Monday, April 5, 2010

How Would You Proceed?

My husband and I are approaching a small financial crossroads. We make his final graduate school payment in June, he graduates in August, and that will bring a small automatic raise (about $1000 a school year minimum). That means that we will have an extra $750 a month starting in August. We’re wondering what we should do with it since we have several options. I know, it’s a good problem to have, but I have a personal finance blog for a reason (I over-think money)…

Here’s the info we’re working with:
  • We’re in our mid-20s and want to retire at age 52.
  • Our current emergency fund has 3-4 months of expenses in it and our jobs are VERY stable.
  • Our mortgage has about $73,300 left at 5.375% and is already on track to be paid off by the end of 2017 instead of 2022.
  • Hubby’s car loan has about $10,700 left at 4.6% and is already on track to be paid off by the end of 2011 instead of 2013.
  • We contribute 6% to my 401k, which is matched up to 6%.
  • We fully fund one Roth IRA ($5000 a year).
  • We put about $200 a month into our Scottrade account.
  • We put $250 a month into our vacation account.
  • We each get $75 a month in “fun” money.
  • We also put $200 a month into a home and auto maintenance account.
Mr. BFS and I agree on a couple of things and are wondering about a few other options, so he suggested I ask you. What would you do with an extra $750 a month in our position? Do you need to know anything else in order to decide?


  1. Good question. I would pay off the car first, then add a little into the fun money because it sounds like you've earned it. After the car is paid I'd snowball the car payment and $650 from the $750 ($100 to fun$) and put it on the house. I'm sure that would put you over $1000 per month or at least $12,000 per year extra on the house.

    That's just me. You could also invests it all had hope the market doesn't tank :-)

  2. First the car. Then I build up the emergency fund to 12 months. Then fund a second IRA, and add some to the fun and vacation fund.

    Next send a check to me. (Just teasing)
    BTW BFS, FMF is 5 today.

  3. I'm of a similar mindset to Jeff, but with one additional step. I'd first double check that you're still comfortable with the retirement plan number. If you are, fantastic, if not beef up retirement savings, followed by a combination of car repayment and fun. Otherwise, just car and fun. I believe that you need to enjoy raises a little, otherwise the incentive to work hard for them diminishes.

  4. I would use it to help pay off the car then use the car payment amount towards upping contributions to your 401K and towards the house. I feel that if you want to retire at 52, you may need to up your retirement savings more than 6% (even with a matching 6%).

  5. I would fund the 2nd Roth and get the car paid off faster. You mention though that you're sending $250 per month to the Scottrade account. Since you mention it separately from funding one Roth, I just wanted to know you can trade within a Roth, right? (Such as by opening a Roth at Scottrade and then using that $250 per month that you were sending already to fund the Roth?)

  6. You sound like you are doing great! (If only I were so organized.) I think, if I were in your position, I would pay off the car loan even sooner than the 2011 goal. It looks like the last of your remaining debt not counting your mortgage. Which ever decision you make, I'm sure it will be a financially sound one!

  7. Julie, the Roth IRA is for retirement too. Would you put more into a 401k or open another Roth IRA?

  8. Jackie, yep, we know. In fact, when we open another Roth IRA, it would be heavily invested in specific high yield stocks and managed by hubby.

    We're funding Scottrade separately since it will be used as the bridge that will cover the 8 years between the time we retire and when we can easily start withdrawing from our retirement accounts.

  9. Wow to everyone...I see the death of our car note in the close future...that's the one thing absolutely everyone agreed on. :-)

    Alrighty then...we'll definitely pay off the car ASAP. My husband really liked the suggestions that included raising the fun money (surprise, surprise), so that will probably happen too.

    Would y'all put everything possible towards the car? Even if that meant putting off a second Roth IRA until 2011?

  10. I would raise the fun money, $50/month at least ($25 for each), then fully fund the 2nd Roth and the remaining going to the car loan.

    My priority would be the retirement, as there isn't a big deal to paying off the car a year early.

    I don't think you could go wrong either way. Mr. BFS needs the extra money for curling. :-)

  11. BFS,

    I would fund another Roth IRA and then on top of that max out your 401K to full 16500 or whatever it will be when you are done with the car and funding another Roth IRA. I am of the mindset that you can't save enough for retirement. I also agree with MikeS about upping your fun money.

