How to save for mutliple goals and where to put that money?
May 13, 2010 5:33 AM Subscribe
Financial/Savings Filter: How do I save for multiple goals at once and do I keep it all in the same savings account?
I'm nearing my late 20's in the United States and I have reached the point in my professional career where I can really start saving up more money than I've been able to in the past. A few things, at the moment I have a small emergency nest egg of a few thousand dollars that many people believe you need for emergencies (loss of job etc). Aside from that I want to start saving for a house and retirement. My company does not offer a 401K, instead they have a profit sharing plan accept we cannot add anything to it, so I feel like it's not really something to match the point of a 401K or an IRA. At the same time I don't want to use my savings account for retirement purposes because I'd rather just keep my nest egg there and use it to start saving up for a down payment/expenses of purchasing a house.
My question is, how do you start saving for multiple things at once, do I save for both a house and retirement but lessen the amount I put into each every month, or do I simply go ahead and save for a house and once I have done that (multiple years away) then start saving for retirement? I'm interested in this specifically and also how people manage different accounts, do you have emergency nest egg/savings in one account or do you split them up etc...
I'm nearing my late 20's in the United States and I have reached the point in my professional career where I can really start saving up more money than I've been able to in the past. A few things, at the moment I have a small emergency nest egg of a few thousand dollars that many people believe you need for emergencies (loss of job etc). Aside from that I want to start saving for a house and retirement. My company does not offer a 401K, instead they have a profit sharing plan accept we cannot add anything to it, so I feel like it's not really something to match the point of a 401K or an IRA. At the same time I don't want to use my savings account for retirement purposes because I'd rather just keep my nest egg there and use it to start saving up for a down payment/expenses of purchasing a house.
My question is, how do you start saving for multiple things at once, do I save for both a house and retirement but lessen the amount I put into each every month, or do I simply go ahead and save for a house and once I have done that (multiple years away) then start saving for retirement? I'm interested in this specifically and also how people manage different accounts, do you have emergency nest egg/savings in one account or do you split them up etc...
ING Direct allows you to open multiple savings accounts for multiple purposes very easily. The tax paperwork is all streamlined so you get a single form to use with your tax return. That's how I do it. I have separate ING accounts for my daughter's college savings, my emergency fund, my vacation fund, and several other large future purchases.
posted by mkb at 5:56 AM on May 13, 2010
posted by mkb at 5:56 AM on May 13, 2010
My savings are all over the place, but it seems to work for me so I will share it:
I'm currently saving for a) retirement, b) house, c) emergencies, and d) "other". I believe you can do all at the same time, rather than one exclusively at a time. Remember, compound interest means that the more time your money is in savings, the more you'll have when you take it out. For that reason, I believe putting money away for retirement now, even though it might be a small amount, is very important.
Everything is split up this way:
-Retirement account through work. I use automatic payroll deductions and I don't even realize the money is "missing" from my paycheck. I realize this is not an option for you, but bear with me for now.
-A separate mutual fund account (with a separate investment firm) for a house down payment. This has years and years to go, but I put money into it fairly regularly. I don't automatically deduct from my paycheck for this. This is sort of a legacy fund, as my parents started it when I was a kid for my college expenses and I continued to put money into it once I started earning my own way.
-An online savings account for emergencies. I've built it up to the point that I almost never put money into it anymore. It's also incredibly clunky to get money in to and out of, so it doesn't see much use.
-A "retail investment" account (through yet another firm) to diddle around with stocks on my own. Since I don't really have confidence that I can "beat" the market (or even the mutual funds I have), this money is the "other" fund for whatever comes up. The plan right now is to generate a small amount of cash flow with it.
I also have a checking account which I keep enough money in for time-sensitive emergencies, since it can take several days to get money transferred from my savings to my checking account.
As to how much goes into each... I'm not terribly concerned about buying property, but my company offers excellent retirement matching. So, most of the savings goes into the retirement account. Compound interest, remember - my first day of work, a returning retiree was in my orientation and told me, "I'm making more money being retired than I did working full-time for the company!" So keep that in mind.
