Save for a house, or save for retirement?
August 4, 2015 9:04 PM   Subscribe

Which should come first once I start making more money: save for a house, or save for retirement and a 6 month safety net?

I make decent money but live paycheck to paycheck because of medical expenses and rent being high. I thankfully have no debt but am dipping into my very small savings a lot lately and it's not good. Someday, hopefully in the near future, I will make more than decent money and finally have an income that exceeds my budget. Happy thoughts all around!

In the mean time, my parents want me to come home and live with them for a while so I can start saving up, which I'm all for. However, my parents insist that the primary thing I should be saving for right now is a house, since my rent usually seems to be the same as what a mortgage on a nice home would amount to. My friends, however, are all setting aside money for three things: retirement, 6 month safety net, and a slush fund for occasional fun stuff. Which is the smarter avenue financially?

Things that make me think "do what your friends are doing":

* I haven't yet been able to start a retirement account even though I'm nearly 30.
* I know very little about retirement except that I need it and that scares me.
* I don't really want a house. I don't see myself wanting a house for maybe another 5-10 years. I may not ever want a house. It depends on if I get married.
* I'm pretty sure I don't want kids and a college fund won't be in the mix for a long time even if I do end up having one/some.
* My rent will probably always be high because I will likely be living by myself for the next 5 years unless I magically find a romantic partner to share expenses with. Living alone has been the best thing I've ever done for myself ever. I won't ever do roommates again unless they are my parents (UGH) or the person I'm gonna marry.
* I work in an industry where I could be laid off. There is a chance that I could get a job at a state school, which would allow me to get better benefits, but that means setting aside all my career goals and I am not okay with that.

Things that make me think my parents are on to something:
* IDK they're my parents and whenever they fixate on something it usually means that I need to pay attention but they won't explain themselves and just keep saying that of course I want a house and it's stressing me out.

So should I go with my gut and start saving for retirement/safety net asap, or are my parents on to something that I don't understand? If the answer is "YES RETIREMENT YES SAVINGS", what should I do right now to get started if I won't be at a job that offers retirement for maybe another 3-6 months?
posted by Hermione Granger to Work & Money (38 answers total) 28 users marked this as a favorite
 
Safety net is priority number one. Retirement saving should be ongoing. I see that you're in California- don't buy a house there unless you're rich. If you don't have six months of savings, you probably can't afford a house in California right now.
posted by oceanjesse at 9:08 PM on August 4, 2015 [16 favorites]


Always emergency fund before saving for other things. If you don't have an emergency fund and you have some kind of medical emergency or your car dies or whatever, you're screwed. It's a bad idea to pull money out of retirement accounts and if you're saving for a house but don't want a house for a decade, you probably are going to want to put your house savings (if you want house savings) in a non-liquid investment, which will likely earn you higher interest rates, but won't be easy to access should you need it for something that comes up.

Also, you could be laid off. That just emphasizes the need for the emergency fund even more. You are right, you do need to save for retirement. The earlier you start, the better. If your parents don't get this, show them a chart like this that illustrates the power of compound interest that works in your favor if you invest earlier (read that article!). Also, there's a limit to how much you can contribute into tax-advantaged retirement savings per year. If you don't use that now, you won't be able to use it later by just contributing more, especially if your income gets much higher and disqualifies you from being eligible for some of the options.

Just make an emergency fund and tell your parents it's a 'down payment savings fund'. If you never have an emergency, maybe your white lie will become the truth....
posted by treehorn+bunny at 9:20 PM on August 4, 2015 [6 favorites]


It doesn't need to be either/or, but if you're nearly 30 and you don't have anything saved for retirement yet, you're not ready to buy a house yet either. Get your emergency fund established (it doesn't necessarily need to be 6 months--do a little research and figure out what makes sense for you).

Then run some numbers and figure out how much you SHOULD be saving for retirement in order in order to achieve some non-cat-food-eating nest egg by the appropriate time. There are a ton of calculators out there to help you figure that out.

