Dear Liz: My husband and I are in our late 40s. My husband is the sole provider. We have $200,000 equity in our home and a 5.875% interest on our mortgage. We have nine months’ worth of expenses saved in an emergency fund, plus we contribute $100 a month to our son’s college fund and 6% to my husband’s 401(k). We make regular monthly payments on a student loan balance of $12,000 (at 4.167% interest) and a personal loan balance of $12,000 (at 0%). My husband has had two stretches of unemployment over the last five years, each lasting for about six months. We have begun saving in a secondary account and are uncertain how to best use that money. Should we pay off the student loan? The mortgage? Invest in a CD or IRA? Or consider some other investment strategy?
Answer: You don’t say how much is in your husband’s 401(k), but a 6% contribution rate when you’re in your late 40s is unlikely to generate a big-enough nest egg to retire. Boosting that contribution rate should be your priority, and you should consider contributing to a Roth IRA for each of you.
Likewise, saving anything for your child’s college education is smart, but $100 a month won’t get you far. Just for comparison, consider that parents of newborns need to save around $600 a month to pay the full cost of a public college. Those who start later or want to cover a private college have to contribute much more.
Most families aren’t able to save that much, so the next best thing is to simply save what you can — after you’re fully on track with your retirement savings.
You shouldn’t prioritize paying down your relatively low-rate debts over these two far more important goals. But you may want to consider refinancing your mortgage to dramatically lower your rate and perhaps free up more cash for your goals. Just try to make sure the loan will be paid off by the time you plan to retire. A 15-year loan, in other words, might make more sense than refinancing into another 30-year mortgage.