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The Honolulu Advertiser
Posted on: Sunday, January 3, 2010

Even the financially fit can improve their situation

By Michelle Singletary

WASHINGTON Despite a still funky economy, many people are doing well.

Yes, the unemployment rate is too high. People continue to lose their homes. And credit card debt is smothering many consumers.

But as the year comes to a close, I wanted to address questions from readers who are fine financially yet need some tweaks to the way they handle their money.

Let's start with a young couple in their late 20s who sent me a note during one of my online chats. They have an infant daughter and both are federal employees. They've saved more than $160,000 in their retirement accounts. Even with a child, they are able to contribute about $1,700 a month (combined) toward their retirement. They have three months of expenses in an emergency fund and no credit card debt.

Both drive cars that they bought used, paying cash.

They are doing well.

But they have about $22,000 in student-loan debt. They aren't happy with their bad dining-out habit. They are concerned about a hefty house payment. They purchased their home at the height of the housing boom; their payments are large but still affordable.

"We had intended to work on paying down the mortgage early using bonuses, tax refunds, and other windfalls, but we have spent all of that money and much more on house maintenance and repairs," the wife wrote. "I'm starting to think that it would make sense to cut back a little on our retirement contributions in order to pay down some of our mortgage debt. A part of me feels that we should just tighten our belts and find enough money to keep up with the retirement savings while paying down the mortgage. But there's another part of me that really enjoys the little luxuries, and feels that we should allow them before making extra payments on the mortgage. What do you think?"

I think they should be congratulated for a job well done for so early in life. Now for the tweaks.

First, I suggest they cut back on the excessive eating out and the little luxuries to get rid of that $22,000 in student-loan debt. Really, why in the world people hang onto this debt is beyond me. What is it, a pet?

I'd pay off the student loans before paying extra on the mortgage. I would also start a college fund a 529 plan for that baby before I would make extra mortgage payments. For more information on investing for college and 529 plans, go to www.saving forcollege.com.

Once the student loan debt is paid off, they can take the money devoted to that expense and apply it to mortgage payoff. Bankrate.com has a good calculator to help you figure out how extra payments will help. They should also look at their tax withholdings to make sure they aren't overpaying during the year. Instead of getting huge tax refunds, they could take the extra money in their paycheck every month and apply this to their home debt or student loans.

This couple shows that even good money managers can be better.

Another reader wanted some advice on how to apply some extra funds.

"In 2009, I was able to accomplish several of my financial goals refinanced my mortgage (4.75 percent fixed), paid off my student loans (YAY!), and with my December paycheck will have saved up enough for a six-month emergency fund," the person wrote.

Commendably, the reader is also generous. "I've contributed to charity every year, and have no plans to stop that habit. If anything, I'll increase it."

The issue: "I expect I'll have about $600 to $1,000 per month left over after expenses next year, and I'm trying to figure out what to do with it. How would you divvy up extra funds to maximize financial security long term and personal enjoyment in the short and medium term?"

The options the reader described:

• Boost retirement. "I turned 30 earlier this year, and have total retirement savings of about $80,000."

• Buy stuff. "I really didn't buy a lot of new furniture or stuff when I bought my place. I haven't taken a long vacation in some years either, so am itching to do that as well."

If you are in this great position, why not do both save more and spend some?

We can all save more, especially for retirement. If you've been an excellent steward, it's OK to treat yourself. So go ahead, get a great sofa and take a wonderful vacation. And bring me back a T-shirt.

Michelle Singletary writes for the Washington Post. Her e-mail address is sin gletarym@washpost.com.