What To Do With Extra Money?

[nitramaj]

Hi everyone,

Over the past few years, I have been getting a rather large tax return. This year I got right around $2000 back.

So, I just changed my with holdings in order to get a bigger paycheck which has given me about $80 extra a month. I'm trying to decide what I should do with that extra money.

Here are the three options I'm considering:

1. Increase emergency fund. I currently have $1500 in it.

2. Increase 401k contributions. I'm currently contributing 5% with a 50% match from my employer. I have $19170 saved so far.

3. Pay down debt. I owe $2800 in student loans with interest rates between 1.22 and 2.22% with about 4.5 years left, and $8800 for a car loan at 6.69% also with 4.5 years left. No credit card debt.

I'm 30 years old, my monthy take home is between $2200 and $2400 depending on hours worked at my part time job. My monthly expenses are rather high, due to the HCOL area I'm in (Durango, CO), at around $1900.

I'm leaning toward increasing my emergency savings, but I wanted to get some outside opinions.

Thanks!

[cronewitch]

If your employer will match more than 5% that is your best use of money.

[parker1b2]

I would increase the EF until you have at least 6-8 months living expenses, then work on increasing 401K and paying off debts. I know from experience and living in a HCOL area also, that if you do lose your job or they cut back on hours, unemployment might not be enough. That is my opinion though.

[Gardening Grandma]

1) I would put the $2000 into the EF
2) I would put the extra $80/mo into the EF until you had 6 months' worth of expenses covered. Then I'd put it on the car loan. That's a guaranteed return of 6.9%.

[debtheaven]

I would put the 2K towards your EF, and the extra 80 towards retirement ... try to get that 5% to 6% or maybe 7%.

[phil5185]

I would do another W4 - change it to about $200/m, that way you owe only about $400 in April 2012.

With the extra $200/m, I would build the EF to $2500.
And then put the $200/m into a Roth IRA at a company such as Vanguard, invest it in a Target2050 Fund. If you can, it would be good to contribute $5000/yr (the limit).

I would not prepay any of the loans - the student loans are 'keepers', the car loan is kinda high interest but I would keep it and use extra money for a Roth.

[Artemis Windsong]

Is that moose your pet?

[share88]

EF first IMO.

If you spend $1900 a month and take home $2200-$2400 where is the "extra" going now?

[Peace77]

Increase your emergency fund until you have 8 months worth of expenses.

Then, pay off the car loan.

Next, add to your 401(k) if you can get additional match funds.
If not, open a ROTH IRA.

[jd2005]

Are you comfortable with a $1,500 EF? If yes, and if your employer continues matching your 401(k) contributions, I would contribute to the 401(k). If you are not comfortable with a $1,500 EF, and want more in there, add the extra cash to the EF.

I would not pre-pay your student loans as they are at decent rates. The car loan I would tackle after EF is in place (at your comfort level - mine is $5k), and you have maxed out your employer contribution of 401(k).

[998fbird]

First I would work on building my EF and as part of my EF I would stock my pantry to hold me over in case of unemployment. Next I would pay off the car loan. Finally I would build up some money and start a investment fund for income, bonds which pay interest and stocks which have dividends. Then you snow ball the investment income into more investments. I would continue to invest in my 401K up to the company match or as a way to defer income and lower my tax liability, but I would put most of my retirement money into things you can tap if another downturn happens.