Q I am a 24-year old graduate student living in Minneapolis. I have very little take-home pay as a result of my tuition deduction (about $11,000 for the academic year). But I have secured a job for the summer that will provide me with about $7,000 between May and August. What you think I should do with this extra income?
Should I leave the money in my savings account? Invest it? Or should I pay the remaining $3,000 on my car loan? (I don't have any student loans.) I invested a significant proportion of my additional income last summer in relatively low-risk mutual funds and have watched it dwindle away in the last six months, so I was unsure about that route this year.
A I can see why you're torn. The good news is that you can't make a mistake choosing any of those options. Get rid of debt? Great. Add to savings? Smart. Invest for the long-haul? Savvy. If it's just one of those three choices, I'd pick the car loan.
But how about dividing the money into three pieces, or at least two? You can play with the numbers and percentages (I'm not sure how much you will have after expenses). I would put the biggest chunk toward getting rid of the car loan. It will boost your savings and earn you a decent rate of return. For example, let's say your $3,000 car loan is at 5 or 6 percent. Paying it off is the equivalent of earning a 5 to 6 percent return on investment. That's not bad in this market.
The economic environment is bad, and how long the downturn will last uncertain. The closer you are to finishing your Ph.D., the better it is for you to have savings. You could end up moving to a different part of the country for a job, and taking on a new job and moving always is expensive. This might take up the rest of what you can save.
But if there is a sliver left, remember, you're young. You spent the time to carefully select a number of good mutual funds. It's a safe bet that over the next 10, 20, 40 years that money will compound considerably. That argues for putting some of the extra savings into the funds.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to firstname.lastname@example.org.