Just graduated from college...what do I do with this money?

If I understand your situation correctly, ie that your company will be putting $13,500 a year into your 401k without you doing anything?

Then I would be tempted to put very little or nothing into my 401k, invest my 401k in a couple of good equity index funds, and concentrate on paying down my debts. The key is high diversification and low cost, via equity index funds.

My reasoning being the debts cost you (6%?), so 6% / (1 - personal marginal tax rate) in terms of pre tax income. Hard to beat that

*guaranteed* return from paying down debt.

And from a portfolio perspective, paying down debt (after you have set aside 3 months of living expenses in a money market fund) is the equivalent of holding cash (ie very low risk) but at a safe guaranteed return (as above). So you total risk portfolio is very low.

Basically I see your portfolio choice right now as having exactly 2 assets (plus 3 months of living expenses): a risky long term asset (equity index fund) and a cheap asset (paying down debt) which has a fixed return. Your choice is to optimise between the two, and your employer has made it easy for your (if I understand your situation right).

In the future, you may wish to buy a home. I am a big fan of same under US tax law, *but* believe that in most US property markets, now is absolutely not the right time. Houses are by any measure as expensive as they have ever been in US history in most markets (rental yield, price to average income) and I do not believe that will be sustained. I don't think the time will be right for at least 12 months, and possibly much longer (depending on where you live, etc.).

At which point, paying off low interest student debt to take on mortgage debt may not be such a clever idea, and you will in any case need to have saved a 10% deposit.

But right now, when the world is your oyster and you are on your first job, becoming debt free but with significant 401k savings would be a good thing.

What are the interest rates and lengths of the student loans?

What happens to this roughly $14k of the company's profits earmarked for you if it is not put into a 401(k) plan?

When, if ever, do you plan to buy a house? Do you plan to get married within, say, ten years? No need for a car? Or do you have a good one, owned outright, already?

One thing with which you should become familiar immediately is the investment vehicle "Roth IRA." You can google, as a good start.

Congrats on the good-paying job and asking good questions about your finances so early in your life.

Congratulations, you're off to a good start. First, what are the 401(k) choices? How does that $13.5K get invested? Does the company choose the fund or are you allowed to move it (within the 401(k) of course.) If it's in company stock, you should be careful to diversify it out to the other choices as soon as you are permitted. Your next investment option should be $4000 toward the Roth IRA, as we don't know, and can't know, what rate you'll be in when you need to withdraw money either for an emergency, or at retirement.

Next, what are your goals? $800 for the rent alone is great, but you also cover power and internet, wow. (my utilities average $600/month, ack!)

If you plan to stay put, and no short term plans for marriage, it seems to me that you can whack that loan to zero in 2 years. You do not have any other deductions, so your loan's rate of interest is the rate you are paying. If it's 6%, that's a great return on your money (i.e. 'getting 6%' by paying down 6% loan) but if any is sub 3%, just save money in a good money market fund. If you are ever able to owe at one rate but earn more in a CD or money market, **and** you are disciplined, I'd rather see you with $30,000 at 5%, owing $30,000 at 3%, than zeroing both out.

But back to the house. It sounds like you may be in a smallish apartment. If your goal is to buy a house, saving toward that while still owing some of that student debt is ok. $40,000 is a great down payment. A $200K 30yr mortgage at 6% is $1200/month, which is easily affordable to you. Tough to give a single answer without knowing your goals. For that matter, if you'd save 25% of the 54K, which is possible, you could be on a path to retire in less than 20 years, if that appeals to you.

The world is your oyster. JOE

I concur. I would make sure that the 401K money is diversified so you don't end up with company stock or some other Enron scenario. Beyond that, I'd maybe invest $100 a month somewhere else in a Roth or the company 401K (if you are allowed to do so). Then focus on burning up that debt.

-john-

Cool! What choices do you have about how to invest it?

What's the interest rate on the student loan?

Are these alternatives mutually exclusive?

