Help us weigh financial priorities.
April 9, 2014 5:00 PM   Subscribe

My family's income has just increased, and we're having trouble choosing between financial priorities. Advice?

We're in the fortunate situation that our income just increased, both from a bonus and a raise. The challenge is that we're having trouble choosing how best to use this money and going round and round in our discussions about this.

Our retirement savings are in very good shape, so that's the one thing we don't need to tweak right now. The things we'd like to do and are having trouble choosing between are:
1. Increasing the emergency fund. This currently is at about 1/3 the usual level due to recent urgent spending.
2. Paying off low-interest debt. We owe about $50K between a car loan and home equity line of credit, both at low interest rates (3% and 2.7% post tax). The payments on these loans are manageable for us.
3. Increasing college savings for our kids. We have a 529 plan but aren't funding it at a high level right now. We put in a few hundred dollars a month, when various online calculators suggest we should contribute more like $2K per month if we want to fully fund private college for 2 kids.

Of the two adults in our family, one tends more toward the debt-averse (and so wants to pay down the debt as quickly as possible), and the other tends to emphasize savings more and favors a larger 529 balance to give it more time to appreciate (and points out that low-interest debt is not crippling). The recent bonus would be enough to completely pay off the car loan, eliminating one monthly payment.

If you've been in a similar situation, how have you chosen between different financial goals? Or can you give us advice on how to weigh the different priorities in our discussions?

Anonymous because of the financial details.
posted by anonymous to Work & Money (15 answers total) 1 user marked this as a favorite
If I read you right, you own your home outright, but for the HELOC. I am guessing that your kids are under 10. I think you are in a very good position. Congratulations.

I agree with the second person. Low-interest loans should not be your priority. I would agree that the emphasis should be on building the emergency fund back up and money for education. Without knowing what your incomes are, it may be that the focus on private college may be a little illusory.
posted by yclipse at 5:08 PM on April 9, 2014

A car is a cast-iron depreciating asset, so out of the liabilities, the car loan looks like the lowest hanging fruit: paying it off gives you more flexibility in terms of sale or trade, and frees up money for regular savings.
posted by holgate at 5:13 PM on April 9, 2014

Emergency fund comes first. Make sure that it's fully funded and maybe even take the opportunity to re-figure the number given your current circumstances. After that, evaluate the debt interest rates and find out if there are penalties for early repayment. Compare those numbers to the interest you'd earn on college saving accounts and decide how to split the balance of the money accordingly.
posted by quince at 5:15 PM on April 9, 2014

You are attempting to choose between Good Things. There's no wrong answer here. Instead, you should be guided by your family goals.

What is it that you hope to accomplish long-term? Which of these three choices is most likely to help you achieve those goals? It may be that you decide to pursue more than one of these choices at once (a bit toward the emergency fund, a bit toward debt, a bit toward college). That's fine too. As I say, the answer depends on your overall goals.
posted by jdroth at 5:23 PM on April 9, 2014

Put your money in The Most Important Thing. Cars you currently drive, college for your children, credit card debt... only you can decide what reflects your values. My hope is you would invest in the future generations before yourself, but that's a pretty unpopular stance these days.
posted by Houstonian at 5:42 PM on April 9, 2014

Take all your new resources and allocate:

60% to Emergency Fund until it's where you want it
20% to College Fund
20% to debt

Once the EF is where you want it, double the percentages to college fund and debt, and use the rest to save up for a fabulous family vacation every year.

Congratulations on your good fortune.
posted by feckless fecal fear mongering at 5:46 PM on April 9, 2014 [4 favorites]

1. Increasing the emergency fund. This currently is at about 1/3 the usual level due to recent urgent spending.

That one; get the emergency fund back up to the anticipated level, then divert the money to some other purpose.
posted by davejay at 6:01 PM on April 9, 2014 [1 favorite]

Emergency fund.

There's no greater luxury than knowing that you have some available cash if you need it. Think of it this way. You owe someone else the car and HE loans. You owe yourself and your family an emergency fund. Pay yourself first, then finish off the low interest debt.
posted by 26.2 at 7:26 PM on April 9, 2014

How do you know that both kids will go to a private college for four years without any scholarships?
posted by "friend" of a TSA Agent at 7:44 PM on April 9, 2014

I personally would talk this over with a financial advisor -- my banks (USAA and Chase) offer free consultations. Maybe yours does as well?
posted by spunweb at 8:28 PM on April 9, 2014

Emergency fund, pay-off the car, then retirement funding (even though it's okay already), then maybe investments that will generate cash flow alter on.

College funding for the kids is not the best use of your income, as heartless as that sounds. They will have multiple college funding sources, while you have far fewer retirement funding sources. In fact, your contributions to their college funding now may impact their ability to access those other sources of college funding later. Including scholarships, depending on the program.

But as spunweb notes, we're just a bunch of folks on the Internet. Seek out some professional opinions.
posted by notyou at 8:33 PM on April 9, 2014

If you get say 5% annual growth on the 529, and it grows tax free, that's a better use of your money than paying down the low interest loan, especially if you have to pay tuition later from investments that grew at the same rate but not tax free. But that's just one way of looking at the situation and obviously there are multiple factors to consider.
posted by Dansaman at 10:52 PM on April 9, 2014

My opinion on prioritization:

1. Emergency Fund
2. Pay off debt, starting with the highest interest rate debt first
3. Fund the 529 plans for the kids
4. Retirement fund.
posted by tckma at 6:51 AM on April 10, 2014

I would prioritize the emergency fund. I would prioritize last the car. It's nice to pay down debt, I get it, but if it's really low interest, then (1) investing can give you a better yield and (2) it's better to have the liquidity of an adequate emergency fund.
posted by J. Wilson at 8:06 AM on April 10, 2014

I think you ned a financial planner so you can discusss this with them an dinclude details that would be relevant to teh decision thath you dont want as identifiers online (how old are the kids, planning on any more, what industries do yous work in and are they volatile, do either of you have parents you may need to care for, could you move for family or a job in the foreseeable future, etc). With what you wrote my knee jerk reaction would be to fund the emergency fund as 1st priority and pay down the car as the second priority.
posted by WeekendJen at 10:29 AM on April 10, 2014

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