What you can do, since you don't get a 401(k) or anything like that, is to consider a Roth IRA. The earnings are tax-free, so you can put your after-tax income into it and not get double-dipped by the government. If you have direct deposit, you should be able to allocate a percentage of your paycheck to go directly to the IRA account. If you have it deducted automatically, without ever seeing the gross, you really won't miss it.
posted by backseatpilot at 6:37 AM on May 13, 2010
I'm currently saving for a) retirement, b) house, c) emergencies, and d) "other". I believe you can do all at the same time, rather than one exclusively at a time. Remember, compound interest means that the more time your money is in savings, the more you'll have when you take it out. For that reason, I believe putting money away for retirement now, even though it might be a small amount, is very important.
Everything is split up this way:
-Retirement account through work. I use automatic payroll deductions and I don't even realize the money is "missing" from my paycheck. I realize this is not an option for you, but bear with me for now.
-A separate mutual fund account (with a separate investment firm) for a house down payment. This has years and years to go, but I put money into it fairly regularly. I don't automatically deduct from my paycheck for this. This is sort of a legacy fund, as my parents started it when I was a kid for my college expenses and I continued to put money into it once I started earning my own way.
-An online savings account for emergencies. I've built it up to the point that I almost never put money into it anymore. It's also incredibly clunky to get money in to and out of, so it doesn't see much use.
-A "retail investment" account (through yet another firm) to diddle around with stocks on my own. Since I don't really have confidence that I can "beat" the market (or even the mutual funds I have), this money is the "other" fund for whatever comes up. The plan right now is to generate a small amount of cash flow with it.
I also have a checking account which I keep enough money in for time-sensitive emergencies, since it can take several days to get money transferred from my savings to my checking account.
As to how much goes into each... I'm not terribly concerned about buying property, but my company offers excellent retirement matching. So, most of the savings goes into the retirement account. Compound interest, remember - my first day of work, a returning retiree was in my orientation and told me, "I'm making more money being retired than I did working full-time for the company!" So keep that in mind.
What you can do, since you don't get a 401(k) or anything like that, is to consider a Roth IRA. The earnings are tax-free, so you can put your after-tax income into it and not get double-dipped by the government. If you have direct deposit, you should be able to allocate a percentage of your paycheck to go directly to the IRA account. If you have it deducted automatically, without ever seeing the gross, you really won't miss it.
posted by backseatpilot at 6:37 AM on May 13, 2010
Response by poster: Addition: These are all extremely helpful. Right now I do use an ING savings account but I wasn't aware that I could open up additional ones so that I could organize what the purpose is, I will definitely look into that. I also saw that they do IRAs, both the standard and the ROTH and it seems by the consensus here is that the Roth IRA is the way to go.
Perhaps the best thing to do is to have two savings accounts, one for the house down payment and the other for emergency funds, and then keep a separate Roth IRA for retirement fund.
posted by modoriculous at 7:00 AM on May 13, 2010
Perhaps the best thing to do is to have two savings accounts, one for the house down payment and the other for emergency funds, and then keep a separate Roth IRA for retirement fund.
posted by modoriculous at 7:00 AM on May 13, 2010
Here's what I've got going, and my age and goals are pretty similar to yours
- bank account with 0% interest, where I keep my spending money for the month
- ING accounts - 2 CDs and 2 savings accounts. One of the savings accounts is my emergency fund; one is my "saving for a car/house" fund. I contributed to both until I hit a place I'm happy with for my emergency fund; now I contribute only to the car/house fund unless I've used the emergency fund for something. I count the CDs under the
- Vanguard Roth IRA, which I max out each year. I've got one of the Target funds.
- my employer's 401k, which I just started contributing to. They don't match, but I might as well take advantage of this. I contribute 10% of my paycheck.
The Roth IRA is attractive to me because if need be, I could take out my contributions. I would hesitate to do this, but if that's the difference between being able to make a down payment or not, I'll do it.
In how many years do you plan to buy a house?
I would put money away for retirement and a house at the same time. If you do a Roth IRA, it's only $5000 a year - it's a manageable amount but a lot better than nothing.
posted by punchtothehead at 7:06 AM on May 13, 2010 [1 favorite]
- bank account with 0% interest, where I keep my spending money for the month
- ING accounts - 2 CDs and 2 savings accounts. One of the savings accounts is my emergency fund; one is my "saving for a car/house" fund. I contributed to both until I hit a place I'm happy with for my emergency fund; now I contribute only to the car/house fund unless I've used the emergency fund for something. I count the CDs under the
- Vanguard Roth IRA, which I max out each year. I've got one of the Target funds.
- my employer's 401k, which I just started contributing to. They don't match, but I might as well take advantage of this. I contribute 10% of my paycheck.
