Long time reader, first time poster...

I have read the recommended order of investing here a number of times:

401k to match
High interest debt
Roth IRA
401k to limit
Non-tax advantaged mutual funds

However, neither my wife nor I have the option for 401k at work, and the Roth IRA limit is well below 10% of our combined income. What is the best option for us? Should we just fund the Roths totally and then save in non-tax advantaged accounts? I will be eligible to participate in my company's profit sharing plan as of September. The past few years, this plan has funded the maximum allowable (ie 20% of salary) to each of its employees accounts. I know that this should not be a substitute for my own savings, but it will certainly help us get ahead faster than we can on our own.

We have a couple of low interest debts as well as some remaining student loans. Our budget has called for putting about 14% of our take home pay into "savings" which we have targeted towards retirement accounts. At the same time we are paying about 23% of our income into paying down the combination of our student loans plus a relatively low interest vehicle loan and a low interest loan on an improvement to our rental property (the interest on which is a deductible business expense). For reference, we only owe 14% of our income per month on these liabilities (ie the sum of the required payments is 14% of our take home).

After a careful review last night of our budget adherence it turns out that despite "paying ourselves first" we have had to "borrow" money back from my savings to cover the rest of our bills at the end of the month. We have been going way over on the discretionary portion of our budget. We both recognize that we can do better in this regard -- we live quite frugally as it is. A 6-month old at home keeps us from going out much at all. Rather the bulk of the spending seems to come from anticipated but infrequent items such as car repairs, home repairs (not upgrades, mind you), and infrequent but larger than normal household costs (we bought a years' worth of hamburgers last month because of a great sale and a large freezer). However, we recognize that we will have to budget more to discretionary -- or rather to shift more to an "infrequent but non-discretionary" category than we have been.

So the question is: Do we tap the extra 9% we are paying to aggressively pay down low interest debts, or do we temporarily reduce the amount available to save for retirement until the all of our debts are gone? At our present rate of payoff, all of our debts will be eliminated in 2.5 years. I consider low interest to be about 6.5% or less, by the way.

Thanks for your comments...

Are you comfortable giving a breakdown of how much the debt is what the rate is for each one? There are different kinds of debt and, IMO they have different repayment strategies. For example, standard rule of thumb is to hold on to student loans and pay off credit cards ASAP. But if your credit card is at 0% of 2% for life or something and your SLs are at 6.5 it makes sense to put more to SLs.

As far as saving for retirement, I'd definitely max out the Roths. And then, yes, I'd start saving in a taxable account. If you use index funds the taxes you have to pay should be minimal. If you hold long term the rate is only 15% which is a darn good deal.

As far as having to dip into savings or whatever to meet your budget, you should set up your budget so that you're paying a little each month to a car maintenance fund and a house maintenance fund. That way, you have some saved up for when you need to make those repairs instead of having to dip into other savings to do it. Look back at your old bills and see how much you typically spend each year for car maintenance (include oil changes, tune-ups, new tires, everything). Divide it by 12 and then save that much each month. This is one reason I like ING because I can save that money directly into a "car maintenance" fund. If you do this with all of your irregular but annual expenses then you won't have to scramble when they come up.

Also, before you budget more to discretionary, make sure you can't make cutbacks instead of throwing more money at it. Sometimes you just really underestimated your budget so you have to increase it. but sometimes you're just over spending in a particular area so you just need to get that under control.

Good luck.

Thanks for the response. Many of your points are things that I think I figured out on my own just by virtue of having to think through the whole situation in order to type it all out. My wife and I were talking just this afternoon about including an item or items for non-regular, non-discretionary payments. I'm already doing this for regular but non-monthly payments, like insurance premiums, etc., as well as a monthly budgets for expenses that occur every month but are not always quite the same, such as fuel bills, and utilities.

Here is our current list of debts and the associated interest rates:

Student loans:

500 5.75%
350 8%
260 8%
4400 7.7%
2500 5%

Car Loan
28,500 5.5%

Credit Card
11,000 5%

As I stated before, the credit card interest payments are deductible since the balance on the card represents work done on my rental property.

What's interesting is that I guess I haven't been paying much attention to my student loan rates because some of the seem to unnecessarily high interest rates. I know that they haven't always been that high but I believe they are variable and can change once per year. I have looked into consolidation before, but the interest rates offered always seemed to be a bad deal compared to what I have. I might almost be better off using a balance transfer option on a credit card for some of them since the rate I would be paying would be lower than the tax advantaged rate on the student loan.

I have reviewed my discretionary purchases for the last few months, and there are definitely some things that we spent money an that were unnecessary. I believe that part of this was simply inattention to budget. We have 2 checking accounts, one that pays all of our fixed bills (mortgage, car loans, utilities, etc.) and a second one that gets funded 3 times a month for discretionary spending. Recently I had to cancel the debit card associated with the discretionary spending account since it had been compromised. The ineptness of my bank (which has just been bought out by another bank, thank goodness...) left me without a discretionary card for far longer than I would have liked which left me using my "fixed payments" debit card for discretionary purchases. Because I wasn't paying close attention to this card as closely as I should have I probably spent a bit too much. Added together with those other non-regular, non-discretionary expenses and here I am asking for advice on a personal finance forum...

Here's another question about my retirement plan:

I have already contributed $3000 for this tax year to a Regular IRA (with post tax money... I will have to wait until next spring to see the tax advantage...). Would I be better off converting that to a Roth? Is this easy to do given that I'm still in the same tax year that I contributed the money?

5 minutes of research shows that loan consolidation is not an option. Of the loans listed above, some are held by my wife and some by me. Apparently married couples can no longer consolidate loans together. I wonder if you can "consolidate" one loan. Or can you refinance a student loan to retain the tax advantage while also enjoying a lower rate?

Did I ask too many questions or did I answer too many on my own? (IOW bump...)

Are your credit cards or LOCs maxed out? If not, you could do balance transfers -- and then consolidate those balances with a loan. But you'd only want to do that if your interest rate is going to end up lower.

That's a great idea. I was thinking the same thing this afternoon when I opened the letter from one of my loan companies notifying me of the July 1st increase in my rate from 7.7% to 8.02%.

At this point I know I can do a balance transfer to one of my credit cards and get 5% for the life of the loan. I can also probably convert the smaller loans to 2% for 6 months. This would put me about 4 months ahead of the payoff schedule for that loan so it shouldn't be a stretch. At those rates I will be paying less than the effective rate of the student loan AFTER the tax deduction for the interest. I hate that I won't be able to deduct the interest, but if it costs less not to then I guess I can't be too upset about it.

After I make the consolidation to my credit card, the question still remains of whether to tap the debt paydown on my low interest credit card and car loan or reduce my retirement savings rate to meet the small shortcoming in my budget...

With more analysis it actually looks like it would be best to divert most of my aggressive debt paydown money towards my high interest student loans without transferring any balances to credit cards. Since the loans can be paid off completely in 6-9 months given the amount of money I have to put towards total debt reduction, the amount of interest incurred will be much less than the cost to transfer the balances to a lower rate.