How do we make the most of some positive financial changes?[ Edited ]
So we are about to profit between $20-30K off the sale of our home. I am curious to what our best option is to do with this money. We carry a handful of credit cards with over 90% of credit used on them(totaling $35k or so). My wife has about $15k in student loan debt. We really have never set up retirement accounts. After the sale of this home we will be buying another one after we PCS and for the first time my wife will be employed adding anywhere between $60k-80k to our household income. My question is where do we begin? Should be kick a bit to each card to get them off the high balance rating? Put some away for emergency? Just pay off high rate items? Never really been faced with the positive changes that are coming our way and just need some advice. Thank you in advance.
Congrats on the positive changes coming your way! And thanks for the opportunity to try to help you make the best of them!
While I’m excited for you about the $20-30k profit from the sale of your home, I’m really fired up about the extra $5-6k per month that your wife is going to be bringing in! That kind of extra money can really change your life – but you’ve got to make sure the money is used well. Here are my thoughts on how to do that.
Start Budgeting (or Budgeting Better)
Though this may sound a little harsh, unless you got blindsided by some totally unforeseen catastrophe (which does happen) having $35k of nearly maxed-out credit card debt is usually the result of either no budgeting or bad budgeting. You’ve got to figure out a way to stop spending more than you earn or you’ll never make long-term progress.
Now, you may be thinking this will be easy since your household income is about to increase so substantially. Here’s the reality though: Unless you put a solid plan in place to manage your cash each month, it’s really easy to turn extra money into necessary money by letting your standard of living increase and consume it. Believe it or not, I once met a couple making $500k per year who couldn’t pay their bills. Budgeting is important for just about everyone – sometimes especially if you’re about to get a big lift in pay.
Build a Buffer
Another very important step on the road to financial security is to have a solid emergency fund. Otherwise when life throws you a financial curveball (which it will), the only way you’ll be able to handle it will be to bust out a credit card. Typically you should shoot for 3-6 months worth of your committed expenses. However, because you’ve currently got so much credit card debt, a smaller reserve might make more sense for now. I’d encourage you put it in a separate account so it doesn’t get mixed up with your day-to-day cash flow. Once the debt is a thing of the past, you can push the emergency fund balance up to a more desirable level, but get started with something.
Credit Card Killing
When it comes to your credit cards, I’d start with the highest interest rate balances first. The good news is, if you don’t expand your lifestyle so far as to suck up your wife’s entire new income, you should be able to knock out this debt pretty quickly.
Put the House on Hold?
Next, what would you say to renting for a while rather than buying a new place? I realize this probably won’t be a popular idea but it’s one I encourage you to consider nonetheless. Even though owning a home is working out well for you financially this time, I can’t tell you how many times I’ve seen homeownership result in financial difficulties for military families. I also worry that with your wife’s new income, you’ll be tempted to go even bigger – I know a lot of people would. My suggestion instead would be to try to treat your wife’s income as a way to fix the past and build for the future. And that won’t be possible if it gets used for other things like a house instead.
Foundation First – Then Retirement
Finally, once you get your financial foundation solidified you can then shift your focus to your retirement saving. Have you looked into the TSP? While you could certainly also save on your own into IRAs (something else you may want to eventually consider), I like the TSP because it’s easy to set up, easy to fund, and the investment choices inside it have some of the lowest expense ratios in the industry. You can learn more about it at tsp.gov.
Again, I think it’s awesome that good financial times are just over the horizon for you and I hope my thoughts here help you make the best of them. Thanks again for your question and best of luck to you!