The Roth IRA is attractive to me because if need be, I could take out my contributions. I would hesitate to do this, but if that's the difference between being able to make a down payment or not, I'll do it.
In how many years do you plan to buy a house?
I would put money away for retirement and a house at the same time. If you do a Roth IRA, it's only $5000 a year - it's a manageable amount but a lot better than nothing.
posted by punchtothehead at 7:06 AM on May 13, 2010 [1 favorite]
Nthing ING! I asked this question about how to organize savings accounts. The consensus was ING and I've been using it ever since. I can't recommend ING enough. They also let you have a free checking account (Electric Orange) which lets you access your savings quickly through a Debit Mastercard.
posted by cowbellemoo at 7:24 AM on May 13, 2010
posted by cowbellemoo at 7:24 AM on May 13, 2010
do I save for both a house and retirement but lessen the amount I put into each every month, or do I simply go ahead and save for a house and once I have done that (multiple years away) then start saving for retirement?
I think the easiest way to convey what you should do is with a list of priorities. Once you get the higher priority stuff taken care of, you can move on to the lower priority ones.
* Highest Priorities *
1. Spend less than you make. You don't necessarily need to stick to a detailed monthly budget, but over time you should be taking in more than you spend. The better you do at this step, the easier the rest of them will be. It sounds like you are already doing this, but if your income changes make sure that you still live within your means.
2. Save up an emergency fund in cash for unexpected expenses. If you don't have 3 months worth of expenses saved up, make that your priority. If you have more than 3 but less than 6, consider getting to that target. It depends on how stable your income is and how comfortable you are with the amount you have, but having a relatively large amount of cash at any given time can save you from a lot of financial disasters.
3. Get rid of any debt. I'm mostly talking about credit card debt here, but student loans, car loans, and other kinds of debt count too. In general paying down debt will make you more money in the long run than a savings account, and if you're debt free you have less monthly expenses to worry about. Mortgage debt is not as bad because you are hopefully saving more from not having to pay rent than you are paying in interest, but paying down your mortgage earlier is still saves you a ton of money in the long run.
* Normal Priorities *
4. Save for retirement. These days if you get a new job it's very unlikely that it will come with a pension, and the future of programs like social security is uncertain, so you are mostly on your own for paying for your expenses after you stop working. If your company offers a match for a 401k or similar account, put money into that first, because a full match (100% return) or even half match (50% return) are much higher than the annual returns you can expect from general long-term stock market investments (10% return if you are lucky) and it's easy to roll your 401k into an IRA later if you change jobs. After that, you most young people should open a Roth IRA and contribute as much as they can to that under the limits, because it makes sense from a tax perspective and the contributions can be removed at any time (so it can be a kind of emergency emergency fund). A good starting target goal for your yearly retirement savings is around 10% of your pre-tax yearly income, once you get older and/or your income goes up you can increase that percentage.
5. Make significant donations to charity. On average people donate around 2% of their pre-tax income on charity, and if you get to this point in the priority list you can probably afford higher than that. I think 5% of your pre-tax income is a decent starting goal and you can go up from there. As long as you donate to a registered tax-exempt non-profit, you can also deduct it on your taxes if you itemize. And check to see if your employer has any kind of matching offer for charitable contributions, often they will match 1:1 up to a certain amount per year.
6. Save for short-term goals. Figure out how long you want to save and how much you need to save, to calculate the monthly amount you need to save to get there. Even if you are going to earn interest on the money or are expecting to make more money in the future, just focus on saving enough each month to get there in your planned time. If you are saving for a down payment on a house, figure out what price range you are going to buy in, and focus on saving 20% of that amount.
* Lower Priorities *
7. Invest in taxable non-retirement accounts. This is a low priority because taxes really eat into your returns and you have to make a relatively large amount of money to max out all the above priorities and still have more money to invest. Don't get into any risky trading strategies (stay away from options or forex) and keep your costs down (don't pay $20 per trade and make 10 trades a week unless you have over a million dollars invested).
8. Spend it! If you have all the other priorities covered at this point, you might as well go on a vacation or do something else fun with the rest of it.
In your particular case, it sounds like you have #1 and #3 covered, so you should work on #2 since you only have a few thousand saved at this point. After that, get #4 and #5 working and move on to #6.
posted by burnmp3s at 8:17 AM on May 13, 2010 [13 favorites]
I think the easiest way to convey what you should do is with a list of priorities. Once you get the higher priority stuff taken care of, you can move on to the lower priority ones.