As a rule of thumb, I'd suggest socking away as much tax-deferred money (401(k) and IRA, Roth or not) as you can afford. How much you save may well determine whether you can retire at 50 or at 75.

Meanwhile, I'd like to suggest you check out

That's a website run by a Seattle-area financial manager named Paul Merriman. I am

*not* a customer of his, and have no financial relationship with him. I am mentioning his website only because I think it contains lots of free information and advice that I have personally found useful. Like all free advice, it may or may not be worth what you paid for it--but you can form your own opinions about it.

======================================= MODERATOR'S COMMENT: How about giving us some examples of Paul Merriman's advice?

Goal #1 to financial freedom is to live "below your means". I define this as saving 10% of gross income. The 25% your employer is "giving" you, verify if there are "any strings attached", and then use this as your primary savings plan. Are you sure it's a 25% contribution and not a 25% match?

Goal #2 would be to stay out of debt. If the rates on the student loans are variable, pay these off quickly. Beware of consolidation offers which reduce payment by 75%, but increase term of loan (from 10 years to 20 or 30). $800/month is a reasonable payment, consider paying more (even an extra $25 to $100 month will decrease the overall payment period from 1-5 years).

As for what to invest 401k in, go through some financial planning calculators to determine how much risk you are willing to take. These calculators will suggest a mix of equities and bonds (such as 100% equity, 80-20, 60-40), then also suggest how much domestic equity vs international equity (a possibility might be 45% domestic large cap equity, 15% domestic mid cap, 15% domestic small cap, 15% international large cap, 10% international small cap).

**What I suggested for the allocation is similar to my own, no guarantee yours would match mine.**

Once you find your allocation, look these up in your 401k, see what is available.

Use a Roth IRA for any "personal" retirement contributions. If your

401k is short a particular type of fund (such as it's missing an international small cap and a domestic mid cap fund), then start the Roth IRA in those asset classes, and expand from there as needed.

I didn't know whether it would be appropriate to do so, so I didn't. However, since you asked, and since I have no financial relationship whatever (the extent of my relationship is that I've read a bunch of articles on his site, asked a few questions by email, and gotten answers) with Merriman:

Briefly, his website has lots of articles that appear to be based on common sense backed up by data. He is authorized to offer DFA funds, so part of his pitch is that the DFA funds are good enough that it is worth paying him for access to them. If you're not willing to do so, he advocates Vanguard based on its low expense ratios and the overall utility of index funds, but points out that Vanguard has no small-cap international fund that is open to new investors and does not do as good a job of DFA at accessing some other asset categories such as domestic micro-cap or deep value.

His asset-allocation recommendations appear pretty standard, with two interesting exceptions:

1) He generally recommends that the equity portion of your portfolio should be 50% international, including emerging markets (I think he says 30% international if you don't include emerging markets). He says that 30 years of data show that the 50/50 split has the least long-term volatility. 2) He avoids mid-cap stocks entirely, on the basis that they tend to behave somewhat like small-cap and somewhat like large-cap. His view is that you're better off buying the extremes and rebalancing between them in the hope of reducing the correlation between you asset categories.

So his basic recommendations for equities, as I understand them, are equal parts of

large-cap large-cap value small-cap small-cap value REIT (this is a very recent addition to his recommendations) international large-cap international large-cap value international small-cap international small-cap value emerging markets

His claim is that a 60-40 mix of this equity allocation and intermediate-term bonds has given a long-term return slightly better than having 100% in the S&P 500, and with much less volatility.

He has lists of recommendations for how to approximate this asset mix for various fund families.

Please don't take the foregoing as advice from me! If you're curious about what he has to say, read it for yourself and make up your own mind.

What I found most interesting was

where a chart was offered, showing returns for different fixed/equity mixes from 1970-2005.

