Tuesday, July 30, 2013

Step 3 – what to do with all this extra money you now have lying around

Step 3 – what to do with all this extra money you now have lying around

Now that you have tracked you spending and created a budget, you should have some extra funds to allocate each month. Once one stops buying more junk and eating out a lot, there tends to be a bit of extra cash at the end of each month. In some cases a Large Bit. In our case we were able to trim about 15% from our spending. All of which is being dumped into our investment/retirement accounts. We are already debt free, including our mortgage, and we have sufficient savings for an emergency. So our #1 priority is saving for retirement.

What should you do with it? Payoff debt, start an emergency savings account, invest it, put it in your retirement accounts, get liquored-up, buy a Harley and get tattooed?

Priorities in my preferred order:

·         Start a rainy day and an emergency savings account (2 different things). In conjunction with this also start on the next step. A rainy day fund is a few thousand dollars set aside for smaller problems. Car breaks down, house needs minor work, the wife decides she needs Botox etc…an emergency fund is much more money, usually defined as 3-6 months of living expenses. This is for when something really bad happens: job loss, car needs to be replaced, the zombie apocalypse, teen gets arrested, Obama becomes dictator for life…3-6 months seems like over kill to me. Do whatever is comfortable for you.

·         Payoff credit card, student loan, auto and any other consumer debts (excluding your mortgage). More on debt payoff in a later post, but for now an easy way is to pay as much as you can on the debt with the highest interest rate and just pay the minimums on the others. Once that debt is paid off, keep repeating the process with the other loans. Some people prefer the "snowball" method, Google it. Basically you payoff the smallest balances first, then attack the next smallest and so on.

·         Invest for retirement
o   Contribute enough to your work 401k to get the employer match
o   Max out your IRA (Roth or regular depending on your circumstances) and your spouses. $5,500 each. $6,500 if 50 or older*
o   Max out 401k. $17,500 max currently. $23,000 if you are 50 or older geezer.*
o   Save in non-retirement accounts

·         Save for the kid's college. We don’t do this. Our kids pay for their own schooling. More on how that has worked out for us in a future post.

All of the above will be discussed in greater detail in future posts.

*401k's have lousier investment selections than an IRA at a place like Charles Schwab, and they usually change very high fees.

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