Where should we put our money?
May 23, 2014 5:33 PM Subscribe
My family's combined income just increased by over 50% in the span of a week, between a new job for my husband and a significant raise for me. This is obviously AWESOME. We went from living on a very tight budget so we could afford to put some savings away, to have a couple thousand dollars a month beyond even that savings. What do we do with it?
We already donate/give and will increase that in proportion to our new income. We have been saving about 1/3 of our monthly income up to now, but that is all pretty short time savings (like for yearly taxes/insurance/tuition, car repairs, house repairs, vacation) - after recently paying off the last of a student loan, we have about 5K saved for various near-future expenses. Beyond that, we have no savings other than retirement accounts through work.
We each contribute the maximum to our IRA that our employers match. Should we increase our contributions to those accounts? Should we open some other type of retirement account?
What about longer term (but not retirement) savings - like saving for a new car or new house/home addition 5-10 years down the line? Should that be in some kind of account other than just a regular bank savings account?
We have no debt (including mortgage - we own our home outright) and are planning to continue living well within our current means. Our biggest goal is to remain debt free (even when we decide to move to a larger house) and for us to be able to live on one income for a few years once we have children. I would say we are somewhat counter cultural in how we view money... we are not interested in getting super wealthy, we live in a way smaller/crappier house than we could afford to, and plan on living below our means for the rest of our lives. With that in mind, how should we plan/save for these goals of remaining totally debt free and having the freedom to live on one income for a while?
We already donate/give and will increase that in proportion to our new income. We have been saving about 1/3 of our monthly income up to now, but that is all pretty short time savings (like for yearly taxes/insurance/tuition, car repairs, house repairs, vacation) - after recently paying off the last of a student loan, we have about 5K saved for various near-future expenses. Beyond that, we have no savings other than retirement accounts through work.
We each contribute the maximum to our IRA that our employers match. Should we increase our contributions to those accounts? Should we open some other type of retirement account?
What about longer term (but not retirement) savings - like saving for a new car or new house/home addition 5-10 years down the line? Should that be in some kind of account other than just a regular bank savings account?
We have no debt (including mortgage - we own our home outright) and are planning to continue living well within our current means. Our biggest goal is to remain debt free (even when we decide to move to a larger house) and for us to be able to live on one income for a few years once we have children. I would say we are somewhat counter cultural in how we view money... we are not interested in getting super wealthy, we live in a way smaller/crappier house than we could afford to, and plan on living below our means for the rest of our lives. With that in mind, how should we plan/save for these goals of remaining totally debt free and having the freedom to live on one income for a while?
Should we increase our contributions to those accounts?
If you don't need the money for something else and you want to invest it, then definitely retirement investments that are tax-deductible, or at least grow tax free, are a good idea. Investing more when you are young has the great benefit of the money having more time to grow. But be careful about fees...a lot of retirement investments have big fees. If your employer has such a plan, see if you can get into a "self-directed brokerage account" (SDBA) option instead and invest in ultra low fee index funds from Vanguard or Fidelity.
posted by Dansaman at 5:39 PM on May 23, 2014 [1 favorite]
If you don't need the money for something else and you want to invest it, then definitely retirement investments that are tax-deductible, or at least grow tax free, are a good idea. Investing more when you are young has the great benefit of the money having more time to grow. But be careful about fees...a lot of retirement investments have big fees. If your employer has such a plan, see if you can get into a "self-directed brokerage account" (SDBA) option instead and invest in ultra low fee index funds from Vanguard or Fidelity.
posted by Dansaman at 5:39 PM on May 23, 2014 [1 favorite]
In retrospect, one thing I wish I'd thought of when I was in a similar situation a couple years ago is that there's no hurry. Don't rush to spend this new-found money right away, of course, but there is also no pressure to do anything with it right away, even something "sensible" like a specific savings plan. If you just let the money pile up, you have time to assess your options and the money will still be there when you figure something out - take your time.
The only sort-of exception to this is 401(k) contributions, which you must make out of your salary in the current year. Even with that, though, you may well be able to max it out in the last 2-3 pay periods of the year if you want to take the next several months to consider your options.
posted by Joey Buttafoucault at 5:46 PM on May 23, 2014 [4 favorites]
The only sort-of exception to this is 401(k) contributions, which you must make out of your salary in the current year. Even with that, though, you may well be able to max it out in the last 2-3 pay periods of the year if you want to take the next several months to consider your options.
posted by Joey Buttafoucault at 5:46 PM on May 23, 2014 [4 favorites]
You should go through and figure out a comfortable budget for your family with your new income. People here recommend YNAB a lot, I like mint, it doesn't really matter--figure out what you need for your essentials, plus some wiggle room, plus give yourself an entertainment budget so you can actually enjoy your income increase.
