Prioritizing Savings

[jeep725]

My first post! I've been reading through this forum as well as Bogleheads. My struggle right now is with prioritizing savings, investments, and debt.

Debt:
~$5000 car loan, 3.75% (paying $314/mo)
~$5000 student loan, 3.875% (paying $122/mo)
~$115k mortgage, just refid into 15 yr fixed at 3.25% (no escrows, $810/mo)

Hubby contributes 5% into 401k and company matches with 10%

I just opened a ROTH and set up auto pay for $100/mo, and also just put in $3500 for a 2015 contribution. (OThis $$ came out of emergency fund, and still have $7000 earmarked for emergency in savings earning 1%.)

(We also have a 529 plan, and I have a rollover IRA that I have not been contributing to)

Here's where my prioritizing is causing me some confusion. I've been wanting to build up emergency fund in I bonds, although I know this needs a 1 year seasoning to become liquid. I put $2350 in December, and am trying to figure out should I put some in I bonds every month to start seasoning another $7000 in emergency fund?

OR would this extra money be better spent going in to the Roth to max out 2015 and 2016 right away? Knowing if we did have an emergency I could in theory take it out again?

OR would this extra money be better spent paying down the car or student loan? Both of which are not high interest debt.

OR keep socking money away in liquid reserves for emergency earning basically nothing?

I'm very conflicted over the options. Any thoughts or suggestions?

[Glenstache]

There are many threads on here about emergency fund strategies. If you have a 1 year wait period, then it is not accessible for emergencies. Bonds are good as a stable, low risk place to stash money.

As to paying down debts that is a balance against your expected real rate of return. Paying off debt is a very low risk way to increase your net worth and is very satisfying/liberating. But, over a 10 year time frame, if you go 5% in investments but got effectively 4% back from debts, which is the better strategy?

Look at your car related expenses and see if you can whittle those down (many threads on car payments, I'm sure a parallel is in one of them). Personally, I sold a newish car I had payments on, bought a used mid-mileage car and freed up nearly $10K. That obviously depends on the car/situation but is often low hanging fruit.

[clarkfan1979]

I am a big fan of a minimum 6 month emergency fund. This is based on both people losing their jobs at the same time.

[Greenback Reproduction Specialist]

I'm also a big fan of having a 6 month emergency fund, in CASH. I'm OK if it isn't earning anything, because it is money I dont want risk associated with. I suppose there is inflation risk, but that is why I have a little(and I do mean little) saved in gold, just for that off chance that inflation gets crazy.

OR would this extra money be better spent going in to the Roth to max out 2015 and 2016 right away? Knowing if we did have an emergency I could in theory take it out again?

Issue I see here is the early withdraw penalty, and it could actually loose value between now and when you need it, leaving you with less than 6 months savings.

should I put some in I bonds every month to start seasoning another $7000 in emergency fund?

This is an idea I have considered as well, but in addition to my emergency fund, and more like a low interest savings account that cannot be touched for a while. But you may not be able to access it when you need it.

OR would this extra money be better spent paying down the car or student loan? Both of which are not high interest debt.

If I were in your shoes, I would get serious about knocking out both and quick, instead of investing. The interest isnt to bad, but the car is a depreciating liability, and the student loan will NEVER go away, even in bankruptcy, unless paid off. When those payments are gone, you now have $400+ per month you can stash away! And never have to worry about paying on if you loose your job before FIRE, and makes obtaining FIRE $400 less per month.

Just my two cents.

[TheAnonOne]

OR would this extra money be better spent paying down the car or student loan? Both of which are not high interest debt.

If I were in your shoes, I would get serious about knocking out both and quick, instead of investing. The interest isnt to bad, but the car is a depreciating liability, and the student loan will NEVER go away, even in bankruptcy, unless paid off. When those payments are gone, you now have $400+ per month you can stash away! And never have to worry about paying on if you loose your job before FIRE, and makes obtaining FIRE $400 less per month.

I can't say I disagree with paying down debt, though what the debt is tied to shouldn't matter too much. I would just hit the highest interest debts first. We can plan for doomsday all day long if we want, but your better off in most ways playing the odds (casino term...).

[use2betrix]

While not ideal if the market is down, is it that bad to have your taxable investments be part of an emergency fund? I usually keep 2-3 months and work in a risky contractor position where jobs end regularly, but I know if I literally couldn't make ends meet I could pull out of my VTSAX some. Plus, if pulling out for an emergency after a job loss it likely won't be a huge dent in our net worth.

[Glenstache]

While not ideal if the market is down, is it that bad to have your taxable investments be part of an emergency fund? I usually keep 2-3 months and work in a risky contractor position where jobs end regularly, but I know if I literally couldn't make ends meet I could pull out of my VTSAX some. Plus, if pulling out for an emergency after a job loss it likely won't be a huge dent in our net worth.

Some suggest that if keeping emergency fund in taxable accounts that the account be funded with 120-130% of what you would keep as emergency cash to allow for unfortunately timed market declines.

[jeep725]

So the general consensus seems to be attack the debt.

So a plan might be to

1. keep the 7k in savings for emergency
2. use any extra income towards debt

I will continue to put $100/mo in to the Roth, but won't make any extra contributions, nor  buy any more savings bonds to season for the emergency fund. (Until car and student loan paid off)

Once debt is paid, build up more in emergency either bonds or savings. Then contribute more to Roth as the final step, but will be in a year or so down the road.

ETA: Give the current market conditions, I was anxious to get more $$ in to the Roth now, thinking that more time in the market is better.

I guess I find it hard to prioritize the emergency fund before the Roth, though I understand it is a part of a sound financial plan.

[Mermaid3011]

So the general consensus seems to be attack the debt.

So a plan might be to

1. keep the 7k in savings for emergency
2. use any extra income towards debt

Actually I AM doing exactly the same thing. :)

My ### are just a little bit different, but overall the same strategy. Have a small emergency cash fund (and/or a cheap line of credit that is not being used unless it's a REAL emergency) and everything else goes into the highest interest debt.

Now your interest rates are so similar, I could imagine that paying off the car first (as the monthly payments are higher) will give your psyche a nice push to keep going with your new lifestyle. It may be worth getting that one out of the way first, feeling awesome and seeing results and then tackling the student loan.

all the best!

[jeep725]

Thanks everyone!

Yes, getting rid of that car payment will free up cashflow and in turn help in other areas as well.

Cheers!

[Greenback Reproduction Specialist]

OR would this extra money be better spent paying down the car or student loan? Both of which are not high interest debt.

If I were in your shoes, I would get serious about knocking out both and quick, instead of investing. The interest isnt to bad, but the car is a depreciating liability, and the student loan will NEVER go away, even in bankruptcy, unless paid off. When those payments are gone, you now have $400+ per month you can stash away! And never have to worry about paying on if you loose your job before FIRE, and makes obtaining FIRE $400 less per month.

I can't say I disagree with paying down debt, though what the debt is tied to shouldn't matter too much. I would just hit the highest interest debts first. We can plan for doomsday all day long if we want, but your better off in most ways playing the odds (casino term...).

You are right, it doesn't matter if things go as planned. But, you loose your income longer than your savings will cover, and it can happen.. health, economy, jobsite injury, etc... interest rate isn't the only important factor, terms within the loan and how binding the terms are, should be considered. Its not a doomsday scenario, it happens to people all the time.