What to do now that 'bad debt' is paid off

Q: I know you've written about saving and investing for retirement in previous years, so I apologize for asking now.

I didn't pay attention because I owed more than $30,000 in credit card debt and couldn't even imagine starting to save.

I'm 32 years old, and I got out of what I call bad debt about a year ago. The only debts I have now are my mortgage, which is at a fixed rate of 7.75 percent and a car loan at 1.9 percent. I know it's immature, but after building an emergency fund equal to three months of living expenses, I decided to reward myself and have been spending the money I was putting toward my credit card debt on fun, nonessential items.

I don't have any retirement savings, and I'm now ready to stop my fun spending and begin accumulating money for my future. I have about $600 a month I can invest and would like to know how and where to put this money so it will help me in retirement.

A: How exciting. You must be very proud of yourself to have paid down that amount of credit card debt.

The fact that you eliminated your "bad" debt, haven't gotten back into debt for your fun purchases and are ready to start saving sounds pretty mature to me. No need to apologize for the question. As with most topics, if a financial subject doesn't currently apply to you or someone you care about, it isn't of immediate interest.

Now that your bad debt has been eliminated, you may qualify for a lower interest rate on your mortgage, and you should consider refinancing your home. A meeting with a qualified financial adviser to discuss your personal situation is recommended, but the general guidelines below should be helpful.

* The first place to investigate for your savings is an employer-sponsored retirement plan. Most employer plans offer a match of employee contributions up to a certain amount. Even if an employer's match is only 10 cents, you should consider contributing up to the amount that it will match. Two reasons you may not want to contribute to a plan, even if the match is good, are costs and vesting schedules.

The money you contribute is always yours to take with you, but all or a portion of the company match stays with the company if you terminate employment before you are fully vested. If you plan to leave before becoming vested, you might want to save elsewhere first. This is especially true if the plan has high internal fees, making it costly. An expensive plan will have a negative effect on your rate of return. Check with the plan administrator to determine the vesting schedule and fees.

* If you decide to contribute to the employer-sponsored plan, still have money you can invest and have earned income that does not exceed the limits set by Congress, contribute to a Roth IRA.

Roth IRAs are funded with after-tax dollars, grow tax-deferred, and all earnings and growth are tax free if withdrawn after age 59 1/2. Your contributions can be withdrawn without taxes or penalty at any time.

As much as $4,000 can be contributed for tax year 2007 and up to $5,000 for tax year 2008. For taxpayers 50 and over, an additional $1,000 catch-up may be made for both years. If you are eligible, contribute the maximum to the Roth IRA.

The income phase-out range for single filers is $99,000 to $114,000 for 2007 and $101,000 to $116,000 for 2008. The income phase-out range for married filing jointly or head of household filers is $156,000 to $166,000 for 2007 and $159,000 to $169,000 for 2008. If your income falls in the phase-out range, you can contribute only a prorated amount, and if your income exceeds the phase-out range, you cannot contribute to a Roth IRA.

* If you still have money to invest, direct it to your employer retirement plan or a highly rated no-load mutual fund.