Dear Liz: My wife and I are about to sell our home and move in with her parents. We’ll have to drain our savings of $15,000 to pay off the rest of what we owe on the mortgage. After the sale, however, our reduced expenses mean we’ll have at least an extra $5,000 a month. We’re carrying roughly $20,000 in credit card debt and make $130,000 a year in income. I see this mortgage-free living as a great opportunity and don’t want to waste it. Can you recommend a good book or point us in a direction to ensure we capitalize on this interesting time in our lives?
Answer: That must have been one massive mortgage you were carrying. You may feel positively giddy once those payments are gone, but don’t let it go to your head.
It would be easy to ratchet up your spending now that there’s so much extra money in the bank, but resist the urge. Concentrate first on wiping out your credit card debt, then focus on building up your emergency savings. The discipline of paying off debt and building savings will help you learn to live within your means—something you obviously weren’t doing when you took on that home loan and built up credit card debt.
You also should be saving aggressively for retirement, if you aren’t already. Take advantage of any workplace retirement plans, contributing at least enough to get the full company match, and consider funding Roth IRAs for both of you. Roth contributions aren’t tax deductible but the money is tax-free in retirement, and you can contribute up to $5,000 each as long as your modified adjusted gross income as a married couple filing jointly is under $167,000.
You can learn more about the basics by reading Eric Tyson’s excellent primer, “Personal Finance for Dummies.”