After your income has grown to the point where you have your emergency fund, can put an adequate amount of your earnings away toward retirement, then you can start putting away toward other shorter-term goals such as a house.

A couple things to keep in mind, though: the cost of owning a house vs. renting involves a whole lot more than just the mortgage! If your mortgage payments wind up equivalent to your current rent, your total housing costs will be much more--you have to figure in taxes, maintenance, probably higher utilities if you're talking more space to heat/cool/illuminate, water/sewer, etc. etc.

You should also check out one of the "rent or buy" calculators that take into account specific local real estate conditions to figure out whether you're better off putting extra income toward a mortgage or to keep paying rent and throwing any extra funds into other savings vehicles.
posted by drlith at 9:21 PM on August 4, 2015 [11 favorites]


If you can get into a house, interest rates are really low, that makes a huge difference over time. If you have a job that pays into retirement, then put in as much as you can. The low interest rates are everything right now.
posted by Oyéah at 9:21 PM on August 4, 2015


I didn't answer your last question. You don't need a job to offer you a retirement plan. You can open a Roth IRA yourself (credit for my links goes to mefi's own jdroth).
posted by treehorn+bunny at 9:22 PM on August 4, 2015 [1 favorite]


I really recommend the sound financial advice of Washington Post money writer Michelle Singletary. She's conservative when it comes to saving but also realistic and isn't about making a quick dime off her readers: here are some resources, such as on Saving and Buying a House. She has weekly columns and chats so you can read the archives as well as pose your own questions, too.
posted by smorgasbord at 9:23 PM on August 4, 2015 [7 favorites]


Also, if your job doesn't offer a retirement plan, open up a Roth IRA with one of the very many online investment brokers and you can stick up to $5,500 a year in it.
posted by drlith at 9:26 PM on August 4, 2015


Buying a house is a sort of retirement savings. The main benefit you get, even if property values stagnate, is a fixed housing cost. And if you pay it off before retirement (easily possible) then you head into retirement with only maintenance costs for housing. This can be a substantial savings, though it does carry some risk.

The downside is that a house is not easily liquid - and the transaction costs of selling and buying a new house can kill any equity you build. If you are in a position where you are uncertain about your next 4-5 years, it probably doesn't make much sense to buy.

A buy vs rent calculator can help also. Point is, it's a complicated and individualized question, and you kind of need to judge for yourself whether the benefits and risks are worth it. It's not crazy talk on it's face.
posted by Pogo_Fuzzybutt at 9:26 PM on August 4, 2015 [3 favorites]


You are 30 and are paying off medical expenses. My first thought is that you need an emergency fund, so that you never have to go into debt for medical expenses again. Your parents are right, renting instead of buying isn't a wise move. If you could be guaranteed income for the rest of your life that would cover rent then, sure, have fun. But, at some point you will not be able to work and if you own your own home, you don't have to worry about getting evicted. So, focus on paying off debt and setting aside an hefty emergency fund with the plan of eventually buying your own home. Buy a smaller home than you can afford and pay it off quickly. You can look for a duplex or something with a guest house so that you can pull in renters to help pay the mortgage. Keep adding to the emergency fund and start building a retirement plan.

On a side note, don't plan on a future wife to help pay your mortgage. If you do get a woman pregnant, she will need at least a year off to have the baby and recover from it. There is also no guarantee that your dream wife will always be able to work. Only buy what you can afford from your income.
posted by myselfasme at 9:31 PM on August 4, 2015 [1 favorite]


I think the first thing I would save would be 6 months of living expenses. Then, I would start putting some money into a retirement account. The big advantage of doing so at a young age is the magic of compounding. It does not have to be binary. Put some into retirement and some into a big purchase/investment account.

