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If you have read my previous post, Life After an Auto Loan, you’ll notice that I was undecided on what I wanted to do after my auto loan was paid off.  Over the past month I made a decision to split it up.  I am allocating 75% of the $400 to my student loans and the remainder to my Roth IRA.

By making this move, my student loans repayment schedule fell to 4 years from their original 10 years!  This is a huge drop in time and interest.  Based on my calculations, I should be keeping about $3,000 in my pocket that would otherwise go to the loan company.  If I allocated 100% to the loan, that would cut the time down to about 3.5 years.

Depending on your income level, you may be able to claim student loan interest paid on your taxes.  Unfortunately for me, I am unable to claim this.  So, for me, it makes no financial sense to carry this “good” debt.  Depending on how you look at things, some say that no debt is “good” debt.

What exactly is “good” debt?  “Good” debt is any debt that’s taken out for the prospect of growth, such as a student or home loan; it may also be tax-deductible.  When you take out a student loan, you are investing in education that will, hopefully, increase the earning potential over your lifetime.

As much as I want to pay down my student loan quickly, I still need to save for retirement.  I currently match my employer’s 403b at 1% and contribute to my Roth IRA.  Before I bought the house, my Roth IRA was maxed out every year at $5,000.  This past year, I only contributed a $1,000 to it – after my tax return!  This year I am trying to set aside for my Roth IRA every month, while still saving a portion from my tax return.  If my calculations are correct, this will place me at roughly $2,000 saved for the 2010 year.

Once you finished with a debt, what did you do with the extra money?

So, you made your final auto payment.  3 – 5 years (or less) of blood, sweat, and interest have paid off.  Now the big question is, “What do I do with this extra cash flow?”  Sure, you can disperse this back into your checking account, but what happens in another couple of years once another vehicle is needed?  Will you have enough for a decent down payment (20%)?  Maybe you want to buy your next car in cash?

I recently paid my 5 year auto loan in less than two years and now I’m starting to ask myself these questions.  I am finding many things to do with this extra cash flow, including spend it!  I need to come up with a plan so that I can stick to my goals.

Using the Auto Payment to Pad the Emergency Fund
Using this extra cash flow to pad my emergency fund might be the best idea to reach my goal of $20,000 sooner.  I might direct most of the auto payment here for a few months just to give it a boost.  If I redirect the whole amount to my emergency fund, I will easily reach my goal by the end of the year.

If you do not have an emergency fund, it’s important that you start as soon as possible – even if the amounts are small.  You will be better off just by getting into the habit of saving.  Remember, it starts with the small things!

Using the Auto Payment to Pay Down Debt
I’m also considering using this to pay down my student loans.  Since I make too much money to write off the interest on my taxes, I want to rid of this debt as quickly as possible.

According to the IRS for 2009, if you are single and your modified adjusted gross income is above $75,000, you are not allowed to deduct the interested.  The deduction is phased out between $60,000 and $75,000.  If you are married and make more than $150,000, you cannot deduct student loan interest.  This too gets phased out between $120,000 and $150,000.

The bottom line is you are allowed to deduct the most student loan interest IF:

• You file as single and make less than $60,000.
• You file as married and make less than $120,000 combined.

Check with your tax advisor to see if you qualify to write off student loan interest.

Using the Auto Payment to Save for Another Vehicle
Why not continue to make auto payments to myself?  By doing this, I’ll be ahead of the game for when it’s time to get another vehicle.  I may even be able to buy the next one in cash!

Divvy up the Money
There are many things I would like to do with this extra cash flow.  In the end, I might divide it up in equal parts to various saving accounts.

I will keep you posted on which route I take.  What have you done with the extra cash flow after a debt was paid off?