Friend posed an interesting question that I thought I share with y’all / crowdsource your wisdom. She has 50K in savings account at 0.5%. Also has 80K in student loans at 3.5% fixed interest. My advice to her is to payoff 20K at least and keep 30K as a rainy day fund / invest some of it. What do you guys think? Her view is that the loan is a manageable monthly payment that she can service easily while also preserving cash as a safety net. Thoughts?

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Ignoring any risk preference and assuming no major purchases on horizon or alternative investment options, I'd keep 6 months of living expenses and use the rest to pay down the debt.

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Very solid advice. I agree. In this inflationary environment her 50K is actually losing value so might as well deploy some of that and reduce the principal. Thanks!

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My optimal mix is:

1. 10k immediate savings in regular bank account

2. 10-15k in HYSA as the remainder of my quick access "I just lost my job" emergency fund (I'm in LCOL city so adjust accordingly)

3. X amount I plan to spend within 5 years (down payment etc) also in the HYSA

4a. Rest of my rainy day fund in a brokerage acct (e.g. want to take a year off, quit without another job lined up, cover all deductibles etc. - It's basically the portion of my brokerage I've mentally prepared to liquidate if every worst case scenario happened and I had to meet all my expenses/deductibles after losing my job).

4b. Actual LT investing in brokerage.

5. Pay off debt if rates are >5%. Adjust for riskier life events/situations (new job, joining startup, launching startup, economic downturn, going back to school, adding another major debt, etc)

Can you tell I'm slightly risk adverse? Lol

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Hahaha. Thorough. I like it! Thanks 🙏🏼

3.5% loan is honestly free money…
I would keep 6 months worth of savings invest the rest in a etf

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She needs an emergency fund of 6 months of expenses (surely it’s not 50k). Whatever is leftover she should put towards the loan. She is still broke and needs to get over having that 50K in the bank because it makes her feel rich. Interest rates on loans might go up as well. She can aggressively attack those while we are in forbearance and be debt free. Introduce her to Dave Ramsey

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3.5% interest rate is not bad at all. If I were her, I would not pay off student loans yet. 20k is a quite thin saving. You never know if something would happen and you need cash. At 80-100k savings, it may make sense to pay off a portion of student loan.

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I think another approach you can give her is to pay extra $500 or $1000 for each payment. I think your friend may feel more comfortable that way as she can budget for it. It's still extra 10k at the end but it may her feel safer. My husband grew up poor, and he always felt insecure that if he didn't have lots of cash on hand, he might end up losing our house and being poor like his family if something happened. I successfully persuaded him to pay off his 30k student loans before we got married (for my own sake 😂) but I could totally relate to your friend.

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Put it all in the market, gold jacket, green jacket

I’m too dumb for this reply

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Use the entire thing to pay off the student loans. Do some quick math on it. She’s paying $233 a month on that loan

If she does what you’re suggesting, she’ll pay $175 a month

If she uses all her savings, she’ll pay $87 a month

Tldr, if she uses her entire savings to pay off as much as she can, she’ll be getting a free $145 extra a month than if she let it sit

I think if she can keep 6 months of savings. What ever number that would be then dump the rest at the student loans

Agree with the advice that she should keep money to cover expenses for 6 months.
Also like the idea of just paying off more on a monthly basis.
Are there any refinance options? E.g. reducing debt and get a better rate? Although 3.5 is not bad.

I’d probably hold off on the student loan. The rate is low, and these liberal politicians might actually erase part or all of that debt. It’d be a shame to pay it off now. Or if it’s private, it could also be erased or forgiven as some sort of settlement or class action lawsuit. Sure it’s low probability, but these are possible. If the rate on the loan was 6-7% I might pay off a bit more.

Also, I think they’ve frozen the interest and payments on loans at the moment.

All this depends on the specific loan and lender.

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