* Highest Priorities *
1. Spend less than you make. You don't necessarily need to stick to a detailed monthly budget, but over time you should be taking in more than you spend. The better you do at this step, the easier the rest of them will be. It sounds like you are already doing this, but if your income changes make sure that you still live within your means.
2. Save up an emergency fund in cash for unexpected expenses. If you don't have 3 months worth of expenses saved up, make that your priority. If you have more than 3 but less than 6, consider getting to that target. It depends on how stable your income is and how comfortable you are with the amount you have, but having a relatively large amount of cash at any given time can save you from a lot of financial disasters.
3. Get rid of any debt. I'm mostly talking about credit card debt here, but student loans, car loans, and other kinds of debt count too. In general paying down debt will make you more money in the long run than a savings account, and if you're debt free you have less monthly expenses to worry about. Mortgage debt is not as bad because you are hopefully saving more from not having to pay rent than you are paying in interest, but paying down your mortgage earlier is still saves you a ton of money in the long run.
* Normal Priorities *
4. Save for retirement. These days if you get a new job it's very unlikely that it will come with a pension, and the future of programs like social security is uncertain, so you are mostly on your own for paying for your expenses after you stop working. If your company offers a match for a 401k or similar account, put money into that first, because a full match (100% return) or even half match (50% return) are much higher than the annual returns you can expect from general long-term stock market investments (10% return if you are lucky) and it's easy to roll your 401k into an IRA later if you change jobs. After that, you most young people should open a Roth IRA and contribute as much as they can to that under the limits, because it makes sense from a tax perspective and the contributions can be removed at any time (so it can be a kind of emergency emergency fund). A good starting target goal for your yearly retirement savings is around 10% of your pre-tax yearly income, once you get older and/or your income goes up you can increase that percentage.
5. Make significant donations to charity. On average people donate around 2% of their pre-tax income on charity, and if you get to this point in the priority list you can probably afford higher than that. I think 5% of your pre-tax income is a decent starting goal and you can go up from there. As long as you donate to a registered tax-exempt non-profit, you can also deduct it on your taxes if you itemize. And check to see if your employer has any kind of matching offer for charitable contributions, often they will match 1:1 up to a certain amount per year.
6. Save for short-term goals. Figure out how long you want to save and how much you need to save, to calculate the monthly amount you need to save to get there. Even if you are going to earn interest on the money or are expecting to make more money in the future, just focus on saving enough each month to get there in your planned time. If you are saving for a down payment on a house, figure out what price range you are going to buy in, and focus on saving 20% of that amount.
* Lower Priorities *
7. Invest in taxable non-retirement accounts. This is a low priority because taxes really eat into your returns and you have to make a relatively large amount of money to max out all the above priorities and still have more money to invest. Don't get into any risky trading strategies (stay away from options or forex) and keep your costs down (don't pay $20 per trade and make 10 trades a week unless you have over a million dollars invested).
8. Spend it! If you have all the other priorities covered at this point, you might as well go on a vacation or do something else fun with the rest of it.
In your particular case, it sounds like you have #1 and #3 covered, so you should work on #2 since you only have a few thousand saved at this point. After that, get #4 and #5 working and move on to #6.
posted by burnmp3s at 8:17 AM on May 13, 2010 [13 favorites]
Definitely Roth. You can pull out contributions any time without penalty, and earnings in cerrtain cases as well. Did you know you can take out 10k in earnings for a first time downpayment? Only downside is you have to have the Roth open for five years.
So open one sooner rather than later.
posted by pwnguin at 8:35 AM on May 13, 2010
So open one sooner rather than later.
posted by pwnguin at 8:35 AM on May 13, 2010
Response by poster: I'd like to buy a house in a couple of years, I get yearly bonuses that could substantiate to the amount for a down payment by then. My credit card is basically paid off, I have another year on my car loan, and about 10 grand in school loans to pay back as well so I'm not completely debt free at this point. Sounds like I still need to focus my efforts on the emergency fund and then I can go ahead and start the process for everything else.
posted by modoriculous at 9:30 AM on May 13, 2010
posted by modoriculous at 9:30 AM on May 13, 2010
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posted by PhoBWanKenobi at 5:56 AM on May 13, 2010 [4 favorites]