Comments on: What the heck is consumption smoothing? http://totalcandor.com/blog/2008/07/what-the-heck-is-consumption-smoothing/ A Conversation About Income, Wealth, and the Steps in Between Sun, 22 Apr 2012 14:08:55 -0700 http://wordpress.org/?v=2.8.5 hourly 1 By: Michael http://totalcandor.com/blog/2008/07/what-the-heck-is-consumption-smoothing/comment-page-1/#comment-11555 Michael Tue, 22 Jul 2008 21:39:46 +0000 http://totalcandor.com/blog/?p=223#comment-11555 The point I'm making in my last sentence is that many people incorrectly feel that saving will come easier later in life when the student loans are paid off. I believe that to be inaccurate because life's natural expenses (wedding, kids, bigger home, higher taxes, higher utilities) will creep up even if you are very careful. To your question about selecting what to do with your excess funds, be it to save more or to pay off debt, know that you're asking a great question. Too many people never struggle with what to do in your situation because they never feel like they have extra funds in the first place. First, make sure you have an emergency fund of 3-6 months of living expenses. So, if you have accomplished that goal, that comes first. If you have, then the choice between saving more in a high-interest savings account vs. paying off student debt is a classic trade-off in interest rates. Which is paying higher? Both are guaranteed returns. But remember, you can't take out student loans again if you have an emergency, so make sure that's taken care of first. Of course, this requires making several other assumptions, including that you have no other expensive (credit card) debt and are already maxing out your match at your workplace retirement plan. The point I’m making in my last sentence is that many people incorrectly feel that saving will come easier later in life when the student loans are paid off. I believe that to be inaccurate because life’s natural expenses (wedding, kids, bigger home, higher taxes, higher utilities) will creep up even if you are very careful.

To your question about selecting what to do with your excess funds, be it to save more or to pay off debt, know that you’re asking a great question. Too many people never struggle with what to do in your situation because they never feel like they have extra funds in the first place.

First, make sure you have an emergency fund of 3-6 months of living expenses. So, if you have accomplished that goal, that comes first. If you have, then the choice between saving more in a high-interest savings account vs. paying off student debt is a classic trade-off in interest rates. Which is paying higher? Both are guaranteed returns. But remember, you can’t take out student loans again if you have an emergency, so make sure that’s taken care of first.

Of course, this requires making several other assumptions, including that you have no other expensive (credit card) debt and are already maxing out your match at your workplace retirement plan.

]]> By: M. Contreras http://totalcandor.com/blog/2008/07/what-the-heck-is-consumption-smoothing/comment-page-1/#comment-11542 M. Contreras Tue, 22 Jul 2008 19:14:16 +0000 http://totalcandor.com/blog/?p=223#comment-11542 I'm interested in your last sentence: "For most people (even those with student loans), that means when they first start out in the “real world.” Having completed by first year in "The Real Wold", as a rule, I put at least 10% of every paycheck into my ING savings account. However, I occasionally get a large check every quarter or so. I can't decide if I should pay off my highest rate student loan first or save more. I’m interested in your last sentence: “For most people (even those with student loans), that means when they first start out in the “real world.”

Having completed by first year in “The Real Wold”, as a rule, I put at least 10% of every paycheck into my ING savings account. However, I occasionally get a large check every quarter or so. I can’t decide if I should pay off my highest rate student loan first or save more.

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