In the Carnival of Under 30 Finances #15 we were asked:

Assume you are an average 25 year old with $25,000 debt (on account of your student loan) You have been given a lump sum $10,000 and the following four choices:

1. Invest it for your retirement funds.
2. Save/invest it for your future home.
3. Save/invest it towards your child’s/children’s future college education.
4. Pay part of your student loan debt.

You can pick only one of the above choices towards which you should use the entire $10,000. Which one will you pick? ..and Why? Assume that the rate of return on the three investments choices is the same and the student loan charges you an interest rate that is equal to this rate of return. Would your answer be any different if the amount was $25,000 instead of $10,000? Again, you can pick only one of the choices.

First I would cross off option 3 because

Ø I am paying off my own student loan debt, therefore, my potential kids will do the same.

Ø Your average 25 year old with student loan debt probably does not have a child yet. It’s pointless to save for something you don’t know you will ever have.

The other 3 options yield the same (negative) returns, with the assumptions given. The next step would be to look at the conditions or “terms” of each of the potential investment options.

Typically retirement funds have conditions that limit the liquidity of your money. Roth IRA comes to mind, with a minimum 5 year penalty for early withdrawals. (If I’m 25 I may need that money for an emergency before I turn 30!)

Using it as an investment for a home seems like the best option because it offers the added opportunity of adding equity to your assets, something that just paying off your loan will NEVER get you. Worst case scenario, in a year or two you could have the option of regaining that money by selling your home (better than the terms of a retirement account).

I was in the same position about a year ago and I took my own advice. Then again, I wasn’t your average 25 year old.

If I was given $25,000 instead, it would be better to pay off the student loan debt because the rate of return for your overall debt is raised up to 0% for that option. Sounds bad, but it is the lesser of … 3 other evils. Investing the money and maintaining the debt (at the same rate) would only break you even, kind of. You would actually lose the value of your investments to inflation AND you will still have $25,000 to pay. You can purchase a home with no money down later if you wanted to build equity.

Submitted to Money, Matter and More Musings for the Carnival of Under 30 Finances #15.]