Dear Helaine: I’m 33 years old. After years of earning a modest salary, I moved to a new company two years ago and got a substantial pay bump. I spent the first year saving for a down payment on a house, and bought a small condo six months ago. I now have a four-month emergency fund, but only put 4 percent of my income in a retirement account. I’ve recently gotten another raise in the form of increased commission payments, and after adding some small luxuries, I now have an average of another $300 a month.
My problem is I can’t decide the most responsible use of the funds. Should I just put the extra money in my 401(k)? I’m also tempted to refinance my home from the current 30-year mortgage to a 15-year one. I spoke to my lender, and I would pay an extra $450 a month and save $100,000 over the life of the loan.
I am confident I could cut expenses to make the extra payments, but finances would be tighter. I do plan on staying in my home for at least the next 10 years, and I love the thought of possibly using it as a rental property once the loan is paid off, or selling for a very nice down payment. But I also know that my commission is never guaranteed, and if the economy takes a downturn, I could be saddled with a house payment that is difficult to afford.
One other thing -- I just started regular contributions to my retirement account in the past year, since I was paying off my student loan debt. So what makes the most sense? I am worried if I don’t make an investment decision soon, I will just squander the extra money every month. -- Good Problem but Very Torn
Dear Good Problem but Very Torn: As you noted, good fortune doesn’t always last. No matter how skilled you are at your job, commission income can ebb and flow. The reasons can range from economic dips to seasonal variations to headwinds that specifically impact your business. As a result, I would urge you to not make permanent commitments with your newfound money -- which means I don’t recommend refinancing your home to a 15-year loan. If doing it makes your finances tight when the going is good, I don’t think you want to deal with the financial consequences of a bad month.
Moreover, you’ve admitted you are behind on your retirement savings. In an ideal world, you should be putting between 10 and 15 percent of your salary aside for your post-work life, not a measly 4 percent, and you should have started doing so in your mid-20s, not your early 30s. The most valuable money you can put away for retirement is the money you can set aside in the early stages of your work life, because it has the most time to compound -- that is, grow over time.
So that’s my recommendation. Should you find your newfound commission income is less steady or regular than you think, it’s easy enough to reduce the amount you are setting aside for retirement. And congrats on all your success!
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