  12. I would beef up the emergency fund. 3-4 months isn't enough anymore.

  13. Hey BFS, looks like you've been getting great tips. I tend to agree, pay off that car loan! Once that loan is paid off, I'd bump up the 401k to 8 or 9 percent or the max of the $16,500 and the rest snowball towards the mortgage. And hey, give yourself a small treat and see if you can squeeze in some fun money. It's well deserved. :-)

  14. MikeS, the curling comment made my husband laugh. :-)

  15. Julie and JOB's Money, I agree that we need more retirement investments. I'm thinking we need to fully fund another Roth IRA before I increase my 401k contributions, right?

  16. Claire, I agree...we need a few more months. We'll start adding a little more to our emergency fund every month and let it build up. Our jobs are very stable, so we'll take advantage while we can, right?

  17. BFS, definitely fully fund the Roth IRA before upping contributions to your 401K. I would also put in a goal of maxing out the 401K to 16,500. To keep things in perspective, my husband and I have very stable jobs, but since his parents declared bankruptcy when he was a child, he insists we put a large amount in our FFEF. It is liquid and should probably do better in an investment fund, but I can't justify taking away his feelings of security and ability to sleep at night for some money.

  18. Julie, I can totally see us funding another Roth IRA and being able to bump up my 401k a couple of percentage points, but I don't think we'll be able to fund two Roth IRA's and put an additional $16,500 into my 401k in the same year. Well, we could, but it would require giving up other savings goals (like Auto and Home Maintenance and the Vacation and Fun Money accounts).

    I'll definitely zero in on another Roth IRA though. :-)

    I'm assuming an FFEF is an emergency fund...what do the first two "F"'s stand for?

    I too would support a large emergency fund if it made my husband feel is a tool for happiness and security, right?

  19. wow, great string, here are a few thoughts....

    #1- Definitely consider more than 3-4 months emergency fund. Even with stable jobs, there are so many things that can go wrong and you need cash fast. I personally like to have a minimum of 9 months in a MM just in case.

    #2- Consider paying to convert traditional IRA's to Roth's this year. Makes sense for a lot of people.

    #3-If your husband likes curling, I strongly suggest a 16 foot or longer bar shuffleboard table! I guarantee he'll thank me.

  20. Car, thanks for the suggestions.

    #1-We will be increasing our emergency fund a little bit at a time. I was wondering, can't you lose money in a Money Market account though? Isn't it a little unsafe for an emergency fund or am I misunderstanding how they work?

    #2-We don't have any regular IRA's, so we're good there.

    #3-My hubby likes the sweeping part of Curling, so I think the shuffleboard is out. BUT, he'd love for me to add on a Curling lane to the house! :-)

  21. #1- Money Markets are liquid, close to cash, and have minimal risk. While rates suck right now, they're apt to go up again soon and even with bad rates, small interest is better than no interest. If memory serves, the first time one dropped below $1 was 2 years ago, and the Treasury swooped in to prevent panic and put in a temporary guarantee to absorb any potential losses for investors.

    #3- While many die hards won't allow you to go near the table after a throw, you consider adding a sawdust sweeping component to bar shuffleboard!

  22. BFS,

    The FF means fully funded. We have a little under 6 months' replacement salary in our emergency fund.

    I think that getting as close to fully funding 2 Roth IRAs and maxing out your 401K as you can is a good goal. You don't have to get there immediately, but it will definitely help with your goal of retiring early. My husband plans to retire early. Me? Not really because I love what I do. We still max out both our 401Ks (16500 each) a year. We also have close to 50% high-3 salary pensions waiting for us. We don't qualify for Roth IRAs.

  23. I would split it between paying off the car and starting to give regularly to charity. Donating time is great, but donating money faithfully is often even more difficult! And, the reality is that a small amount of dollars can go a long way in many parts of the world.

  24. Julie, thanks for explaining.

    Yep, I think we're going to divide up 90% of the new money between a 2nd Roth IRA, the car loan, and our emergency fund. 10% will be divided between our fun money accounts.

    We came up with an extra $1300 from an unexpected tax refund and are debating whether to pay down the car loan with all of it or split it between investments and the car loan.

    I think it's kinda' cool that we're discussing extra money and only disagreeing about how to responsibly use it...LOL.

  25. Amanda, my only problem with giving money to charities is that I usually don't agree with the way the money is spent and sometimes's like I'm sitting there criticizing every little waste since my money is involved. I rather donate my time since I have some control on how I'm "used" as a resource.

    On the subject though, I do donate regularly to Pughearts and spontaneously to all sorts of charities (Alzheimer's research, breast cancer walks, etc). I do it with my fun money and it's not an earth-shattering amount ($10-$20 a month), so it isn't seen in our budget.

    Anyway, thanks for the suggestions! I do appreciate everyone's involvement. :-)