100% stocks were 11.1% with STD of 17.2% but 50%/50% mix was 11.0% with STD of 8.4%

The lower STD gave a worse 5 yr return of 9.7%. Worse 3 yr return for mix was -4.1% vs stocks only -40.9%. I've spent so much time analyzing stock returns, I haven't given as much thought to the fixed side. Kind of took it for granted.

JOE

I think the OP at age 21 can afford to be 100% in equities:

70% domestic. 30% international. If possible, a Total Market Index Fund for the domestic (I don't think such a thing exists for international-- you are confined to the large caps).

I don't want to get any fancier than that. Small cap, growth, value are all factors that come in and out of favour, a total market index fund will even out over all these factors. And I don't have a particular bone that emerging markets are going to better than developed markets over time, because historically, I don't think they have. Economics does not govern stock returns.

My suggested international stock allocation is a guess about how important, in the long run, international economies will be to an American consumer.

I don't think bonds are particularly attractive at this time, and I certainly wouldn't suggest a 21 year old have more than 20% of his/her portfolio in bonds. (if they do, a medium term, US bond fund, preferrably index).

A lot depends on what funds are available in the 401k, and what they cost (MER and TER in mgmt and total expense ratios).

This is not quite correct:

It was the S&P 500 index that had 11.1% with STD of 17.2%

The 50%/50% mix is 50% fixed income and 50% globally diversified equities, which did indeed return 11.0% with STD of 8.4%

100% globally diversified equities returned 14.1% with STD of 16.7%, so substantially higher returns than the S&P with slightly less volatility.

Ya pays yer money and ya takes yer choice.

Get rid of that student load debt soon, and don't take on any more debt! That plan will get you ahead faster than any decision you could possibly make about which mutual fund to buy or what asset allocation to make.

I like to think of whatever time it takes to pay off college loans as part of college itself. In other words, in the first year or two you are out of college into your first job, live essentially the way you lived in college. Live in a cheap room or apartment in a part of town where the rents are low. Eat modest sensible food. Keep on with the kind of entertainment you enjoyed in school, and don't indulge in any new found extravagances or luxuries. Save as much as you can, and pay off those loans. 50% would be a suitable figure. Then, after a year or two or three you can finally "graduate" from college and get on with a more satisfying lifestyle. But continue to save and invest (to a lesser degree than 50%, of course) even then.

Do we not care what interest rate/term are for the student loans? If the loans are 3% fixed, is he not better off just putting the money in CDs earning 5%? We know he's not in itemized deduction territory, but since he's just getting started, don't you first recommend the emergency fund/cash build up? In other threads I've suggested that an emergency fund wasn't needed, so long as some source of money was available, either a 401(k) loan, equity loan, margin loan, etc. The OP has none of that. 20% credit card debt should be aggressively attacked. Low interest student debt, I wouldn't be so fast. I hope OP will answer what he rates/terms are, as well as his longer term housing intent is. JOE

Having been in this situation "recently", my advice is pay off the loans.

$800/month for 10 years (most government subsidized loans I am aware of have 10 year repayment periods). If we assume the standard repayment of 10 years, this is a significant portion of his take gross pay (1/5 % of gross pay).

If we assume this is an average person age 22, the next 10 years is a long time. Probably go through 1 car, possibly get married, buy at least one house (I bought two houses in my first 8 years out of school). Some of these things involve credit checks, debt ratios and being out of debt would help the cause relative to "rates of return" for other places to put $$.

There could be "more optimum" solutions- I was paying off debt while investing (I was aggressive about the debt payoff... I did not open my IRA until most student loans were paid off.). My peragative is that

10 years is a LONG time for a college graduate and being debt free gives choices and flexibility when it comes to paying for a car, house, wedding or other significant financial purchase/ decision.

Yes, he could find a better use for the money than paying off the college loan if the interest on it is low and CDs earn, and continue to earn, quite a bit more. And, yes, it is a good idea to have an emergency fund, but being without one for a while is not new, since he had none while in college. My suggestion of living on the cheap is no doubt exaggerated, but still it could be a very good plan to do without some expensive items for a while and hopefully pay off the debt quickly, build up an emergency fund, and invest in a 401k and Roth all at the same time, or at least get a good start on all of them.

