Investment for Noobs

[Aksannyi]

Basically, I've never really invested money in my life. I work through a temp agency while I put myself through school (it's really better for me this way right now) so I don't have a 401k ... I do have savings accounts but I want to start investing a little more.

I've been looking at the different types of investments like IRAs, CDs, Bonds, Stocks, etc., and I'm totally overwhelmed. Whatever I do, it will probably be through USAA since I trust them, but basically, what's a good way to start investing as a noob? Basically looking at starting with like $1000, and I'm really terrified of anything risky to be honest. I had a CD a few years ago when I first returned from my deployment (that was drained by my ex-husband when he found out about it but let's not discuss that), and the yield was low but there was minimal risk. That's basically how it is, right? Low risk = low yield, high risk = maybe high yield but possibly lose?

Honestly I'm terrified of risk because I'm not usually in a great financial state. I work of course, I make what I need, but something happens like the truck breaking down and then I'm in trouble for a few months while I catch up. So the possibility of putting some money somewhere that I might conceivably lose it is not attractive to me in the slightest.

Also, I have two scenarios in mind and I'm not sure which is better:
Option A: Throw every last additional dollar at Sallie Mae in attempts to pay those bitches off and get them out of my life for good.
Option B: Throw half of every additional dollar at Sallie Mae and the other half into some sort of savings/investment account to both work on paying down debt and work on building some wealth.

Basically, is it better to grow some savings while not paying down debt as well as I could be doing or is it better to pay down the debt and then start saving?

Yeah so I'm completely lost and have no idea what I should do.

Advice?

[galkaindaclub]

What are the interest rates on your loan(s)

[Bardicrune]

It really depends on interest rate on the debt and whatever the estimated return on your investment. There is not a definitive answer without those two variables.

[Aksannyi]

I have a bunch of loans, and the rates are as follows:

1 at 5.25%
1 at 13.25% (Paying this off ASAP)
1 at 7.25%
2 at 6%
10 at 6.8%
2 at 3.86%
1 at 4.66%
2 at 1.73%

Obviously a wide variance averaging about 6% if I had to guess without actually doing the math. Obviously that makes a difference.

[Cutriss]

I'm interested in this too. I have a good amount of 401(k) distribution going on at my company, and the missus is doing the max match at her company. I get 7.5 without requiring any match at all. I also tuned my withholding last year (after having like a $6000 refund) to just put all the excess withholding into the 401(k) as well (since I'm already comfortable at the current paycheck level).

I don't really have a good idea whether or not I'm getting good returns or not. I mean, I have the numbers, but I just don't know if I should be leaving this alone or if I should get more involved.

[Xno Kappa]

Invest in diapers.

[wipers]

@ OP http://www.investopedia.com/universi...ent-loans6.asp

[galkaindaclub]

So I would recommend keeping an emergency fund in savings to cover a few months of living expenses if possible and then any extra after that should be applied to your loans in order of highest to lowest interest rates. It is unlikely your own investments will exceed the rate of return of paying down your loans which is like indirectly investing in yourself.

[wipers]

Invest in diapers.

I laugh but honestly there are worst things you could invest in...

[Obiron]

I don't have much advice on the best place to start, since I've had a 401k for a long time and nothing else. I'm just starting to look into IRAs. Anyway, I just wanted to comment more on the risk aspect. When it comes to a retirement oriented investment, like 401k or IRA, I think the general recommendation is to put your money into their high risk investment options. The idea behind it is that some years you will see big losses, but over the space of 30+ years you'll see much more gains than in the same time span in a low risk option. Basically, keep it high risk until retirement is getting near, then start moving to low risk so that you don't take a big loss right before you retire.

[wipers]

I'm interested in this too. I have a good amount of 401(k) distribution going on at my company, and the missus is doing the max match at her company. I get 7.5 without requiring any match at all. I also tuned my withholding last year (after having like a $6000 refund) to just put all the excess withholding into the 401(k) as well (since I'm already comfortable at the current paycheck level).

I don't really have a good idea whether or not I'm getting good returns or not. I mean, I have the numbers, but I just don't know if I should be leaving this alone or if I should get more involved.

http://www.investopedia.com/articles...-your-401k.asp

[Aksannyi]

@ OP http://www.investopedia.com/universi...ent-loans6.asp

I'll read through that - thanks. I'm on deferment right now as I'm attending school but I try to send them money whenever I can (which isn't often, unfortunately).

It is unlikely your own investments will exceed the rate of return of paying down your loans which is like indirectly investing in yourself.

This is basically what I was wondering. Which sucks, because I'll basically be at retirement age by the time I've been able to pay the student loans off. :/

[wipers]

If you interest rate is pretty high paying off more a month really won't help that much I know from experience...

[Raldo]

If you interest rate is pretty high paying off more a month really won't help that much I know from experience...

Are you serious? <_< The higher your interest rate, the more useful it is to pay off more per month.

[Abandon]

Invest in diapers.

im fucking dying

[Aksannyi]

Are you serious? <_< The higher your interest rate, the more useful it is to pay off more per month.

