Question for the Money Doctors
Question submitted on Mar 14, 2012.
QuestionWe are a young family of four with baby #3 on the way. We are currently renting, as we short sold our condo in June of 2011. We have $14,000 in student loan debt. We need to purchase a larger vehicle, as three kids will not fit in the back of our small car. We are also hoping to save a 6 month emergency fund, as well as a down payment on a house. With debt payoff, purchasing a vehicle, emergency fund to build, and a home down payment to save for, which goals should we tackle first? What should our first steps be? Not sure where to start. Hit each goal one by one, or save a little towards each?
Good question and glad to see you are actively thinking about your financial goals. Your first step should be to prioritize your goals. While being debt free is always a great goal to have, it takes time, patience, and disciplined financial habits to achieve and there is such thing as "good" debt when managed properly. Looking at your question and not knowing you or your financial specifics, I would speculate on your goal priorities as follows:
1. Vehicle purchase (presumably to be financed)
2. Emergency savings fund to build
3. Home down payment to save for
4. Debt payoff.
Personal and family objectives can often supersede financial ones, so if your current vehicle cannot accommodate your needs, selling your current car and purchasing a good, safe used vehicle that fits your family should be a priority. I suspect you will need to finance this purchase net of the proceeds of your current vehicle so you will have to see how that payment fits into your annual budget/cash flow.
Building the emergency fund should be a priority as well because without it, you do not have any cushion regardless of whether you rent or own a home. Once that is sufficiently built you can set aside funds for a future down payment to help your growing family. You will be able to do an analysis on renting vs. owning since the rent you pay is not tax-deductible and mortgage interest and property taxes on your own home are tax-deductible. I would not be in a hurry to dismiss the student loan compared with your other objectives as student loan interest is tax deductible and presumably at a low interest rate. Pay the minimums here until you have met your other objectives.
Best wishes with your growing family and reaching your financial goals.
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