What's the best use of extra money from a raise?

[brokelibrarian]

Hello, everyone.

Long time MMM blog reader, medium-time forum lurker, and aspiring not-drowning-in-debt lady. I have mustachian habits but no mustache yet and I’m at a bit of a crossroads in my financial life. 

Long story short, I’ve been dragging myself out of a huge debt emergency for 5 years and it’s been a long and winding road full of financial setbacks. My net worth is still a negative number but it’s almost $50k closer to zero than it was 5 years ago. I’m not putting out a full case study because I think I’m on a good trajectory (I live on about $18k/year and the rest goes to debt repayment.), but I just FINALLY got a new job that’s paying me competitively and isn’t killing my mental health (I was a prison librarian for 2 ½ years and now I’m a faculty librarian at a community college--more money, summers off, and most importantly: not prison!) so I’m at a point where I actually have the ability to make choices about my money instead of throwing all of it at whatever fire is currently singeing me.

Since getting a salary increase a couple of months ago I haven’t changed my spending habits, other than increasing credit card payments. I’ve been throwing every spare penny at debt for 5 years, sometimes leading to more debt because I don’t have enough savings for life’s hiccups. I get a significantly bigger paycheck now but I also have to budget for unpaid summers so after bills and planning for that I have an extra $350/month I wasn’t making 4 months ago. When the fall semester starts and I have an entire academic year to save for summer instead of one semester I’ll have an extra $700/month after summer savings.

So here’s my question: What’s the best thing for me to do with this money at this point? Hit loans harder, build up a high yield savings account, or start investing outside of my employer’s retirement plan? I’m guessing the answer is “YES” but I don’t know what combination of the three makes the best use of my money while leaving me a reasonable cushion for those inevitable hiccups.

Some details:
*35 years old, never married, no kids, no pets. Will be getting married in a year or two and moving into his house so I’m not concerned about saving up for that in the near term. He has 3 kids 50% of the time and that’s plenty of parenting for me so we’re not planning on more.
*Master’s degree with $50k in debt with 6.55% APR on $45k and 7.65% on $5k, currently on income-based repayment & paying $302/month. No undergrad loans.
*Two Lending Club loans to consolidate credit card debt from feeding myself during unemployment 1. after grad school and 2. after relocating for former partner’s dream job:
        #$1624 @ 9.33% APR, paying $185/month with scheduled payoff Dec. 2018
        #$3930 @ 6.99% APR, paying $175/month with scheduled payoff March 2020
*Credit card debt from last round of savings-killing disaster will be paid off as soon as today’s transfer clears (GIGANTIC MILESTONE!). Credit score before this payoff is 780.
*$1k emergency fund in standard credit union savings account. Summer savings money is also going in there at a rate of $1500/month until May. Planning on moving that to a high yield savings account within a few weeks, unless someone has a better idea. I will need to live off that money from mid-May through August (when I’ll start contributing again) so it has to be accessible (within a few days if not immediately).
*I keep a part time “substitute” job at a public library that brings in another $1200/year or so. As soon as that paycheck clears I make a payment for that exact amount on whatever debt has the highest interest rate at the moment.
*I’m in the planning stages of opening an Etsy shop as a side hustle that I’m hoping will make enough money to cover the cost of my bookbinding/paper marbling habit. More would be wonderful but I don’t want it to become a third job (yet). I pushed myself too hard for too long and I'm careful these days about making sure I have some leisure time for my mental health.
*I’m going to start taking a few art/graphic design classes here and there because they’re free since I work for a state school and I’m hoping that will help me build up that business over time. I also just love being a student and can’t turn down free classes.
*My only “property” is my 11 year old car that’s long paid-off and worth a little under $4k. It’s going strong and I’m hoping to drive it into the junkyard myself but I am concerned about possibly needing to replace it soon-ish because machines don’t care about your plans.
*I have about $28k in assets scattered around a bit from several years of baby-stepping my way into a decent-paying job. The only part of it I’m both open to and capable of doing anything with is a tiny IRA worth a little over $2k from my last job before I relocated (rolled over from a 401(k) after I stopped contributing via paychecks). The rest is in state pension funds, one of which is vested and the other of which will be vested in about 8 months.
***I’m interested in FI but not RE. I chose my profession because I love it and I’m passionate about it and it gets me out of bed in the morning. Sure, I’d love to be in a position for work to be optional (dropping back to ½ or ¾ time would be nice and is easily doable in libraries--it's finding a FT job that's hard), but I’m pretty confident I’ll opt to do it until I’m physically unable to do so. IT’S THAT GOOD. And summers off mean I can still travel and pursue things I couldn’t with a year-round job. So I guess you could say that my ultimate goal is to be a half-time librarian and half-time bookbinder until I decide I want to stop or my health forces me to retire.

