Hi all -- I've been focused on paying down debt, but am starting to think I need to adjust my strategy to a more balanced approach between debt payoff and retirement savings. What approach would you take and why?
Current Debts (86,126):
Mortgage (5.4%): 16,351
Federal Student Loan (5.16%): 20,997
Private Student Loan (3.59% Variable): 41,290
Truck Loan (1.99%): 7,488
In 2015, we put 34% towards debt (calculated off of gross salary)
Current Retirement Savings:
Me: 4% into a 401K at work, 4% match
HB: 4% into a 401K at work. 10.5% additional. (Yes that's a 262% automatic return)
This works out to be about a 9% savings rate (based off gross salary) for retirement if you count the matches as extra compensation.
Income: 2 earners about 140K/yr combined gross income.
Emergency fund: Live on last month's income + ~2k in targeted spending account that could be tapped for emergencies if needed. Works out to be about a 1 month emergency fund.
Current Strategy:
1. Save into 401K the minimum to get matches.
2. Put all extra money on to the highest interest debt -- our mortgage -- at 5.4%. The mortgage interest is not tax deductible. Also this is on an adjustable rate that will increase to 7+ percent in 2019. Payoff likely in Oct 2016.
3. Put all extra money on to the 5.15% student loan. With the student loan interest deduction, the effective interest rate is 3.86%. Payoff expected in February 2017?? See here for rational for why the effective interest rate is lower than actual interest rate:
http://forum.mrmoneymustache.com/ask-a-mustachian/student-loan-interest-deduction/This is where we hit a turning point, as we will have paid off all debt with a 5%+ interest rate.
What would you do next, and in what order would you do these things? Would you balance between debt payoff and savings? Total debt would be about 43K at that point, mixed between the 1.99% car loan and the private student loan at a variable 3.59% (effective interest rate 2.69% because of the student loan interest deduction).
Some options:
- Save up emergency fund to at least 3 months worth of expenses (~12k). Might want to pad even further because considering having kids in the next 18 months. Would need to plan for unpaid leave for maternity leave.
- Pay off truck - gets rid of minimum payment in 1-2 months worth of extra debt repayment but is a very low interest rate. Definition of a quick win.
- Bump up 401K contributions - HB's would have priority as my 401K has a terrible expense ratio of .75%
- Save for a house payment so we can stop living in a mobile home.
- Continue to go full-throttle on debt repayment and be debt free in an additional 15 months.
Any suggestions are welcome!! Please let me know if you have questions / need clarification.