continue saving or pay down student loan?

[Kristin]

Mustachians, I need a little direction.

My wife and I are off to a good start with our emergency fund.
We currently have $6,000, which is roughly 2.5 months of our current spending rate.
I am struggling with whether we really need all of this in savings (making a sad .5%).  I have a $40k student loan at 6.8% and could definitely start throwing all of our extra money at that instead of splitting between savings and paying down debt.
Fortunately, the only debt we have is our mortgage and my student loan.

Any thoughts on if we should continue growing the emergency fund, take some and pay off a chunk of the student loan, or leave the emergency fund where it is currently and just start putting all the extra cash towards the loan?

Thanks everyone!

Kristin

[bikebum]

Probably depends on how secure your current income is and how quickly you could get another job if you needed. 40k will probably take a while to pay off; I would not want to put an emergency fund on hold until then. Also, 6.8% is not crazy high, not great either though.

My vote is to contribute to the emergency fund and pay off student loans at the same time, until your emergency fund is where you want it. If your student loan rate is higher than your mortgage rate, I would definitely focus on the student loans before paying any extra mortgage payments.

If your current income is very secure and it would be easy to get another job, a 2.5 month emergency may be good enough and you could tackle that student debt hard.

You probably will anyway, but wait until you get some other responses before deciding. Someone else may see something I did not. Congrats for taking control of your financial situation!

[StarryC]

Does your wife work for pay?
Do either or both of your jobs provide health insurance?
Do you have children?
How secure do you think your jobs are?
How low could your expenses go in an emergency?
Do you live in a place with unemployment insurance, and if you were laid off under the right circumstances, would you be eligible?
How easy would it be for either or both of you to get another job?
What percent of your total income are you currently spending?
If your emergency fund were to run out, what would your plan be? (Move in with family, sell the vacation home, nothing?)
What are the likely "emergencies"?  (Medical deductibles, car repair, dental work, job loss)
What type of quick credit do you have available (Credit card limits, home equity line of credit?)

If, for example, you have no kids, your wife works, you are saving more than 50% of your income, both jobs seem relatively secure, you ride bikes to work, your expenses could drop to under $1800/month in an emergency, you would be eligible for unemployment, you are both highly employable in a high demand field, and you could move in with family if your fund ran out, and have $10,000 of available credit. . . then your fund is probably good.

If your wife has no income, cares for your 4 children, and the $2,400 a month expenses are non negotiable, and you have nowhere else to go when it runs out, and your credit limit is $500, then you need a much larger fund. 

[Fuzz]

I like Starry C's response.

If you don't have kids, I would throw all extra money at student loans and possibly a little extra into a retirement account. I think it's OK to put maybe ~200/mo into a 401K or a Roth, depending on your income. You don't need a big e-fund. There are two of you; you both work. It's unlikely that you would both lose your jobs at once (see you're already diversified). If you did have something happen, you could figure it out and deal with it.

I've got a little bit more in student loans and a little bit less in an e-fund. But I also have lots of zero percent CC offers in my mailbox, and could move in with my mom if something horrible happened. My thinking is that if I lost my job, my expenses would go close to zero and I could get another job before I ran out of cash.

If you can access cheap housing in an emergency, and you don't have dependents, then it's pretty easy to bring your costs to close to zero. Pay down that debt!

[Kristin]

OK, so here is what we have:

Does your wife work for pay?
Yes, part time nurse assistant and finishing nursing school in May 2014.  She will then moving straight into a master's program to earn her NP.  She will either be able to work part-time or full-time as a RN starting in June 2014, so our income will drastically increase in 8 months (almost double).

Do either or both of your jobs provide health insurance?
Yes, my job provides health insurance for both of us.

Do you have children?
No children, but planning to start in the about a year.

How secure do you think your jobs are?
My job is very secure.  I have been will the company for over 3 years and received 2 promotions in that time.  If something were to happen, there are direct competitors in the area that I could probably work for immediately.

How low could your expenses go in an emergency?
Our $6,000 emergency fund could cover 2.5 months of our current spending, but I think we could stretch that to about 4 months in a crisis and cut back to bare essentials. 

What percent of your total income are you currently spending?
I am contributing 6% of my income to my 401k, my employer matches that and provides an addtional 6% for a total of 18%.  We also have IRA accounts, but not currently contributing to those.

If your emergency fund were to run out, what would your plan be? (Move in with family, sell the vacation home, nothing?)
What are the likely "emergencies"?  (Medical deductibles, car repair, dental work, job loss)
What type of quick credit do you have available (Credit card limits, home equity line of credit?)
I do have a Visa Card with a $15,000 limit, and I get 0% offers all the time.  I hate using CC's, but I would if need be.

[Stache In Training]

With those answers, I'd probably have to agree with Starry C.  Pay down the debt. 

My students loans didn't, (but I've heard of other's that did/do, and many mortgages do, for an example.) but if you pay ahead, sometimes at the end of the year, they'll "re-evaluate" and lower the payment amount.  It's to make sure you're still paying for the entire term, i.e. more interest for them.  But with a lower payment, you'll be able to either save more after the "re-evaluation," as I understand you may want more of an emergency fund.  Or just keep paying off more.  Just food for thought, in case you lien holder "re-evaluates."

