Tweaking a successful financial formula

Despite a still funky economy, many people are doing well.

Yes, the unemployment rate is too high. People continue to lose their homes. And credit card debt is smothering many consumers.

But as the year comes to a close, I wanted to address questions from readers who are fine financially yet need some tweaks to the way they handle their money.

Let's start with a young couple in their late 20s who sent me a note during one of my online chats. They have an infant daughter and both are federal employees. They've saved more than $160,000 in their retirement accounts. Even with a child, they are able to contribute about $1,700 a month (combined) toward their retirement. They have three months of expenses in an emergency fund and no credit card debt.

Both drive cars that they bought used, paying cash.

They are doing well.

But they have about $22,000 in student-loan debt. They aren't happy with their bad dining-out habit. They are concerned about a hefty house payment. They purchased their home at the height of the housing boom; their payments are large but still affordable.

"We had intended to work on paying down the mortgage early using bonuses, tax refunds and other windfalls, but we have spent all of that money and much more on house maintenance and repairs," the wife wrote. "I'm starting to think that it would make sense to cut back a little on our retirement contributions in order to pay down some of our mortgage debt. A part of me feels that we should just tighten our belts and find enough money to keep up with the retirement savings while paying down the mortgage. But there's another part of me that really enjoys the little luxuries, and feels that we should allow them before making extra payments on the mortgage. What do you think?"

I think they should be congratulated for a job well done for so early in life. Now for the tweaks.

First, I suggest they cut back on the excessive eating out and the little luxuries to get rid of that $22,000 in student-loan debt. Really, why in the world people hang on to this debt is beyond me. What is it, a pet?

I'd pay off the student loans before paying extra on the mortgage. I would also start a college fund -- a 529 plan -- for that baby before I would make extra mortgage payments. For more information on investing for college and 529 plans, go to http://www.savingforcollege.com.

Once the student-loan debt is paid off, they can take the money devoted to that expense and apply it to mortgage payoff. Bankrate.com has a good calculator to help you figure out how extra payments will help. They should also look at their tax withholdings to make sure they aren't overpaying during the year. Instead of getting huge tax refunds, they could take the extra money in their paycheck every month and apply this to their home debt or student loans.