Yeah um ...

I did a spreadsheet with the compounding interest function in Excel and even with one of the lowest loan amounts, after 10 years that loan with the highest rate will have accrued the largest amount of interest.

For reference, that loan is $3,604.73 at 13.25% interest and after 10 years of zero payments, it will have compounded to a total outstanding balance of $12,509.93, which is a difference of $8,905.20.

Compare that to a loan at $11,438.98 at 5.25% interest, after 10 years of zero payments, it will have compounded to a total of $19,081.32, which is a difference of $7.642.34.

Still a lot no matter which way you slice it, but the more of the principle I pay down which is actually what I've been paying now, what small amount of interest accrues monthly plus additional principle, I'm going to save myself a lot of money over the long run. I just calculated out what a $350 payment would do, and that would prevent over $900 of interest from accruing over 10 years. Obviously, the more I pay, the less I will have to pay long term.

I mean, if I were paying minimum payments and only adding an extra $5, yeah, that's not going to help. But when you add a significant amount so that the principle is being lowered, it will make a difference over a period of time.

Another few months though, and that 13.25% shit is going to be gone, and good riddance.

[octopus]

I use https://www.betterment.com/. I like it a lot. It's basically built for noobs ;o

[galkaindaclub]

Yeah um ...

I did a spreadsheet with the compounding interest function in Excel and even with one of the lowest loan amounts, after 10 years that loan with the highest rate will have accrued the largest amount of interest.

For reference, that loan is $3,604.73 at 13.25% interest and after 10 years of zero payments, it will have compounded to a total outstanding balance of $12,509.93, which is a difference of $8,905.20.

Compare that to a loan at $11,438.98 at 5.25% interest, after 10 years of zero payments, it will have compounded to a total of $19,081.32, which is a difference of $7.642.34.

Still a lot no matter which way you slice it, but the more of the principle I pay down which is actually what I've been paying now, what small amount of interest accrues monthly plus additional principle, I'm going to save myself a lot of money over the long run. I just calculated out what a $350 payment would do, and that would prevent over $900 of interest from accruing over 10 years. Obviously, the more I pay, the less I will have to pay long term.

I mean, if I were paying minimum payments and only adding an extra $5, yeah, that's not going to help. But when you add a significant amount so that the principle is being lowered, it will make a difference over a period of time.

Another few months though, and that 13.25% shit is going to be gone, and good riddance.

Yeah, you absolutely have to come up with a plan to avoid just making minimum or non-payment. It sounds like you cannot afford to make any traditional investments and you need to tackle this asap or this will haunt you forever. If you land a job after school that offers 401k matching, I would say you should contribute up to matching since it's free money, but other than that every possible extra penny has to go towards getting yourself out of debt.

With that said, still keep a liquid emergency fund (as I said previously) for those expensive life moments that are out of your control.

[RKenshin]

So I would recommend keeping an emergency fund in savings to cover a few months of living expenses if possible and then any extra after that should be applied to your loans in order of highest to lowest interest rates. It is unlikely your own investments will exceed the rate of return of paying down your loans which is like indirectly investing in yourself.

Pretty much this.

The only investments likely to see a 6%+ return are investments that can also see a -6%+ return. The average return over a span of 5-10+ years may still come out to 6%+ (the market itself as a whole averages ~7%), but for shorter periods it's a gamble and by no means a reliable/guaranteed thing.

That being the case, you will have more money in your pocket over the long term if you pay down your student loan debts first, before dabbling in the market. Investing really should only come after all credit/student loan/higher interest debt (save a mortgage, though debatable) is paid down, and establishing a solid emergency fund.

I actually was in almost exactly the same situation myself, about 3 years ago. I was debating with myself over whether to invest or pay down my student loan debt (~5%), and ultimately opted to pay down my loan debt; saved myself $20,000 in interest payments and 8 years on the payment period.

If you interest rate is pretty high paying off more a month really won't help that much I know from experience...

This isn't really one of those topics where 'experience' has anything to do with it. Math is math.

If you have $50,000 in debt at a 6% interest rate, and:
- Pay $500/m, you will pay a total of $19,488 in interest over the loan period (~11.5 years)
- Pay $700/m, you will pay a total of $12,011 in interest over the loan period (~7.5 years)

That's simply all there is to it. You're never penalized for paying extra, in any way, apart from being able to claim less of an interest deduction on taxes (mortgage/student loan) by paying down the loan faster (which does NOT come close to matching what you're saving by doing it).

[Cutriss]

You're never penalized for paying extra, in any way

This is not completely accurate. In some states, it is against the law to have borrowing schemes with early payment penalties, but not all. A friend of mine bought a car several years ago and only found out after the fact that the interest-over-term was fixed and that if she paid extra, it would only be credited toward her next payment and not toward the principal.

It depends not only on your state laws but also the type of debt. Most (if not all) conventional mortgages should not have this issue, but smaller arrangements (such as personal loans, auto loands, HELOCs, etc) may have this stipulation.

Caveat emptor.