Good luck!

[Kristin]

Thanks everyone!

I was feeling that the $6,000 is probably sufficient for most temporary emergencies like auto repair, house repair, etc.  But this gives me the reassurance I needed that I'm not way off base.
I agree that I will probably continue to put $100 - $200/month into savings to build up an extra fund for investments; but I will now focus on throwing everything else at this student loan.
I appreciate the feedback about student loans re-evaluating the payment amount at the end of the year.  I have not heard this before, but all of my loans are Federal.  So I will definitely see in January if there is an adjustment and report back. That would certainly provide some flexibility in the future if the budget needs to be adjusted.

Thanks again!

Kristin

[Stache In Training]

That sounds like a great plan.  Continue saving a bit, to give you that piece of mind, but put everything else towards paying off your debt. I like it!

I hope your student loans do do (<-hehe) the "re-evaluation." (I'm sure there is an actual term for it.)  My loans were federal too, but were then held via a local bank, and that's who I made the checks out to.  Either way, you should be able to call and ask someone so that you don't have to wait till January to see if it's available.  If you wait, and they don't, then you're probably stuck till next year.  I'd contact them before hand, and see if you can request that a re-evaluation happens.  The worst they are going to say is no, and then you're right back to your plan.  But if they can, then you know to put every penny you can towards it in the next 2 months.  Does that make sense?

[Kristin]

That sounds like a great plan.  Continue saving a bit, to give you that piece of mind, but put everything else towards paying off your debt. I like it!

I hope your student loans do do (<-hehe) the "re-evaluation." (I'm sure there is an actual term for it.)  My loans were federal too, but were then held via a local bank, and that's who I made the checks out to.  Either way, you should be able to call and ask someone so that you don't have to wait till January to see if it's available.  If you wait, and they don't, then you're probably stuck till next year.  I'd contact them before hand, and see if you can request that a re-evaluation happens.  The worst they are going to say is no, and then you're right back to your plan.  But if they can, then you know to put every penny you can towards it in the next 2 months.  Does that make sense?

That absolutely makes sense.  We will also get our tax return in February (usually between $5,000 - $6,000), I will get my annual bonus in March (usually net of $2,000 or more), and will get my annual raise effective 4/1/14.  I am also planning to take 50% of our tax return and put it towards the loan, the other 50% will go to savings, and will also split the bonus 50/50.  That should put a serious dent in the loan by the end of March, and will allocate the additional money from my raise in April going forward.  I think with this plan for the next 2 years, I should be able to pay off the student loan at tax time in 2015, worst case scenario.  That is not accounting for the additional salary dollars my wife should earn effective June 2014 when she starts working as an RN.

I think that is a reasonable plan that will continue to add to our savings.  If our savings grows to more than we realistically need, I can always either put another lump sum towards the loan, or add to the IRA or Vanguard account.
Let me know if anyone else has additional ideas for allocating the tax return and annual bonus.  I figured a 50/50 split would be the safest route.

Thanks guys!  I'm actually kind of excited about this plan :)

[Stache In Training]

Since you're getting a windfall of about 8k by march, I'd say to actually look into investing in a total stock market or 500 index fund. (In the mean time, stick with the plan you already laid out: the savings 100-200 a month and rest towards student loans)  By march, you'll already have more saved in your emergency fund, and you'll know if your student loan payment amount will have changed. 

Between (hopefully) having lower loan payment amounts, a raise, and already having 5-ish more months (Nov, dec, jan, feb and march) of savings put towards your emergency fund; Your emergency fund will be in better shape, and you can probably switch from putting that savings toward your emergency fund (or just part of it), to toward investments.  Also, since you're starting with 8k, it won't take you long to get up to 10k, which will give you even lower fees. (admiral funds via Vanguard)  That's just my thought.  Get a head start on investing.  I'm sure others may say to yes, use it to pay down your debt.  It's going to be a personal choice I think.

Either way, I'd definitely say to pretend you're not getting a raise, when it comes to spending habits, and just put that extra money on "auto" into savings. (whether that savings is emergency fund, student loan payoff, or investing, will be up to you.)

Also, I see you're only getting .5% on your savings.  Check out capital one 360.  Their savings accounts are .75%, and even the checking accounts have interest (Only like .2%, but better than nothing.)  Here's my refer a friend link: https://r.capitalone360.com/fvMaBF6sbX  If you use that, you'll get $20 and I'll get $20.  Please don't feel like I'm at all pushing you to use that.  In fact, if you go to the MMM blog, I think you'll get an even better sign up deal.  I won't be hurt if you don't use mine. :P  Either way, .25% more can add up to a bunch over the long run!

P.S. You mention 'add to the IRA' as a possible next step.  I might move that to more of an immediate step after the emergency fund gets to wherever you are comfortable.  You always want to be putting in the max.

Good luck! I think you're definitely on the right path.  You're choosing between multiple good options.  So almost a no lose!