Where Should Your Money Go First?

If you’re like us, you’re wrestling with how to prioritize all the many things that you want your money to accomplish. In our case, we have credit card debt. We have auto loans and a home loan. We have retirement to think about, and our emergency fund needs some love. All of those items are good options, but what is the best option?

There are benefits to all of these, so I’ll show you the thought process we used. I’ll also try to explain the reasons we came up with the order that we are currently using. If you’re interested in seeing a more thorough picture of our finances, check out our financial updates¬†and our investment reports.

Current Situation

We currently have about $2,450 in credit card debt. In addition, we have two auto loans: one around $10,500, and one around $28,000. We also have $250 in savings, and can still add $4,125 into each of our Roth IRAs for 2017.

Recently, we’ve been putting a lot of money into repairing/renovating our home and paying down credit card debt. We’re putting the home on hold as we tackle these other issues.

As a plus, I’ve been doing some additional consulting work recently which should bring in about $5,000 a month for the next three months.

Credit Card Debt

Our last remaining credit card debt was originally $4,000 and used as a down payment on our minivan. We used one of those checks that give you 0% interest for twelve months. The offer term ends this November.

The check charged an upfront fee of 3% for the balance transfer. So if we pay it off before the end of the twelve months, our total interest is $120. After that the interest rate is 15.9% which equates to about $32 a month. Obviously, we are motivated to pay it off before then.

We have three months to go before we hit the offer end. This means we need to pay on average $817 a month to the card to finish paying it off.

Auto and Home Loans

Our auto loan interest rates are 2.99% and 3.24%. The balances are high, and the loans are both less than a year old. However, they are each on a 5 year term, so they could pay themselves off without accruing crazy amounts of interest.

Our home loan interest rate is 2.625% on a fixed 15-year term. We pay down over $1,000 principal a month just making the normal payment. Because of these facts, we’re not strongly motivated to put this loan near the top of the list at this time.

Retirement Accounts

We contribute each month to an unmatched 401(k) at 3%. There are currently no plans to change this until we’re further down our financial path.

We have contributed $1,375 to both our Roth IRA accounts for 2017. This means we can still contribute up to $4,125 in each account. We have until the end of March 2018 to do this.

Unfortunately, this is not something you can go back and catch up on. Once the time frame is gone, you’ve missed your chance to contribute for that year. This motivates us to make sure we dedicate enough money to each account by the deadline.

Emergency Fund / Short Term Savings

To say we don’t have enough money in our emergency fund is a massive understatement. At $250, we’re only covering 5% of our expenses for one month! We’ve neglected this for too long. This should have had priority over almost all other items on this list. It was drained from about $1,000 down to where it is now during our stint of home remodeling.

We’ve been justifying it by claiming we could just use credit cards in an emergency, since having cash doesn’t earn much interest now anyway, but that plan is fraught with danger.

We have multiple goals for this one: get back up to $1,000, jump up to one month ($5,000), increase it to three months ($15,000), and increase it to one year ($60,000).

Beyond that, we’d like to create another savings account for other larger purchases and investment opportunities.

The Plan

So now that you know our thought process, here is the order we’re going to tackle these items in:

  1. Credit Card Debt: We’re going to get rid of the rest of our credit card debt ($2,450) before the special offer runs out. It will be the highest interest rate if we don’t resolve it.
  2. Initial Emergency Fund: Next we’re going to get back up to $1,000 on the emergency fund. Then we’ll keep on going all the way to $5,000 for a month’s worth of expenses.
  3. Retirement Accounts: Once those are taken care of, we’ll max out each of our 2017 Roth IRA contributions for a total of $8,250.
  4. Flesh Out the Emergency Fund: Finally, we’ll up the emergency fund to three months worth of expenses or $15,000.

That means the money we’ll need to come up with to accomplish these goals is about $25,000. After we have all those taken care of, we’ll re-evaluate the plan.

Do you agree with our strategy? What would you do differently? We’d love to hear from others what their current priorities are.

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