Once you have that figured, set up a direct deposit from your paycheck for some portion of the remainder and just dump it into a savings account. Right now, the best interest-earning basic savings accounts (i.e. ones where you can access your money immediately, not a CD) are with Barclays online. Before worrying about investments, get a nice comfortable emergency savings built up, something that will allow you to live comfortably at your new budget level for 6 months. The Barclays dream account is a good one for things like new cars, vacations, etc. It gives you interest perks for making regular, small contributions.
Ask your HR departments at work if their 401k plans (I assume that's what you mean, and not that your employer is matching an IRA) have independent financial advisers (ours does) that you can call for advice. If your 401k plan is open architecture, they will be a great, free resource to you for how you should diversify your 401k accounts now that you're at a higher income level. If your contributions are currently Roth, consider if it makes more sense to switch to a regular contribution now that you're (I assume) in a higher tax bracket.
If I had enough cash right now to actually start really investing my money outside of my basic retirement accounts, I'd probably go with index funds like VTSMX. Stay out of bonds. Now is not a good time for bonds.
Depending how much money this actually is, it may be worth seeing a fee-based financial planner.
Congratulations!
posted by phunniemee at 5:50 PM on May 23, 2014
Once you have that figured, set up a direct deposit from your paycheck for some portion of the remainder and just dump it into a savings account. Right now, the best interest-earning basic savings accounts (i.e. ones where you can access your money immediately, not a CD) are with Barclays online. Before worrying about investments, get a nice comfortable emergency savings built up, something that will allow you to live comfortably at your new budget level for 6 months. The Barclays dream account is a good one for things like new cars, vacations, etc. It gives you interest perks for making regular, small contributions.
Ask your HR departments at work if their 401k plans (I assume that's what you mean, and not that your employer is matching an IRA) have independent financial advisers (ours does) that you can call for advice. If your 401k plan is open architecture, they will be a great, free resource to you for how you should diversify your 401k accounts now that you're at a higher income level. If your contributions are currently Roth, consider if it makes more sense to switch to a regular contribution now that you're (I assume) in a higher tax bracket.
If I had enough cash right now to actually start really investing my money outside of my basic retirement accounts, I'd probably go with index funds like VTSMX. Stay out of bonds. Now is not a good time for bonds.
Depending how much money this actually is, it may be worth seeing a fee-based financial planner.
Congratulations!
posted by phunniemee at 5:50 PM on May 23, 2014
Given that your biggest goal is to stay debt-free and save up for living on one income for a few years, you will need to save up more than $5K in cash. Think about these questions: How much are your annual expenses right now? Can you sustain a single income lifestyle, for, say, five years before you go back to work after having kids? What if work at your current salary is tougher to find at that time? Will you have something in the bank to fall back on while you keep looking?
Since one of you is planning to stay home for some years, I would try to save for a few years' worth of one person's income before plowing the money into anything that fluctuates (stocks) or is illiquid (real estate or IRAs), or goddess forbid, that depreciates (like a car).
posted by Atrahasis at 5:54 PM on May 23, 2014 [1 favorite]
Since one of you is planning to stay home for some years, I would try to save for a few years' worth of one person's income before plowing the money into anything that fluctuates (stocks) or is illiquid (real estate or IRAs), or goddess forbid, that depreciates (like a car).
posted by Atrahasis at 5:54 PM on May 23, 2014 [1 favorite]
Money's sole value is freedom.
$5k is not freedom.
If you can build that to $50k in cash liquid savings, you have more true freedom. $100k and you are even better. The way you achieve this is immaterial and don't get hung up on that. Sock every extra bit away until you hit $50k. Then consider stocks, funds, etc.
$100k will allow you choices for better investments, such as quality real estate. This increased purchase power translates to a different level of freedom. Good luck.
posted by Kruger5 at 6:08 PM on May 23, 2014 [2 favorites]
$5k is not freedom.
If you can build that to $50k in cash liquid savings, you have more true freedom. $100k and you are even better. The way you achieve this is immaterial and don't get hung up on that. Sock every extra bit away until you hit $50k. Then consider stocks, funds, etc.
$100k will allow you choices for better investments, such as quality real estate. This increased purchase power translates to a different level of freedom. Good luck.
posted by Kruger5 at 6:08 PM on May 23, 2014 [2 favorites]
Response by poster: phunniemee:
Thanks for the congrats. Can you elaborate at what point it is worth seeing a fee-based financial planner? I think what is a lot of money to us is not really a lot - we both work in the non-profit sector. We just have really low expenses so this seems like tons of money.