[Lady SA]

sometimes leading to more debt because I don’t have enough savings for life’s hiccups.

Based purely on this, you should bank this extra money. See https://forum.mrmoneymustache.com/investor-alley/investment-order/

0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.     

[Shelley]

So for me I would increase your emergency fund to a level you are comfortable with, and do the 401k match. Then I’d put everything towards your 9.33% card, once that’s done snowball onto the 6.99% card. These should be paid off pretty quickly. I’m not sure on all the US HSA, Roth, ira stuff. But I would keep snowballing onto the student loan at 7.65% then start having a crack at the big one. Snowballing the debts like that will really motivate you, as you see things being paid off, that’s why I’m suggesting doing it in amount of debt order rather than interest rate order.
Good luck, and well done on your progress so far!

[brokelibrarian]

Lady SA: Thanks for that link. I hadn't come across that post yet and it's a really helpful roadmap for the long term. I figured the answer was going to be to focus on saving for now so that's probably what I'll do for the rest of this semester and then revisit my situation after summer when I start getting paychecks again.

Shelley:

So for me I would increase your emergency fund to a level you are comfortable with, and do the 401k match. Then I’d put everything towards your 9.33% card, once that’s done snowball onto the 6.99% card. These should be paid off pretty quickly. I’m not sure on all the US HSA, Roth, ira stuff. But I would keep snowballing onto the student loan at 7.65% then start having a crack at the big one. Snowballing the debts like that will really motivate you, as you see things being paid off, that’s why I’m suggesting doing it in amount of debt order rather than interest rate order.
Good luck, and well done on your progress so far!

What you outlined is actually the other way around (paying off in interest-rate order) and that's my general plan. It's nice to hear it from someone outside my head to reinforce that I'm doing what I should be doing.

Thanks for the advice y'all. I'm good at overthinking. :-)

[spicykissa]

At those rates, definitely debt payoff. Just make sure you don't run the cards up again, as I think you've learned. It sounds like 401k match isn't part of your equation, since you have the pension.

Do you have a solid, realistic sense of your expenses, so you know how much to save? Sometimes people have trouble budgeting for irregular expenses--some things are true unexpected emergencies, and some things are bound to happen, you just don't know exactly when (like your car--good thinking ahead). Diligent tracking helps a lot with this! I was someone who always underestimated things like car repairs, travel for family emergencies, minor medical stuff, etc.

[brokelibrarian]

Thanks for that. I've been an avid Mint user for about 5 years and that's when I saw the gravity of the situation and started trying to climb out. I have my expenses under control and I have an "everything else" budget every month ($50-100 depending on the month) to try to plan for some of the smaller things that come up. Whatever's left from that every month went to credit cards but will now go to savings.

There's no 401(k) but my employer and I both put a mandatory 7.5% into the pension so I feel pretty good about that. Crappy prison job was mandatory 9% because you can retire at 55 (not worth it) so even though I was only there 27 months it's a decent little chunk. That's actually the main reason my net worth has gone "up" so much. And both those jobs are state jobs so the prison work counts toward my vesting schedule even though I'm in a new plan now. It'll count for my service credit too when I start getting ready for retirement.

I've been keeping a $1k emergency fund but based on the previous responses and some of the other things I've seen on the forum I think I'll take this semester's extra pay and bank most of it and then in the fall when my extra chunk doubles and goes up a bit because of my step increase I'll look at making extra payments, if nothing tragic happens financially between now and August. I'm thinking that if I save up my $1k misc money, enough for medical/car insurance deductibles should I need them, and my max annual out of pocket medical spending I'll be comfortable with starting to dump extra into debt.