I think you also need to have a heart to heart and possibly awkward or difficult discussion with your parents to find out if you will ever be inheriting any money or assets that could be used for either your retirement or a down payment.
posted by AugustWest at 9:37 PM on August 4, 2015


Start here, with the Bogleheads getting started wiki page. That site is just an amazing treasure trove of excellent investment advice, both the wiki and the friendly forums.

In general, retirement savings >>> house. But, I have some good news for you. You can accomplish some of these goals at the same time by investing using a Roth IRA. The key to a Roth is that contributions may be withdrawn tax free. You also open a Roth on your own--you don't need an employer's plan to do this.

Because you can withdraw contributions without penalty, a Roth can double as an emergency fund. Just for the time being, keep the Roth invested in something that is likely to be somewhat stable, such as a bond fund. Hopefully you won't need to make withdrawals. Funding your Roth can be another great way to save for a house down payment if you're in the position of having to choose between retirement investing and saving for a house, too: in the event your plans change and you don't end up purchasing a house, you've already saved quite a chunk in your IRA. You only have a short window (15.5 months, up through 4/15 each year) to fully fund that year's IRA, so you can't get that space back once it's gone. If you were to save for a house in a taxable account, not only would you pay taxes each year on some amount of your gains, but if you later opted not to buy a house you couldn't retroactively shove all of that savings into a Roth.
posted by MoonOrb at 10:13 PM on August 4, 2015 [6 favorites]


my parents insist that the primary thing I should be saving for right now is a house

I'm sure your parents are lovely, but they're Boomers (or near enough) and their sense of financial priorities is always going to be shaped by generational circumstances that do not apply to you.

The big question is where you expect or intend to be living in ten years' time: where you are now, or somewhere different? That, most of all, ought to shape what you do with whatever money you can put aside.
posted by holgate at 10:46 PM on August 4, 2015 [15 favorites]


Interest rates are low, which means prices are inflated. The slightest increase in rates could screw you if you don't have a substantial amount of emergency savings. Houses cost a lot to maintain. Houses can be a pain in the ass, diverting attention away from family, friendships and career.
posted by bonobothegreat at 11:03 PM on August 4, 2015 [1 favorite]


I've been reading and thinking and writing about money for a decade now, thanks in large part to encouragement from the Mefi community. Over that span, my financial philosophy has matured. Here's what I think today:

It doesn't matter what your parents say you should do. It doesn't matter what your friends are doing. It doesn't matter what advice Mefites give you...or that I give you. Only you can decide what the right course of action is for you. To determine that right course of action, you need to decide what your goals are. This may sound silly, but it's essential.

If you think you might want to travel the world for a year, it doesn't make much sense to buy a home. If you like living in the middle of a large city, again a home might not make much sense. But if you have (or want to have) a family, owning a home can be an excellent choice. It's important to understand that there's not a lot of financial difference between owning a home and renting a place to live. It's not necessarily a wash, but there's usually not much difference between the two, and advocates for both sides tend to blow things out of proportion. The choice should be more about your life goals and the lifestyle you want to achieve.

What is vital, however, no matter what your goals are, is to increase your cash flow. That is, boost your income and decrease your spending so that you have a "profit" at the end of each month -- and the bigger the profit, the quicker you'll achieve your goals. You say you're not in debt but have begun to dip into savings. That means you've moved into "negative cash flow" territory. You're spending more than you earn. You're not in debt now, but it's just a matter of time. If you continue to outspend your income, debt is inevitable.

The key, then, is to stop the bleeding. You want to move from a small negative cash flow to an ongoing positive cash flow. I think most of us understand that businesses have to earn a profit in order to survive. What most folks don't realize is that the same principle applies to our personal lives. In order to achieve our goals -- homeownership, travel, retirement, whatever -- we must earn what I call a personal profit. You're not doing that right now. Fixing this should be your top priority.