Atrahasis:
We COULD live on just my husband's income right now, but that would cover expenses only - we wouldn't be able to save much at all. Our annual expenses (not including adding to savings) are lower than his after-tax salary. So my question is more, what should we be doing with my current salary so that when I am not working, we still have money both in long-term savings and also available for nearer-term expenses? We do not foresee needing to dip into savings for normal expenses while living on one income.
posted by raspberrE at 6:17 PM on May 23, 2014
Thanks for the congrats. Can you elaborate at what point it is worth seeing a fee-based financial planner? I think what is a lot of money to us is not really a lot - we both work in the non-profit sector. We just have really low expenses so this seems like tons of money.
Atrahasis:
We COULD live on just my husband's income right now, but that would cover expenses only - we wouldn't be able to save much at all. Our annual expenses (not including adding to savings) are lower than his after-tax salary. So my question is more, what should we be doing with my current salary so that when I am not working, we still have money both in long-term savings and also available for nearer-term expenses? We do not foresee needing to dip into savings for normal expenses while living on one income.
posted by raspberrE at 6:17 PM on May 23, 2014
If I were you, I would max out a Roth IRA (each), give yourself a teensy bit more breathing room in your regular budget (so as not to get resentful) and then save the rest in a regular savings account for long-term goals and as a buffer for when one of you stays home for a while. My husband and I were in a similar situation and that's what we did--we can now live off one income and have pretty decent retirement savings, and no debt aside from the mortgage.
posted by peanut_mcgillicuty at 6:41 PM on May 23, 2014
posted by peanut_mcgillicuty at 6:41 PM on May 23, 2014
If I were you, before I opened a savings account at the bank (where you earn hardly any interest), I'd put anything I didn't need for 5-10 years or so into a Vanguard index fund (either the 500 index or the total market index). Obviously there are no guarantees with the stock market, but historically, over a ten-year period, there has been an extremely high likelihood of recouping your money and then some in an index fund. Don't try to pick individual stocks to gamble on - an index fund is a much safer option, and the fees are extremely low since the fund isn't actively managed beyond balanc. Of course there is risk in the stock market, and you need to weigh your own risk tolerance; but I personally would look into putting at least some non-retirement savings that I didn't need for 5-10 years (or even better, 10-20 years) into a Vanguard index fund.
posted by ClaireBear at 6:41 PM on May 23, 2014 [3 favorites]
posted by ClaireBear at 6:41 PM on May 23, 2014 [3 favorites]
Here are the usual saving priorities, in order of importance:
1. Emergency fund of 3-6 months living expenses
2. Max out tax advantaged savings options. You could max out your 401k, but I'd suggest getting a Roth IRA maxed out first since that gives you tax-free income during retirement. Roth IRAs are also useful because contributions (not earnings) can be withdrawn without penalty any time, so it can be a backup emergency fund.
3. Non tax advantaged savings.
It's also a good time to think about the other parts of your financial plan, like insurance - do you have life and disability insurance?
I suggest you look at the wiki and forums at bogleheads.org. Living beneath your means and prioritizing savings, along with low-cost investments, are the core of that financial strategy.
posted by medusa at 6:49 PM on May 23, 2014 [7 favorites]
1. Emergency fund of 3-6 months living expenses
2. Max out tax advantaged savings options. You could max out your 401k, but I'd suggest getting a Roth IRA maxed out first since that gives you tax-free income during retirement. Roth IRAs are also useful because contributions (not earnings) can be withdrawn without penalty any time, so it can be a backup emergency fund.
3. Non tax advantaged savings.
It's also a good time to think about the other parts of your financial plan, like insurance - do you have life and disability insurance?
I suggest you look at the wiki and forums at bogleheads.org. Living beneath your means and prioritizing savings, along with low-cost investments, are the core of that financial strategy.
posted by medusa at 6:49 PM on May 23, 2014 [7 favorites]
raspberrE: I would put money into a fat cash fund, both for a rainy day, and as a savings for other things, like a house down payment. Kruger5 speaks the truth. Money is freedom, yes, but more specifically, cash is freedom.
posted by Atrahasis at 7:17 PM on May 23, 2014 [1 favorite]
posted by Atrahasis at 7:17 PM on May 23, 2014 [1 favorite]
Lame as it may read; Gov't I-bonds are now at 1.94% ; which does beat the bejesus out of any CD out there. Almost as close to cash as there is as far as savings go.
posted by buzzman at 8:31 PM on May 23, 2014
posted by buzzman at 8:31 PM on May 23, 2014
Save it. If you don't need it for 10 years and your emergency fund is set up, put it in the market.
posted by jpe at 5:11 AM on May 24, 2014
posted by jpe at 5:11 AM on May 24, 2014
If you are planning to stay in the same house long-term, I would advise investing in it in ways that would decrease your costs in the long run... Good insulation, upgrading to longer-lasting materials, possibly adding solar/wind power, etc.
posted by metasarah at 7:58 AM on May 24, 2014
posted by metasarah at 7:58 AM on May 24, 2014
This thread is closed to new comments.
posted by NoraCharles at 5:37 PM on May 23, 2014 [6 favorites]