23 and on my own, what should I be doing?

Question

So I graduated in May with a Computer Engineering degree and started work in September at a major bank located in Jersey City and moved in with a couple of college friends in an apartment in Astoria, Queens.

My job is on a contract where I earn $50 per hour, 40 hours per week. Since its hourly I miss out on wages on holidays and if I need to take time off, but I do have the option to work from home on occasion if needed. I can also earn overtime if I'm needed past 40 hours in a week for something like a software release although this has not come up yet. Without overtime this ends up around 100k per year.

They are already talking about converting me to full-time, but I am not sure if the benefits outweigh the extra wages. My recruiter told me the last person that they placed in the same department got converted from $50/hour to $90k per year. Granted he got healthcare, but I still get that from my parents until I turn 26 so that's dead money in my opinion.

My student loan debt looks like this

Sallie Mae

$10k @ 2.25%

$13k @ 9.25%

$11.5k @ 2.25%

$3k @ 10%

Federal

$3k @ 5.6%

$2k @ 6.8%

$4.5k @ 4.5%

In addition I started off with pretty much no belongings aside from a desk and computer. I invested in a quality bed and bedroom set which I financed over 12 months. $4k @ 0% if paid in 12 months.

My monthly rent is $1150 I have $3000 in the bank.

What I really don't understand is how the interest rates on my Sallie Mae loans can vary so much. I understand that they are variable rate, but what the hell causes the same company to give me 2.25% and 10% on separate loans?

So, what exactly should my goals be here? What do I want to do? Now that I'm actually setup in my new place I'm going to have much less in the way of up-front costs (real-estate broker fee, security deposit, quality work clothes, etc) and can either really start saving or pouring money into my loans. I know I want to knock out that 10% and that 9.25% guy, but how much should I be setting aside for security? Should I continue to make minimum payments on the 2.25% loans and treat them like free money? At what point do I start looking into investments?

Answer 1

Congratulations on earning a great income. However, you have a lot of debt and very high living expenses. This will eat all of your income if you don't get a hold of it now. I have a few recommendations for you.

1. Learn how to make a monthly budget, and commit to never again spending money that you don't have.

At the beginning of each month, write down your income, and write down all your expenses for the month. Include everything: rent, food, utilities, entertainment, transportation, loan payments, etc. After you've made this plan for the month, don't spend any money that's not in the plan. You are allowed to change the plan, but you can't spend more than your income. Budgeting software, such as YNAB, will make this easier.

2. Treat your debt like an emergency.

You are $51,000 in debt. That is a lot. A large portion of your monthly budget is loan payments. I recommend that you knock those out as fast as possible. The interest on these loans makes the debt continue to grow the longer you hold them, which means that if you take your time paying these off, you'll be spending much more than $51k on your debt. Minimize that number and get rid of them as fast as possible.

3. Cut your spending to the bare minimum.

Because you want to get rid of the debt emergency as fast as possible, you should reduce your spending as much as you can and pay as much as you can toward the debt. Pay off that furniture first (the interest rate on that "free money" is going to skyrocket the first time you are late with a payment), then attack the student loans. Stay home and cook your own meals as much as possible. You may want to consider moving someplace cheaper. The rent you are paying is not out of line with your income, but New York is a very expensive place to live in general. Moving might help you reduce your expenses.

4. Don't ever spend money that you don't already have again.

I hope you realize at this point that it was pretty silly of you to borrow $4k for a new bedroom set while you were $47k in debt. You referred to your low-interest loans as "free money," but they really aren't. They all need to be paid back. Ask yourself: If you had forced yourself to save up $4k before buying the furniture, would you still have purchased the furniture, or would you have instead bought a used set on Craigslist for $200? This is the reason that furniture stores offer 0% interest loans. They got you to buy something that you couldn't afford. Don't take the bait again.

You didn't mention credit cards, so I hope that means that you don't owe any money on credit cards. If you do, then you need to start thinking of that as debt, and add that to your debt emergency. If you do use a credit card, commit to only charging what you already have in the bank and paying off the card in full every month. YNAB can make this easier.

5. Salary or contractor?

$50/hr and $90k per year are fairly close to each other when you factor in vacation and holidays. That is not including other benefits, so any other benefits put the salaried position ahead. You said that you have a few more years on your parents' health coverage, but there is no need to wait until the last minute to get your own coverage. Health insurance is a huge benefit. Also, in general, I would say that salaried positions have better job security. (This is no guarantee, of course. Anyone can get laid off. But, as a contractor, they could tell you not to come in tomorrow, and you'd be done. Salaried employees are usually given notice, severance pay, etc.) if I were you, I would take the salaried position.

6. Investing for the future.

Investing is important, but so is eliminating this debt emergency. If you take the salaried position, one of your new benefits will be a retirement program. You can take advantage of that, especially if the company is kicking in some money. (This actually is "free money.") But in my opinion, if you treat the debt as an emergency and commit to eliminating it as fast as possible, you should minimize your investing at this point, if it helps you get out of debt faster. After you get out of debt, investing should be one of your major goals.

7. Now is the time.

Now, while you are young and have few commitments, is the best time to learn to live on a budget and eliminate your debt. This will set you up for success in the future.

Answer 2

Assuming the numbers in your comments are accurate, you have $2400/month "extra" after paying your expenses. I assume this includes loan payments.

