Help request: Need your advice on best way to allocate finances…

[fuzz stash]

Hello 'Stash community!  I've been a reader for a few months now and have already learned a TON and have already began to make some significant changes.  It's amazing how badly I was screaming for this site after looking at my previous habits with money.  I knew there was room for improvement but all I can say is...YIKES!
But the new enlightened me is moving forward and eager to start building my own stash.
 
To ask my question I need to give you some quick background facts.  I’m 38 and my wife is 31.  I am essentially starting over after being a part of the mortgage implode in 2007-08, followed by a failed business (plenty of story here but I’ll save that for the sake of your time).  I’ve spent the past several years paying off debts, getting married in 2013, buying a house, etc.  Basically, plenty of money has been flowing out but none getting stored away.  Suffice it to say I’ve had to unwind a lot of bad habits in terms of money management.  The good news is through MMM, readers like you posting great advice and reading some books on wealth building/investing I’ve made a lot of headway in my mindset regarding money.  Growing a mature stash is not going to be a walk in the park, but that’s quite okay.  I have my sleeves rolled up and am more determined than ever to get to financial freedom.  My wife and I both work fulltime, she is finishing up Grad school this year and I am working on my undergrad degree which will take me another couple of years to complete. 

I am somewhat torn and would really appreciate some advice on how to best allocate all extra cash flow from this point on. 

As I see it these are the primary options we have (though I'm open to new ideas):

Option 1:  100% goes towards paying off student loans until paid (especially the unsubsidized loan that compounds monthly @ 6.21%--shudder).  In this scenario, after loans are paid off I would then begin to fill-up the retire account (401K + Roth IRA consisting of index funds).

Option 2:  Split funds 50/50 (or whichever ratio is decided to be best) toward paying off student loans and investing in index funds.

Option 3:  a better idea???

Part of me wants to get the magic of compound interest working since I’m 38, and the window of opportunity to reap the full benefits are beginning to slip away.
The other half of me just wants to be debt free and really doesn’t like the idea of paying 6-10K in interest on student loans.  This would delay building my freedom fund, but only by a year or so barring any setbacks.

The other side of this is the fact that the market is rather overpriced right now in my opinion.  This fact makes me lean towards the side of focusing on paying off school loans now, then hopefully the market corrects at some point in the not so distant future and I can really ramp up my retirement savings.

I’m eager to hear back from some of you more senior Mustachians.  Whether you have some better ideas or even a vote for which plan makes more sense to you, I’m all ears.   Disclaimer:  If you can’t restrain yourself from punching me in the face I can take it, just know that  I am now very aware that I made things harder on myself with past choices so please keep the feedback constructive.  The important thing is I’ve learned by means of the school of hard knocks and am now prepared to do things right going forward.   

Please accept my sincere thank you for reading and I very much welcome your feedback!

-Fuzz Stash

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Current Financial Snapshot:

Household income (100% W-2):  $90,000 gross / $67,500 net
Current expenses:
Mortgage $14,760 (includes PITI – just refi’d down to 3.5% 30yr Fixed))
Car Loans $0  (both paid off)
Car Insurance $1,800
Internet  $840  (in a contract, will switch once it expires)
Phone  $1,440  (in a contract, will switch once it expires)
TV $720  (another contract..gulp.  I know, I know.  To save you the trouble, I punched myself in the face multiple times for all these contracts and wasted money)
Misc Food and Supplements  1040
Travel $2400
Electric $1800 (I live in Florida)
Water $504
Gas $1400
Student Loan  (See School Debt below)
Groceries  $300 x 12 = 2400   
Dog Food & Related Expenses  $40 x 12 = 480
Gifts  $800
Clothing  $1,000 (working on this with the wife)
Total $31,384

School debt:  $35,000 (when all is said and done)
$20,000 is unsubsidized and compounding at a rate of 6.21% monthly
The other $15,000 will be deferred until I complete school in a couple yrs.

Current Assets:  $5,000 in 401K 

[Spudd]

I would take option 1. That 6% is a big number.

[yoga mama]

I'm not a senior mustachian by any means but I think the overwhelming response you will get here is knock out that 6% unsubsidized debt.  However contributing to your employer retirement plans also makes sense if you get a match.  If not, student loans over retirement right now.

[TexasStash]

I think everyone here pretty much nailed it, but I want to add my voice for emphasis. If your employer gives 50% or 100% match to 401k contributions, contribute exactly enough to get the full match that they offer, and then put everything else toward that ugly student loan.

The reasoning for this is simple... Any match is a nice guaranteed return. Paying off student debt is a nice 6.21% return. Market could return 8-10% but it could easily return 4%. I'd take the automatic return when interest is that high any day.

I'd think pretty hard about getting pretty aggressive in cutting expenses until the student loan with the high rate is paid off... Don't just finish out a contract because it's a contract. They all have termination clauses. Calculate whether the termination fee is small enough that you can come out ahead by cancelling now and not paying the next X months. If you could drop to 50 per month on cell phones, that termination fee for both might be recouped in 3-4 months. Depends on when those contracts end I suppose.

[fuzz stash]

Thanks to everyone for their comments.  All great ideas and I am strongly leaning towards just annihilating the student loan debt first and foremost. 

My employer's 401K match is 25% which doesn't make this option a clear cut choice IMO.  The other challenge is the 401K provider charges fees that equate to 1 - 1.5% from what I understand.  I'm looking further into this, then if/when I finish school and move on--you have to look at the 401k transfer fees.  401k fees aren't talked about much, but it's definitely something worth looking into. The compounding effect of these fees can have a significant (granted not crippling) effect on your freedom fund over time. 

For anybody interested in knowing what those hidden fees really are with their provider you can use this app for a free analysis:  https://www.strongholdfinancial.com/

[frugaliknowit]

Do the full 401K match and attack the student loan.  25% against 6% is worth it.

[Lis]

Do the full 401K match and attack the student loan.  25% against 6% is worth it.

Yup. Employer's 401k plans tend to have high fees, but a match at pretty much any rate will offset that. Contribute the minimum you can to get the full match, then throw every other penny towards that student loan. Being free of it is an amazing feeling :)

[Retired To Win]

In you original post, you showed no Emergency Reserve funds.  Your whole financial plan can come crashing down if your income gets interrupted and you've got no backup savings.  So you really should give priority to building a cash reserve capable of covering a minimum of 6 months of your basic living expenses.  (I keep a year's worth.)  Shaving off some of the optional budget lines you listed, I would shoot for a minimum of $14K to $15K in that reserve account.

Good luck.