Question:

My husband and I have no credit card debt but we have $130,000 in student loan debt. We have a 4.5 percent fixed interest on our mortgage and 26 more years on the loan. We have $15,000 in savings. After our bills (not food, clothes, entertainment etc) are paid we have about $3,000 a month. What is the best way to budget that money? We do not have any investments and we have an infant baby.

Response:

Carmen Wong Ulrich Dec 9, 2013 Former Host
Don’t worry about that mortgage.  You’ve got a great rate and hopefully over the long term, you’ll grow equity.  Hold onto that $15,000 in cash as an emergency fund.  

As for that huge student loan debt (wowzers!) I don’t know what your interest rates are but — and it’s a big but — you mention no retirement savings either.  I’d split that extra $3,000 a month between investing in a tax-sheltered retirement savings account either provided by your employer (like a 401k) and/or an IRA.  

I’m going to assume that you’re making great money because of an investment in your education so though the debt seems monumental, remember that over your careers you’re sure to make multiples of $150,000 in income beyond what you’d have earned without the degrees.  Those student loans were an investment in you and your future earnings so though they are a priority, so it saving for retirement while you have time on your side.  

For example, if you didn’t save for retirement at all and used your $3,000 a month solely for the debt, you’d probably be out in about five to eight years.  But, five years of tax-free growth and savings can also get you well ahead — especially as that money will continue to grow and continue to be contributed to for decades.

Time is powerful when it comes to your money — to both getting rid of debt and growing investments.  Though, if you have student loans with very high interest rates, say at or over 8 percent, I’d tackle those first ’til they’re gone, then split between debt and savings.  Most importantly, set up a system so you’re not tempted to spend that extra money every month.  Stay on track and you’ll be out from under those six-figures soon, and have retirement savings.