You said you have $3k in savings and a $2900 "monthly nut", so only one month of living expenses in savings.

In my opinion, your first goal should be to put 100% of your extra money towards savings each month, until you have six months of living expenses saved. That's $2,900 * 6 or $17,400. Since you have $3K already that means you need $14,400 more, which is exactly six months @ $2,400/month.

Next I would pay off your $4K for the bedroom furniture. I don't know the terms you got, but usually if you are not completely paid off when it comes time to pay interest, the rate is very high and you have to pay interest not just going forward, but from the inception of the loan (YMMV--check your loan terms).

You may want to look into consolidating your high interest loans into a single loan at a lower rate. Barring that, I would put 100% of my extra monthly income toward your 10% loan until its paid off, and then your 9.25% loan until that's paid off. I would not consider investing in any non-tax-advantaged vehicle until those two loans (at minimum) were paid off. 9.25% is a very good guaranteed return on your money.

After that I would continue the strategy of aggressively paying the maximum per month toward your highest interest loans until they are all paid off (with the possible exception of the very low rate Sallie Mae loans). However, I'm probably more conservative than your average investor, and I have a major aversion to paying interest. :)

Answer 3

You are asking all the right questions. I predict a bright future!

In addition to the excellent advice from Phil, I would add that NOW is the time to think about investing. If you have not yet started a retirement account, open up a Roth IRA and max it out ($5.5k in 2014) every year. The time value of money is strong and you will be thanking yourself in 40 years for starting now. Yes, paying down debt is important, and you should do that, too. It's a balance.

If you get converted to a full-time employee, take part in any retirement plan they offer, and max out any matching because it's free money.

Answer 4

Okay, since you work hourly there are two substantial changes you can make:

1) Move out of Astoria and closer to Jersey City, such as, to Jersey City.

Move out of NYC into Jersey!? Heresy! But that ship sailed when you started working there.

2) Work more hours now that you aren't spending 2 hours and 30 minutes of your life commuting. You can make an extra $125 per day, in theory.

Since this is $625 more a week, and $2500 a month, it is a substantial change you can make. Presupposing that your current contract has more hours to work.

Answer 5

You are doing Great! But you might want to read a couple of books and do some studying on budgeting and personal finance - education yourself now and you will avoid pain in the future. I learned a lot from reading Dave Ramsey's Total Money Makeover, and I have found some great advice from the simple budgeting guidelines on LearnVest.

Budget in these three categories with these percentages,

• Essentials (50%) rent, utilities, food, transportation
• Financial (30%) debt, savings
• Lifestyle (20%) cellphone, cable/internet, entertainment, clothes, stuff

You may find that your "essentials" lower than 50%, because you are sharing room and utilities. You want to put as much into "financial" as you can for the first 1-2 years, to reduce (or eliminate) your student loan debt.

Many folks will recommend you save six months (salary/expenses) for emergencies and unexpected situations. But understand that you are in debt now, and you have a unique opportunity to pay off your debt before your living expenses creep up (as they so often do). Since you are a contractor, put aside 2 months expenses (twice what I would normally advise), and then attack paying off your debts with passion. Since you have a mix of student loans, focus on paying them off by picking one at a time, paying the minimum against the others while you pay off the one you picked, then proceed to the next. Dave Ramsey advises a Debt Snowball, paying the smallest one first (psychological advantage, early wins), while others advise paying the highest interest off first.

Since you have over $2400/month available to pay down debt, you could plan on reducing your student loan debt substantially in a year. But avoid accumulating other debt along the way. Save for larger purchases. Your bedroom purchase may have been premature, but you needed some basics. But check your contract. Since many 0% furniture loan deals retroactively charge interest if you don't pay them off in full - you might want to make regular payments, and pay the debt off a month early (avoid any 'gotcha's).

You might want to open a retirement account - many folks recommend a Roth account for folks your age - it is after tax, but you don't pay tax when you withdraw money. Roth is better when you have lots of deductions (think mortgage, kids). But some retirement account would be great to get started.

Open a credit union account (if you can), that will make getting a credit card or personal loan (installment) easier.

You want to build a credit file, but you don't want credit card debt (seems contradictory), so opening 2 credit cards over the next year will help your credit. You want a good credit mix (student loans, revolving, installment, and mortgage - wait on that one).

Answer 6

I also had a student loan and glad you are taking a good look on interest rate as it really makes a huge difference. One of the strategies I followed was since my credit improved as I stepped out of school. I took advantage of a good 0 percent credit card. I applied for discover and got a decent credit limit. There are 2 particular things you are looking for in a credit card in this situation

1. Long term 0 percent purchase rate offer
2. A very good balance transfer offer with $0 transaction charge

Usually the initial $0 transaction charge is only for a couple of months so ensure you take advantage of that.

What is the benefit: Imagine being able to pay off that higher interest rate balance with 0% and not have to worry about it immediately. That way you save on the interest you would be paying and stress as well

Watch out for: Although you have to ensure that you do payoff the money you paid through the 0 percent credit card ( which may have been put off for a year or even 15 months or so) other wise you may have to pay it all at once as the offer is expiring.

Note: for credit cards ensure to note when the 0% is expiring as that is usually not mentioned on the statement and you may have to call the customer service. I was in a similar situation and was able to pay it all off fairly quickly. I am sure you will as well.