The debt mountain is gone. What next?

Post date: 2019-06-16 06:13:48
Views: 165
After struggling for more than a decade with crazy-expensive medical issues, we're finally debt-free and consistently making more money than we spend. Now we're trying to figure out how to arrange our finances — and how to plug the gaping holes (retirement! college! home ownership!) that we simply weren't able to tackle previously. Now that the debt mountain is gone, how should we prioritize?

Some details:

1) We're early 40ish, and made about $150K last year, and we're on track to make about the same this year. That's about a 50% increase from previous years. Our income is split roughly evenly between Spouse 1 and Spouse 2.

2) Spouse 1 is a professor with tenure, so her income (and benefits etc) are as reliable as it gets, and we can anticipate modest raises in future years. She also has opportunities to grab extra teaching that in a good year can boost her overall income by around 10%, though that's not guaranteed.

3) Spouse 2 is a freelancer, so his income fluctuates pretty wildly both month to month and year to year. He currently has a steady client that pays enough, after tax, to cover his contribution to our monthly budget. And he has a number of other less-steady clients that typically add anything between 25% and 100% as much again to our total income. He's been doing well the last couple of years, which is largely the reason for our higher total income.

4) Now we've finally paid off our debts, we've focused on building up some emergency reserves. By the end of next month we'll have 3 months of Spouse 2's contribution to our monthly budget in an emergency fund, and we'll also have a short-term "hey the car broke down" contingency fund of somewhere around $500-$1000.

5) We pay taxes both through Spouse 1's withholding and Spouse 2's estimated tax payments; we've saved enough to make these estimated payments and we're putting enough aside from Spouse 2's income to feel confident that we'll be able to pay any additional tax bill we face at the end of the year.

6) We've been paying into Spouse 1's 401k program in order to get the generous employer match, so we have about $120K in retirement funds. Spouse 2 doesn't have a separate retirement account yet, but as a freelancer he'd be able to divert a significant amount of his income into tax-exempt retirement accounts if we wanted to.

7) We have two very bright kids — aged 10 and 8 — who are likely to want to go to top-flight colleges. We just opened 529 accounts for them, and currently have about $100 in each — obviously this is a disaster and we feel terrible. We'd clearly have to save *very* aggressively to get anywhere close to having enough to offer meaningful help when college rolls around. We're open to helping them with their student loans post-facto too, of course.

8) We're currently renting an apartment in a pretty expensive market (Chicago) and have seen our rent go up by about 20% over the past few years, with more rent hikes likely coming soon. We think buying an apartment would make more sense for us long-term but we'd have to save aggressively to raise enough for even a modest downpayment.

9) We live very frugally, and our discretionary expenses are almost entirely focused on paying for the kids' extracurriculars — math classes for our very gifted eldest, piano lessons, and swimming lessons. We might be able to tighten our belt a little further, in places, but we've already done plenty of that to dig ourselves out of debt, and we really don't want to cut back on investing in our kids.

Our current plan is to maintain an affordable (and very modest) monthly budget, and then divide up every additional dollar we make as follows: 30% taxes, 10% retirement, 10% college, 50% saving towards downpayment.

We think this *might* get us to a point where we could get a low-downpayment mortgage and buy a house by next summer. If it doesn't, we're also considering using a 401K loan to make up the balance towards a downpayment — this would leave us with fairly substantial debt payments for several years, at a time when we'd also be new homeowners with potentially hard-to-anticipate expenses, but it would allow us to get our feet on the property ladder.

Another option, of course, would be to pour everything into the downpayment kitty, and not save any additional money for retirement/college until we have a house. And still another option would be to save more aggressively for college/retirement, and to accept that we won't be buying a house for many more years to come.

Basically, we feel like we're trying to juggle these three priorities — retirement, college, downpayment — and they all seem urgent and like things we should have done a decade ago. Now we're finally in a position to play catch-up, how should we prioritize? What might we be failing to consider?
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