A Perfect Case For Making Things Automatic

Angela writes in with the following situation:

I didn’t see any archives where you unexpectedly come into money. My husband is re-enlisting for a big chunk of change (in the end we will get about 37k after taxes). Here is where we are now:
Credit Card 1 – 10k @ 14.25%
Credit Card 2 – 1k @ 16.99%
Debt consolidation loan – 11.5k @ 14%
Truck loan – 12K @ 12%

So you can see that we can pretty much wipe the slate clean there. Here is my real question. Will all that debt just gone, we will have a little over $2,000 a month left over. How do we make sure that we are not just going to blow it? We have four kids to put through college and a neglected retirement fund to look at. But it seems like it is just too much money to really handle. Help!

According to my math, that debt is about $34K, and you’re getting about $37K. With interest rates like those, you’re definitely in the right to pay all of them off as soon as you get the money. Step one is to get that debt completely gone – any time you’re paying out double-digit interest, you’re never going to get ahead.

This leaves you with about $2,000 a month in excess on your monthly budget, which is great. I also understand that, without a plan, you’re going to be prone to spending all of it, which is not great.

What I would do is start automatically putting that money in various places. Set up automatic deductions from the paycheck into a 401(k) and into 529 college savings accounts for each of your kids – $500 a month into the 401(k) and $100 a month into the 529s will eat up $900 of it.

What about the rest? First of all, I’d build up a nice emergency fund to protect yourself from things like a car breakdown – if your car dies and you suddenly have a large bill at the auto repair place, you don’t want to dip into credit to cover it. I would set a goal of having an emergency fund equal to six months’ worth of your monthly budget – with four kids at home, lots of things can happen when you least expect them. This will siphon off that extra $1,100 each month for a while, but when the time comes, you are going to be incredibly happy that you have that money.

What about when the emergency fund is full? Between now and then, spend some time with your husband figuring out what your most important goals are. Do you want a bigger house? A better retirement? Do you want to really fund your children’s education? Some amazing family vacations in the future? Paying cash for automobiles so you never go into debt again? Each of those goals points to different things to be doing with that money. By putting cash into an emergency fund now, you’re not only building security, you’re also giving yourself plenty of time to think about what you really want to do with your money after the emergency fund is completely funded.

My wife and I dream heavily of a country estate, for example, so we’re focusing on paying down all of our debts with some seriously large overpayments right now, then saving rapidly for this home.

The real key, though, is making it automatic – just set up automatic deductions into appropriate accounts. That means that you’ll never touch that $2,000 a month and never be tempted to spend it. Good luck!

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