What Should You Do Once You Have a Six-Month Emergency Fund?

The following post is via Melissa Batai

If you are free of credit card and student loan debt, congratulations!  You are much further ahead than the average American.  If you also have a six-month emergency fund, you have achieved something that the majority of Americans have not.  According to the Chicago Tribune, only 40% of 25 to 34-year olds can cover six months of living expenses. 

Most financial advice is targeted at those trying to get on their feet financially, but what if you already are?  What should you do once you have a six-month emergency fund?

Of course, what you do depends on your goals and priorities, but here are some suggestions for what to do next financially.

Slush Fund

Every month, are you putting aside money for home repairs?  Car repairs?  If you’re not, this should likely be your next priority. 

Depending on the age of your car, you should be setting aside at least $100 per month per car for repairs.  (And if you have an old car like our 2004 Toyota with 225,000 miles on it, you might want to set aside $200 or $250 a month.)

Likewise, you should set aside 2 to 4% of the value of your house for repairs and maintenance, depending on how old your home is.

Retirement

Next, look at your retirement.  If your company is offering a match, are you contributing as much as you can to maximize the company match?  Do you have a Roth IRAs set up?  Do you max it out each year?

Saving for your retirement should be an important goal, and most experts recommend you save at least 15% of your income for your future retirement.

College Fund

If you’d like to establish a college fund for your children, now is the time to do so.  However, do not take this step before you’ve maxed out your retirement.  Your children can always get loans for college that you can help them pay off later, if you’re financially able.  However, there is no loan for retirement.  You want to have an adequate retirement so you’re not a financial burden on your children when they are middle-aged.

Pay Down Your Mortgage

This one is controversial.  Proponents say without a monthly mortgage payment, you have so many more options with what you want to do with your money—pay for kids’ college, give generously, contribute further to your own retirement.

Others say with historically low mortgage interest rates, there is no need to pay down your mortgage.  Instead, take the extra money you would use to pay down the mortgage and invest it.  You’ll make much more investing over the long term because you’ll likely get a much higher interest rate compared to the interest rate on your mortgage.

The decision is personal whether you want to pay down your mortgage early.

Final Thoughts

If you’re doing everything right and have paid off consumer debt and established a substantial emergency fund, you have several excellent options when deciding what to do next with your money.  What an excellent position to be in!

My Question for You

What do you recommend someone with a six-month emergency fund do next when it comes to finances?  Add to retirement? Start or add more to a college fund?  Pay down the mortgage?  What do you suggest and why?