How to allocate budget surplus

[JinCO]

We just recently refinanced our mortgage, so I’ve been going through the budget and forecasting our spending and saving for the next year.
Here’s our current situation:
Budget surplus – about $2K per month

Debt:
Mortgage: $400K @ 4.625% 30 year fixed
HELOC: $80K @ 2.74% variable
Student Loan 1: $30K @ 4.125% fixed
Student Loan 2: $50K @ 2.625% fixed
Student Load 3: $30K @ 2.99% fixed

We have been putting the extra money into our emergency fund, which is at about $30K at the moment (about 5 months of expenses).

Some options I am considering are:
1) Put extra money towards HELOC as it is our only variable loan and will likely increase over the next few years as interest rates start to go up. We are currently paying $1200 per month on this loan and at this pace would be paid off in about 6 years. If we allocate the entire $2K surplus per month, the loan would be paid off in a little over 2 years.
2) Continue to add to the emergency fund.
3) Start a 529 fund. We have 2 children ages 2 and 3 months.
4) Increase retirement saving. Our only retirement investing at this point is via our 401K accounts. My wife and I both invest the max allowed ($16.5K) and our current balances are around $170K combined. We are both 33 years old.
5) Combination of above options?

[ActYourWage]

Originally Posted by JinCO

We just recently refinanced our mortgage, so I’ve been going through the budget and forecasting our spending and saving for the next year.
Here’s our current situation:
Budget surplus – about $2K per month

Debt:
Mortgage: $400K @ 4.625% 30 year fixed
HELOC: $80K @ 2.74% variable
Student Loan 1: $30K @ 4.125% fixed
Student Loan 2: $50K @ 2.625% fixed
Student Load 3: $30K @ 2.99% fixed

We have been putting the extra money into our emergency fund, which is at about $30K at the moment (about 5 months of expenses).

Some options I am considering are:
1) Put extra money towards HELOC as it is our only variable loan and will likely increase over the next few years as interest rates start to go up. We are currently paying $1200 per month on this loan and at this pace would be paid off in about 6 years. If we allocate the entire $2K surplus per month, the loan would be paid off in a little over 2 years.
2) Continue to add to the emergency fund.
3) Start a 529 fund. We have 2 children ages 2 and 3 months.
4) Increase retirement saving. Our only retirement investing at this point is via our 401K accounts. My wife and I both invest the max allowed ($16.5K) and our current balances are around $170K combined. We are both 33 years old.
5) Combination of above options?

When do you plan paying your student loans? I would attack those or you will be paying for them a long time.

[JinCO]

We are currently over-paying on SL1 and it should be paid off in 3 years. I haven't decided what to do with the other 2 as the interest rates are low and I expect inflation to be higher which will allow me to pay back with cheaper money.

[GREENBACK]

You have 110k in loans evn though your rates are low. I'd start knocking those out once your EF is where you want it.

[JinCO]

I hear you guys about the student loans, but we are paying them fairly aggressively as it is. The loans were at about $180K when my wife finished graduate school 3 years ago. The $110K will be under $70K in 3 years based on our existing payment plan.

[creditcardfree]

I can see you why you asked the question. I'd really have to run some numbers to make a decision if it were me. Have you tried a debt snowball calculator. There's one here. I'm not sure if it takes variable loans into account.

I might look at working on student loan 1 because of the higher interest. If interest rates become equal to the student loan rate before it's paid off, I might then switch to the home equity loan. I'd still want to run the numbers.

I also wouldn't add to retirement or college until the student loans are paid off. Once they are paid off you can agressively save.

Great job on that emergency fund!!

[Merch]

I would probably do the HELOC first. I agree with you that interet rates will only be going up. So the risk is that payment will be more over time and could be over the 4 1/8 you are paying on the student loan.

I agree with an earlier post - get your EF where you want it and start hitting that debt. Once you elimante your debt, I would start the 529 and catch up on the 529.

Just my thoughts and I really don't like variable rate debt especially when I only see it going up. Good Luck.

[EEinNJ]

I think you're already ok on your retirement, and the 529 can wait. I don't know how secure your income is, but you could use some surplus to pump up your EF to 6-8 months.
Are you underwater on your mortgage and HELOC? I would definitely pay down the HELOC if you are.
Student loans can be tax deductible, and if you ever had a real problem you could get a forebearance, but I like the idea of a "snowball" to pay them off.
At almost 600K in debt, it does seem like a lot, and kids get more expensive as they get older, so I hope your income can keep up. Good for you for working on this!

[JinCO]

We're not underwater on the Morgage and HELOC but only have around 15% equity at this point. We earn too much for the student loans to be tax deductible, but I guess it is good that they are an option for forbearance in case we ever got into trouble. In our case I think the kids will actually become cheaper as they get older. We both work so require full time child care at the moment (over $30K per year) so this should go down when they are school age. I'm thinking the emergency fund and HELOC should be the top priorities for this year.

[kork13]

What do you want to bring the EF to? I'll agree with some others, and say to bring your EF up to the level that makes you comfortable, then focus on the HELOC. From there, I might say SL1, then both the mortgage and SL2. By then, SL3 will probably be history just by making the same steady payments you're doing now.

[Runaway Finances]

Something seems wrong to me. You say your emergency fund is $30K and that is 5 months of expenses which means expenses are $6K per month. Does that include your debt payments. I have your P & I on the mortgage at $2057 not counting insurance and Property Taxes. You are paying $1200 per month on the HELOC and max 401K ($2750/mo). Those items alone total $6K/mo. So, I have to assume your "expenses" must not include debt payments.

In my opinion your "expenses" need to include all outgoing expenses including debt service. I believe you should have a minimum of 6 months of total living expenses in savings. Since your rates are low, I would build up the emergency fund first. I agree that interest rates will most likely increase. You can always dip into the emergency fund to pay off the variable loan if the rate jumps high.

Once the EF is built up, then you can work on the debt. I would get your debts paid down before I worked on the college funding. Those kids are going to cost a lot, and it is going to be easier dealing with those upcoming expenses if you are servicing a lot of debt.

[JinCO]

You are correct RF, the $6K number that I came up with was the scaled back expenses meaning instead of overpaying mortgage, heloc, and student loans; we would just pay minimums in an emergency. For example, our HELOC minimum is about $175 per month (interest only) but we pay $1200 per month now. Our budget also has $3K of childcare expenses per month which would be eliminated in the case of a job loss. I agree, I would like the emergency fund to be higher but I guess I’m not sure what the “right” number is. Maybe we should take it up to $40K and then focus on the debt.

[lehresman]

It sounds like you have a good sized emergency fund. If you are comfortable with it, I would encourage you to chuck it toward your debt. I think you're right in choosing the variable rate interest loan first. If you can knock that out in two years, I'd say go for it! Then just start the whole snowball thing and dump that $3200 toward some of your student loans, then dump it all toward the mortgage.

One temptation with a surplus like this can be to let your standard of living increase. But if you diligently maintain the same standard of living, you can work hard to repay some of this debt. Imagine where you'd be in 10 years! Just playing with the HELOC payment ($1200) and your surplus ($2000), in 10 years time, you could repay $384,000 of debt. That's a huge way toward getting rid of your mortgage altogether in just 10 years.