How to do that? It's basic math. In order to boost your cash flow, there are only two options: increase income and/or decrease spending. Usually it's best to do both. So, yes, your parents are onto something when they suggest moving home with them. You say your rent is high, and reducing that should be one of your first courses of action. Housing tends to chew up the largest chunk of the average person's budget; as a result, that's the place the average person can get the biggest bang for her buck. If housing takes up a third of your budget (average for the U.S.), then cutting it in half can free a huge chunk of change. Transportation also takes a lot of money for most Americans. (Housing and transportation together take, on average, half of the typical household's budget. That's crazy!)

Once you've managed to generate a positive cash flow, then you can start using the money to meet your financial goals. One of your first goals should probably be to establish an emergency fund that contains roughly six months of expenses. Next, saving for retirement is almost always smart. After that, what you do with the money should be based on what you want to do with your life, not what your friends are doing or what your parents think is best. Figure out what you want and use your money to pursue those ends.

A final note: You mention your friends have a "slush fund for fun". That's smart, I think. Here's what I recommend (again, based on a decade of reading and writing about this stuff): Take a look at the balanced money formula, a broad budget framework that can help you make sure you're meeting your needs, saving for the future, and having a bit of fun.

The balanced money formula essentially says that you ought to spend no more than 50% of your after-tax income on Needs, which include basic housing, basic food, basic clothing; setting aside at least 20% of your after-tax income for Savings, which includes debt reduction and retirement; and using roughly 30% of your after-tax income for Wants, which means fancy food, fancy clothes, fancy furniture, and fancy fun with friends.

It sounds to me as if your spending is out of balance, that your spending on Needs is far too high and that you're not setting aside anything for Savings. As you boost your cash flow from negative to positive, start bringing your spending in line with the balanced money formula. Get that housing expense down -- it sounds like it's a huge drag on your finances -- and don't feel compelled to buy a home just because you (or your parents) think you ought to. Give up some indulgences (cable? drinks with friends?) for a while until you're able to get things balanced. And also see if there's a way to increase your income.

Sorry that's so rambling. Usually I can be much more coherent about this stuff, but it's 2:30am and I'm suffering from insomnia.

p.s. Check out my one-page guide to financial independence. Although it's written for folks seeking early retirement, the advice is applicable to anyone with a specific financial goal. Oh yeah. Read Mr. Money Mustache. I don't have an active personal-finance site right now (a new one coming in a few months), but MMM's advice is spot-on. Not everyone likes his tone, but his philosophy is perfectly sound.
posted by jdroth at 11:45 PM on August 4, 2015 [40 favorites]


This isn't quite what you asked, but ...

There's no reason your parents can't think that you're "saving ... (for a house)" while you're thinking "saving ... (for retirement)." It sounds like you don't have enough of a cushion to invest as if you were planning to leave the money in place for 35 years, so the difference in strategy between aiming for a down payment vs. retirement is not a big deal.

FWIW, I'm your age, and my dad also thinks in terms of "saving for a down payment." His main concern is that if I ever decide to buy a house, it'd be good to not have all my assets locked away in restrictive retirement accounts. I acknowledged his point, and that's all he wanted - to know that I understood the tradeoffs. By moving back in, you are giving them some right to want an input into your finances. However, if they want to micromanage beyond asking that you put away the equivalent of rent every month, this may not be a healthy arrangement.

Life gets tons less stressful when you have a cash emergency fund and that surprise $900 car repair or $600 in dental work is an annoyance rather than a crisis. So I'd start there.

