Something Crowd (Part 1 of a 2 Part Series). Read John’s thoughts on â€œfinance psychologyâ€ and his attempts to understand why some people go beyond their means to keep up with the crowd.
Trent of The Simple Dollar provides some practical tips in Personal Finance For College Students: Ten Tips For Realistic Money Management In College - Without The Nonsense. Trent hits the nail on the head with this “The key principle, though, is that things that are successful are things that make it easy for people to do other things that make them happy. Thatâ€™s why college students are notoriously bad at personal finance: itâ€™s not easy and it doesnâ€™t make them happy.”
ISPF presents Evaluating and Negotiating Job Offers Part 3 â€“ Stock Options posted at International Student Personal Finance. ISPF gives some tips on salary negotiation with respect to stock options in this post. The idea of stock option is prevalent with the software, engineering, and other “tech” sectors of the job market.
Burningchrome presents Power Secret: A Must Read For Those Age 24 or Younger posted at SmartCoolRich. A small post encouraging investments in Roth IRA at an early age.
Ellen vents about expensive birth control on The birth control you won’t see commercials for posted at A Hundred Indecisions. This is probably the first of it’s kind post I have seen in a while. Directed towards the ladies.
Come on, you don’t think “American Idol” is a comedy show? May be you are thinking more towards “People with british accent demeaning overconfident Americans” show. Sorry if I struck the wrong chords here (no pun).
Fiscal Responsibility presents Who Loses Most In A Break Up? posted at Fiscal Responsibility. The key lesson from the post, summarized in the author’s own words, reads “Like I said, I think cohabitating is fine but I think it is important that each party protect himself/herself financially.”
Hear Bill appreciate the determination of his son’s girlfriend in Good Debt, Bad Debt, No Debt posted at Ask Uncle Bill. I have seen such remarkable students myself and honestly don’t have enough words to appreciate their efforts to educate themselves while being debt free.
Sarah Winfrey presents 55 ways young couples can save money for their wedding posted at Wisebread. Pretty exhaustive article detailing everything from decorations, invitations, cakes…to honeymoon.
Read about English Major’s thoughtful insight into some personal “money moments” and influence of family dynamics on these moments; presented at The Symbolism of Money posted at An English Major’s Money.
Interesting personal finance related entries:
Sam of Surfer Sam and Friends presents 14 steps towards a personal finance plan in his post Your Focused Personal Finance Plan. You’re on your Way to Wealth. This is valid for everybody..not limited to under 30s. A collection of simple common sense tips.
Other Entries related to money/expenses/investing/credit:
Stingy Student presents Stingy Students: Get Your G’s Together, G: #2 High Yield Savings Accounts ($25 Free!) posted at Stingy Students