You (and your family) are fully protected. You have a plan. You’ve destroyed all your non-deductible debt. It’s time to start saving and investing, and get rid of those student loans.
Emergency Fund
I would recommend at least keeping a small emergency fund of $2,500 – $5,000 for Tier 2 – and possibly more if you’ll be in debt a long time. Once you’ve destroyed your debt, you can beef that up to a higher level. Typical financial advice recommends an emergency fund be three to six months expenses.
Sometimes you’ll hear eight to twelve months is the right number. Like most things personal finance, the answer to this question is personal. How much you should have depends on your income situation (one income earner households should have more than two income); your job situation (secure vs. not really); your insurance (if you’re not well insured you would need more – but you’re well insured, right???); and your personal comfort level. First check your emergency plan to discover your real, bare-bones, emergency lifestyle expenses. Then decide the target that makes sense for you, create a plan, and go for it.
Student Loans
You’ll want a good emergency fund in place before getting rid of the student loans. Why? You have a lot of options here in the case of an emergency. You can often go into income based repayment, deferment, or forbearance, if an emergency occurs. Plus as a deductible debt, this usually isn’t costing you as much as the non-deductible debt (exception being if you have a zero percent car loan or something like that).
Retirement Up To The Match
This is the point where you’ll start investing for retirement. I highly recommend making sure you get the match at this step, focusing on that emergency fund and student loan payoff as well. Can you invest up to the match in Tier 2? Sure, sometimes that might make sense. You don’t want to pass up free money, after all, and your company might have a great match and a great 401k. Can you invest more than the match while paying off your student loans? Sure, if you’d want to.
Don’t underestimate the power of focus, though. When you focus on one thing at a time, rather than trying to do everything at once, you have a higher chance of success.
Buy A Home?
Buying a home is a big decision – and not one that’s right for everyone. It depends on where you live, what rents cost vs. buying, and your personal situation. If you’re planning to stay in the same location for about five years or more, it may make sense to buy. Don’t buy too much house, though, or move too often – you’ll delay your financial freedom significantly. Putting at least 20% down on a 15 year mortgage is best. And if your mortgage balance can be two times your income or less, you’ll have an easier time paying it off.
On To Step Four!
Once you have a solid emergency fund, you’re investing at least to the match in retirement, and you’re rid of those pesky student loans – you can turn your focus to the future. Up next: paying off the mortgage, upping that retirement, and starting to invest for your dreams.