After that, I really like the Roth suggestion for you, assuming you qualify. The trickier question is what product to buy to put in it. This depends on your appetite for risk and time horizon. This question has reminded me that I need to just pick one already and set it up! I'll probably go for one of Vanguard's targeted retirement funds, since they have lowish expense ratios and I don't want to have to think about minute differences between various investment products out there.
posted by Metasyntactic at 12:27 AM on August 5, 2015 [5 favorites]


It's worth pointing out that Roth IRAs are not "restrictive retirement accounts." 100% of contributions can be pulled out at any time for any reason with no taxes or penalties due; you can also withdraw some profits without tax or penalties for home buying purposes (typically up to $10k at least 5 years after the account is opened). You can put money into a Roth IRA and tell your parents, totally truthfully, that it is the cheapest way to save for buying a house 5 years out; this is of particular benefit when your parents want you to save for a house, and you need to pretend you're preparing for that now ;)

Roth IRAs are a fantastic tax dodge and you should take as much advantage of them while you can - they're actually worth the most when your income is relatively low, since the deduction you'd otherwise get for other types of retirement savings would be small anyway.
posted by doomsey at 12:50 AM on August 5, 2015 [1 favorite]


I'm a Certified Financial Planner, but not your Certified Financial Planner. You've gotten good advice that you should prioritize retirement saving over a house: purchasing a home can be a great idea in certain situations, none of which sound like they're your situation, at least right now. And step 1 is definitely getting the emergency fund taken care of.

One thing you don't mention is whether there's a retirement plan at work at all - if there is, and there's a match offered, take that match! (Workers lose $24 billion a year in unclaimed employer matches). Meaning, if they match your contribution up to a certain percentage, contribute at least enough to get the full match amount - it's free money. After that, a Roth sounds like it's a great choice for you - you're young and not in a high tax bracket.

Whatever goal you are saving for and whatever kind of account you choose, automation is your best friend. Set aside the amount you save either through direct deposit via payroll, or automatic transfers from your checking account. That way you won't have to remember to do it each time, and you won't be tempted to skip.
posted by shrieking violet at 3:43 AM on August 5, 2015 [3 favorites]


Both Roth IRA's and home ownership work out the best for you the younger you are.

With a Roth IRA, it is quite simply a matter of interest compounding over time. If you start contributing $5500 a year at age 20 into a product with a mere 8% return, you've contributed $247K, but earned $1.9M in interest, and accrued a total of $2.1M. If instead you start at 35, that total accrued drops to only $623K. The time to start saving for retirement is "as soon as possible."

Home ownership, assuming a mortgage, works a little differently, but fundamentally if you pick a fixed rate mortgage, you lock in a very low interest loan for a very long period of time, during which inflation and other factors probably drive up your income, but the loan remains fixed! There are definitely factors such as property tax and repairs to be considered, but the big thing is that you're building equity instead of paying a landlord - the landlord keeps your money and gives you nothing besides housing in return. At the far end of the mortgage, you end up with a low cost place to live, since once you pay it off, it becomes a matter of property taxes, utilities, and repairs.

Both of these work out to being long term financial strategies. You are making plans now for financial strategies that are as long in scope as the entire life you've lived so far. They will have an impact on you for the remainder of your life. Mistakes made now amplify through the rest of your financial life.

If your parents are open to you living at home, that could be an awesome deal. If they're being as pushy as seems to be implied, take the money you would have spent on rent and instead save it towards a down payment on a house. The longer you can live at home, the better that deal is. Take some of the surplus in the remainder of your budget and set up retirement and safety net. Also, squeeze that budget. Money you save for retirement now pays off very well in another 30-35 years.
posted by jgreco at 4:45 AM on August 5, 2015


I basically agree with jgreco, but I wish people wouldn't use language like "a mere 8% return." No one knows what the future holds, but I would phrase it more like this: "If you start contributing $5500 a year at age 20 into a product with an utterly fantastic 8% return..."

I'll also echo the advice that others have given, which is that regardless of whether you are saving for a house or for retirement, an emergency fund is the first priority. You shouldn't think of it as (emergency fund + retirement fund) vs. (saving for a house) but rather (emergency fund + (retirement fund vs. saving for a house)).
posted by sudo intellectual at 5:09 AM on August 5, 2015 [6 favorites]


Yeah, as everyone has said above, the first two priorities would be emergency fund and putting in enough to get any match that might be offered in your company's retirement plans. Once you get those sorted you can work out your other priorities. You need a sizable emergency fund before buying a house anyway!

