First step: stop prepaying your loans at those rates. Now.
Second step: emergency fund.
Third step: fully fund whatever tax-deferred accounts you are eligible for (401(k), IRA).
The reason for this order is that compounding is ridiculously powerful, which means that the earliest money you invest grows the most, so your priority has to be to get as much in the market as you can, as soon as you can. And your tax-deferred accounts will allow you to put more away with less impact on your budget.
Oh: and sell the car -- thanks to your wife, you're not under water in it. Yes, you will take a hit. But it is far less than the hit you will take in depreciation over the next several years. Buy something you can afford with the cash from the sale.
And to go back to the power of compounding: assume you had $40K in cash and chose to buy a car with it. Over the next decade, the car will cost you even more money to keep it running, and will eventually die and need replacement. OTOH, if you had put that $40K in the market, and you got an average return of around 7%, you'd have $80K when you're 50, $160K when you're 60, $320K when you're 70, and $640K when you're 80. You are basically driving your retirement nest egg.
I get the appeal of treating yourself, especially when you've just made it to what feels like a finish line. But really, all you did is stop living beyond your means and start living within them -- that is a great improvement, but it is the start of the race, not the finish. So ask yourself: is the comfort and luxury of sitting in that car worth trading a six-figure bank account? And will it still feel like a worthy tradeoff ten years from now, when the car is creaky and scruffy? Or will you be thinking, gee, I really wish I had a big fat bank account instead?
