Ask Money

A good savings plan?

Chris Farrell Jun 10, 2010

Question: My husband and I both have car loans and student loans that we are repaying. We both contribute to our retirement accounts and have put some money towards Roth IRA’s each month. We also have three months living expenses set aside in a savings account for emergencies.

We have been told that our student loan debt is “good debt,” so we haven’t been paying more than the minimum monthly payment on these loans. If we have extra money to put towards paying down our car loans quicker, maxing out ROTH IRA contributions or depositing more in our emergency savings account, what takes precedence? Up until this point when we have extra money at the end of the month we have been splitting it in thirds for our Roth IRA, highest interest car loan and emergency account. Is this the best approach? Stacey, Oak Park, IL

Answer: Here’s my main reaction to your question: You’re smart with your money. You’re creating a margin of safety by putting extra money into savings and paying down debt.

I also like the tactic of dividing the money into thirds. The division may be somewhat arbitrary, but it works. It’s interesting that the Talmud in one of the oldest references to diversification also divides money into thirds: “A man should always keep his wealth in three forms; one third in real estate, another in merchandise, and the rest in liquid assets.”

So, I would stick with your overall strategy. You could shift your savings priorities for a period of time if it makes sense, however. Let’s say you or your husband get nervous about your jobs. In that case you might want to concentrate on boosting emergency savings. And when you’re close to paying off the auto loan you might want to simply accelerate the process and be done with it. Still, there’s a lot right with the approach and nothing wrong with it.

When the auto loan is done and the savings pot full you can get more aggressive about the student loan. By the way, student loan is considered good debt. The reason is that it reflects an investment in your education and career. To use old-fashioned terminology, it’s productive debt rather than frivolous debt. Student loans are also flexible debt with numerous protections if you do face a financial setback.

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