Ask the Pro: Pay Debt or Invest?

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06/02/2006

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Dear YOUNG MONEY,

I am a young grad now making $33,000. I have $26,000 in college loan debts and I am looking to pay off $100-$200 a month. I want to start investing in a mutual fund, contributing to a Roth IRA and investing in my company's 401(k) plan. Is this too much [at one time]? I want to start some sort of investing/savings for my future and need some help. Thank you.

Sarah Nickerson

Dear Sarah,

You are wise to begin your investment/savings plan at a young age. At this point it is not the amount that matters, it is having a plan and the discipline to stick with it that will pay off down the road when the numbers are larger. Start by identifying your financial goals. In your question you mention several:

Pay off the student loans.
Roth IRA (Retirement)
401k (Retirement)

Keep in mind that with this type of strategy you will be assuming greater risk. If you prefer to manage risk and be more conservative, then a more balanced allocation of equities, bonds and money market would be advisable. In this case, more information is needed before specific recommendations can be made.

You probably have some shorter-term goals as well, such as saving for a home or car.

You should definitely participate as much as possible in your company's 401(k) plan. Contribution limits for 401(k) plans are currently: $11,000 for '02, $12,000 for '03, $13,000 for '04, $14,000 for '05, $15,000 for '06, and then indexed for inflation thereafter. Pre-tax dollars go in, and depending on the plan, your employer may match part of your contribution. Free dollars! A Roth IRA is a good idea, but you should first max out your 401(k) before contributing to a Roth IRA.

As far as the student loans, if you have loans at different rates of interest, try to pay down the higher interest rate loans first. Stay current with your payments and try not to take on any more debt until these are paid off. Write down your financial goals, track your progress, stay focused, and success will be yours.

To Your Success,

Thomas Kane
Financial Advisor
Raymond James Financial Services