Cash flow liberated by refinancing

Question:  My wife and I recently refinanced our home. We paid off the home equity line and the existing mortgage, and now our monthly payments are $500 less than they were previously. What should we do with these savings?

We have two young children, ages 4 and 6, and our only debt, besides the new mortgage, is about $15,000 in student loans. We have no car payments nor credit card debt. Should we pay off the student loan? Use the money to pay off principle? Feed our retirement funds? (We’re both teachers.) Save to add on to our small two-bedroom, one-bath house? Any advice is appreciated! Thank you. Jeff, Amherst, MA 

Answer: Well, you’re asking the right question: how best to save the extra cash that you now have after the refinancing. My first suggestion is to make sure you’re funding your retirement savings plan or plans to the maximum.  

Once you’ve done that, I would put the remaining money into safe savings. Yes, you’ll make almost nothing on money. But the savings will create financial freedom for you and your wife. Once the savings builds up, you can decide on the best use of the money, say, to pay down student loan principal, accelerate your mortgage payments, replace an aging car without taking on debt, and so on. 

I’d seize the opportunity to boost your margin of financial safety.