It’s a new year and by now you’ve gotten your first 1-2 paychecks and should be steady state with your income, expenses and overall budget. One of the most common questions I’m asked is what to attack first – debt? retirement? savings? investing? I know it can be overwhelming, especially if you’re just starting out. I was musing how our financial goals have changed over the years and realized there’s a lot of advice within our journey so below I’ll summarize what we did and my advice for you.
The musing started because we hit a big milestone! This month, we’ll have owned our home for 3 years…but we have made 8 years worth of mortgage payments! Mid-2017 I calculated a strategy to pay off our mortgage in 10 years (versus 30). This is part of my retirement ASAP plan. Paying off the mortgage will eliminate our last remaining debt and reduce our future expenses so we can live on less.
Having a reliable amount of extra money after we’ve paid all our bills and made all our basic savings and investments contributions is pretty new to us, it really just started last year. Here’s how we got here:
- Paid off debt. My husband had a small amount of credit card debt that was paid off before we were even married. Credit card debt is usually Priority #1 due to its high interest rate. Next, my car loan was paid off in 2015. Finally his student loan debt was paid off at the end of 2016 leaving us with the extra funds!
- Steadily contributed to retirement investments. In parallel to paying off debt, we were always contributing up to the point of the match in our 401ks (4% for both of us). I have always been maxing out my Roth IRA and Corey contributed more and more to his as he paid off debt. Once the debt was gone, he was maxing out as well in 2017.
- NOTE: I’ve heard a lot of folks in the past year talking about maxing out their 401k. For us, that’s our final step and you can reference the three steps in priority order in my Retirement 101 post. If you have a considerable amount of debt, I’d like to see you contribute to your 401k just to the point of the company match and then attack that debt with your extra money. I hear a lot of people saying they want to be investing and feel they should spread their money between debt and stocks, etc, but I read an article recently that made a great point – one of the best investments you can make is getting out of debt! It’s not just a nice thought, it makes sense mathematically, too. Often times your credit card debt interest rate is well over the 7-8% return you could get from the stock market. If you have debt, make 2018 your year to focus on paying it down!
- Saved by the bucket load. I like my savings in buckets, that is, separate sub-accounts for different savings goals such as house maintenance, gifts, car, vacations, and of course the emergency fund. When we were saving for our wedding, there was a bucket for that. The house downpayment fund had a bucket as well. If you have something specific you’re saving up for, it needs a bucket! Having one savings account for all these different things makes it very difficult to know how much you have for each goal. What is stopping you from wiping out the whole account for a vacation? I like that Capital One 360 allows me to easily create and (re)name these sub accounts and see them all together at a glance. Our ongoing savings have line items in our budget as well. For example, home maintenance, new car fund, vacations, and gifts. You may need a line item to build up your emergency fund, but once you have met that lump sum goal and aren’t depleting it, that monthly budget money can go elsewhere!
- Played “Let’s Pretend.” After the debt was paid off and retirement and savings were allotted budget line items we were happy with, we started to have extra monthly income with no place to go. In the past year or two we were thinking about having another child. Of course we had to make that decision mentally and emotionally, but there was also a financial component. I was not going to have another child if it meant sacrificing our financial goals (especially if I wasn’t sure I wanted one at all). So I gave a name to the extra money in our monthly budget – “Fake 2nd Kid.” I had a numeric goal that roughly equated to daycare tuition plus a little extra for a college fund contribution, etc. If you are thinking of having a child or know you have one on the way this year, I highly recommend this budget strategy. In your case, you may want to allot that estimated amount and see what’s leftover afterward. Learn to live without that money! Once you do, the best part is, before you actually have the baby, you can sock that money away in savings or pay down some debt! Maybe your maternity leave will be partially unpaid so you can save up some funds to take the maximum length of time without worrying about decreased income. This practice has worked out well for some of my financial follower friends who are new moms!
- Decided what to do with the extra. In our case, that extra that we accumulated started to go toward investing in an S&P index fund. It had been a while since I’d put money in the stock market and I was excited to be back in an advanced financial situation where we could do that again. But after thinking really far ahead to paying for my child’s college education, I diverted more and more toward our mortgage debt. As of 2018, all of that extra money will go toward our mortgage in hopes of paying it off 20 years early. This will also help with my FI/RE goals! Being debt-free is an important milestone on the road to financial independence and early retirement.
I’m hoping this post helps you think about your 2018 financial goals and how you will meet them. Sharing goals with others is a great way to stay on track and be held accountable, so declare your goals in the comments below!