Question: I’m 24 years-old, and I graduate from college in two weeks. Since I’ll be starting a full-time job in July, I’m looking for some financial advice.
Beginning in July, my major expenses will consist of rent, bills, and 3 more years of car payments. I’ve never missed a payment on anything, and I have no credit card debt or student loans to repay.
Since I won’t have any income to meet my initial living expenses and new furniture costs until late July, I need to borrow about $12,000 to cover the costs. I can’t get the money from family members, so I’m considering 2 alternatives: 1) a 48-month personal loan with a 10%-12% interest rate, or 2) asking Citibank to increase the credit limit on my 9.9% card to at least $12,000 and charging the expenses as they arise. >From the amortization and finance charge numbers I’ve crunched, the
credit card option seem to be the better deal assuming I make regular payments ($300/month) to get rid of the debt in 4 years. Could that be right? I’m also looking into opening a low-rate credit card to carry the balance, but that’s only if I have to. I’m very happy with my fixed-9.9% card, and I really don’t want to deal with the hassle of temporary “teaser” rates if I can avoid it. Any advice on borrowing the $12,000 would be helpful.
I’d also like to contribute the maximum amount to my 401(k) plan (15% maximum + 50% match on the first 6%) because of the instant return generated by its tax-deferred status. Combining these contributions with the monthly payments from the $12,000 loan or credit card balance, I would only end up with about $1,000 in liquid savings per year. Of course, this is after ALL other expenses (insurance, gas, entertainment, food, etc.). I currently don’t have an emergency fund, but unlike the $12K loan, I think I can temporarily rely on family members for that. I plan to build up my own emergency funds after my car payments end 3 years from now.
Problem: I’m not sure how to balance my 401(k) contributions with $12,000 in debt. I don’t know which tax bracket I’ll be in, but I think the return I’ll get by simply adding to the 401(k) is much more than the interest I’ll have to pay on a 9.9% APR card. I’ll definitely make regular payments ($300/month) on the credit card, and I’m certainly not the type to abuse my credit. Should I pay off the debt first, or should I go with what the numbers seem to tell me and max out my 401(k)? Are there any other concerns or pitfalls I should watch for?
Advice and personal replies would be appreciated.
Thanks in advance,
Answer: First–not sure where you got the “initial living expenses” estimate. $12,000 is a lot of debt to get into (I was especially concerned that you mentioned new furniture, etc.). It also wasn’t clear how much time will elapse between taking your new job, and getting your first paycheck, and what you will be doing/where you will be living in that time frame. Can’t start earlier? Take a temp job for a few weeks?
It really doesn’t matter about the interest rates, etc., when you get right down to it, debt is possibly going to be the bigget mistake…rethink it carefully before you do anything, and try to make sure that you are living within your means. If that means taking extra jobs or living with things (like furniture) for a while, that may be the shortest term answer to your question.
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