I'm leery of using historic volatility and returns to predict the future.

Global equities I suspect will perform around the SP500, on the basis of the PE that world markets are currently trading at, balanced against the fact the US tends to have better governance.

Put it another way, the best forecasts for 30 year returns of asset classes that I have seen are:

- bonds: take the yield to maturity (nominal bonds)

- TIPS: take the real yield

- equities: take one over the normalised current year PE (as a real return)

The normalised bit is the tricky bit. Robert Shiller does it by taking a 10 year moving average, which I think has merit as an approach.

Nothing about the current prices of bonds makes me want to own them--

4.5% in a world of 2.5% inflation doesn't seem like a lot of risk premium. The scenario in which I am wrong (deflation) is also bad news for stocks (earnings will fall), so I am undiversified against that risk. I typically hold 10-20% cash, though, so that is some measure of protection.

Before doing anything, the OP should build up 3 months of expenses as a cash reserve in a money market fund or CD. I might spring for 6 (having been unemployed that long in my life).

I really don't see the need to feed the 401k before the student debt is discharged, given his employer's position. Even IRA I think it is marginal.

A lot does depend on the student loan rate and the timing of a house purchase (which at age 21, I would suggest is at least 2-3 years out).

Hi James, There is probably a great deal of good investing advice here.It isn't often a good idea to put the cart before the horse. What do you do for a living?How long do you see yourself doing it?Do you like it?What are your higher aspirations?Are you an aggressive investor?Where do you want to be in 10?,20?,30? years?At your stage you need to ask and answer a myriad of ?s.If you ask a thousand people,you will get 1,000 or more viewpoints,most of which don't take into the equation the most important element,you.I wish I could suggest 1 good book on the subject,I can't,but the work in finding your own path,and your own(Custom),advice is a big part of the pleasure of the journey.I personally like Real Estate,it allows a level of hands on control that I like.I suggest as a starting point,Kiyosaki's books,and there is alot to learn from playing his game"Cashflow",if you find Real Estate,to be your cup of tea,be careful there are more charlatans teaching how to invest in R.E. courses by a factor of 100 to 1,or worse.But a great deal of all investment advice in all areas is bogus.You must be an "Educated Consumer"in all parts of your life.Good luck and have fun.dale

Being in the situation right now personally, I agree with you. I have

3% fixed school loans with a few more payments dropping it to 2%. I'm in no hurry to pay off this debt when I have MMA making 5.25%. Now, keep in mind, I still pay extra on this loan and I would advise the OP to do the same as much as possible. But there are advantages of keeping the money liquid maybe most of which are psychological in nature knowing that the money is available if needed. The OP does not mention a mortgage, car loan, credit card debt etc. Assuming he has very little of these expenses, if any at all, he would be a position to be more aggressive in his repayment strategy. It really depends on what his long term plans are. If he is getting married, buying a house, and a new car all around the same time, I would think that he would be better suited to make his payments on the school loan and keep enough money liquid so that he could cover these expenses.

I would hope that if he hasn't already, consolidate to a low fixed rate. Yes, the payment schedule will be longer, but he can still make additional payments on the principal so that he will pay the loan off sooner. Obviously being debt free might help a bit on future rates of return, but we're talking school debt not 25% credit card debt. I don't think that the OP's school debt would preclude him from getting a good rate on a mortgage or car loan.

JB

One of the problems with trying to get ahead while in debt is the impact of taxes and inflation on our savings. As it is in almost every instance, net-net the saver is upside down and prolonging the agony.

All of these short cuts and fancy ideas remind me of the way Texans describe Eastern dudes who come to Texas and try to act like Westerners: All hat and no cattle.

-HW "Skip" Weldon Columbia, SC