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How would you advise a recent college graduate who wants to get married, is in debt but is able to save money every month?

I received this email from Dean who is in this situation right now:

I have about $24,000 of low interest student loans to pay off, and am building up emergency savings. I know it’s smart to pay the minimum on the loans while they are at a low 3% and invest some extra money, but am I really able to invest for a year knowing that I need a full year to gain long-term gains privileges?

Even as I write this it seems like putting in $300 a month would be a good idea, while putting the rest ($400+?) in savings.

I think I’ll have to pay for a ring in about a year (knock on wood), so I should keep that liquid.

What advice would you give Dean?

Before I get started, I have to come clean on my own bias.

I just hate debt. It’s more than just a financial issue. I just don’t like owing money to anyone and I don’t like it for other people either.

My experience tells me that nobody ever got rich having debt.  More important; I’ve never met anyone who had a lot of debt who was really happy.

Of course, plenty of people made money in real estate.  And they did that by taking out mortgages.  But that is just about the only kind of debt that ever makes sense to me. And as recent events prove – mortgage debt can also be dangerous.

Having owned up to that, here are my thoughts for Dean:

1. You have to take a great deal of pride in having the foresight to even look at this issue.   Many young folks don’t even take the time to consider asking for advice. They do what they think is right without bouncing the ideas off of other people.  Dean is a frequent visitor and commenter on many financial blogs.  That means he’s doing what he can to educate himself and make smart decisions.  Bravo Dean!

2. I also like the idea of building up an emergency savings account.  Just make sure you know how much you need in that account.  From the information you provided, it’s tough for any of us to tell you what that amount needs to be but a good rule of thumb is 6 to 12 months of spending.  But remember than an emergency fund is liquid and it’s invested in the bank.  You won’t get much of a return but you get liquidity and safety.  That’s what you should be looking for when you set up an emergency fund.

3. I don’t like the idea of investing the money you could be using to pay off debts.  If you invest that money, it assumes you can do so and earn more than the 3% that you are paying on your debts.  Bank accounts aren’t paying 3% so you must be investing in the stock market.  While you’ve made a killing on that strategy this year (so far), nobody can guarantee that strategy will work out over your own time frame.   In fact, the interest they charge you on your debts could sky rocket just at the time when your stock market investments tank.  Not a pretty picture.  I’d play it safe and throw everything I had at the debt.

4. I’m not a huge fan of making investment decisions based on tax consequences.  The tax angle is important, but it’s secondary. The most important consideration should be your goals and risk tolerance.  You can’t control where the market is going to be when you need the money.  For that reason, if you invest in the market, you should do so with the idea of keeping your money invested for at least 5 to 10 years.  If you need the money in 12 months and you invest in the stock market, you are speculating and therefore, taking on much greater risk.  This doesn’t turn me on all that much.

5. “The Ring” scares me.  Dean, if you are in debt, I’m going to assume that your fiancé knows about it.  Have you discussed your finances with her?  Is a ring the best use of your money when you are just starting out?  Do you think it’s more important to invest in a ring than it is to invest in yourself?  Have you and your future wife considered the trade-offs between the rock and the freedom (of having less debt)?

Again, I admit that I have a bias against spending a ton of money on jewelry and I might be alone on this. In fact, I only bought a “nice” ring for my wife on our 20^th anniversary – when it was well within our budget and at a time when we were fortunate enough to have no debt.

(Had she insisted on having an expensive rock on her finger before we got married, it would have been a huge red flag for me.  It could signal that we had different values and therefore not well suited for each other.)

Readers, what do you think?  Would you give Dean different advice?  How do you feel about spending money on a wedding ring when you are a debt?

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