I size my emergency fund based on 6 months expenses, which is mostly rent for me (I also live in a high-rent area). If I had lower rent, I'd make sure I had enough in the emergency fund to pay two years' worth of my annual health insurance deductible PLUS my car insurance deductible.

As far as saving for houses go -- what you have to remember is that you, today, may not be great at predicting what you will need in the future. You may start to see rents rise much faster than house prices (this is starting to happen in my area). If you can use a vehicle like a ROTH for at least some of your retirement/house savings, you'll allow yourself some flexibility in how you use that money down the line.

You can take 10K out of a traditional IRA for a first-time house purchase, but 10K is a drop in the bucket in an area with high housing prices.

Finally, I second the person above who suggested the Bogelheads. If you don't understand investments/retirement accounts, I highly recommend starting with their book on retirement savings. The more you know, the more you will become empowered to start fixing this situation. Even just starting to put 1% of your salary into your 401(k) (if you have one) at work will start you down the road. You can do it!
posted by pie ninja at 5:30 AM on August 5, 2015


Ah, sorry, just saw that you won't be at a job that offers retirement for another few months. In that case:

Start paying yourself (aka your savings) first. If you have Direct Deposit right now, you can ask your company to redirect a certain percentage or dollar amount to savings. If you don't have Direct Deposit, start a standing transfer of $50 or $100 (or even just $20) to your emergency savings on a set date each month. Start low. It's surprising how fast it snowballs once you start seeing the money add up in there.

I prefer having two savings accounts -- one that's a small slush fund linked to my checking, and an emergency fund/long term savings fund that is is at a different bank that pays higher interest and takes a couple days to transfer money from. Makes it easier to keep the long-term funds separate.

Most Roth accounts require some startup money (I think $1K is the lowest I've seen? but maybe someone else has a better suggestion) so you'll need to accumulate some money before you get a Roth started -- make sure you've got enough in regular savings to cover your medical costs etc. before you take that step.

Finally, start reading up on retirement savings so you are ready to make your decisions as soon as you either (a) get enough to open a Roth or (b) start a job with a retirement savings program.
posted by pie ninja at 5:39 AM on August 5, 2015


And actually, I was wrong, Schwab will waive the $1K opening requirement if you set up a $100/month Direct Deposit.

The Bogelheads will be all about Vanguard, but Vanguard, while awesome, has a $1K minimum and even then only lets you invest in STAR or Target Retirement which are funds which have holdings in both bonds and stocks and may not be appropriate if you are looking to keep that money in something less volatile.
posted by pie ninja at 5:47 AM on August 5, 2015


Pie ninja, I believe you are incorrect in stating that Vanguard only lets you invest in STAR or Target Retirement. Certainly that has not been my experience.
posted by sudo intellectual at 6:01 AM on August 5, 2015


Don't save for a house if you don't want one. Don't save for a house - even if you DO want one - until you have an emergency fund saved up. Definitely don't buy a house until you have an emergency fund on hand (and don't use it to pad up your down payment!). A short list of things that has required our emergency fund in the three years since we bought our house: basement flood, furnace dying in the middle of a stretch of negative temperatures in December, washing machine crapping out when we had a newborn, other major appliance malfunctions, plus we have several planned upcoming maintenance projects that will require a lot of money to fix and won't be covered by homeowners insurance. Houses are money pits, not investments - it's nice if they get you a return when you sell them, but while you live there, you will need to be spending money (a LOT of money!) on them. Don't do it without a safety net.

Emergency fund, then retirement. Then a house if you want one by then. If your parents' offer comes with the right to dictate your savings, don't take it.
posted by peanut_mcgillicuty at 6:02 AM on August 5, 2015


sudo intellectual, I'm going by what they say in the fine print on their website (which I linked to), which is that you can open an account with $1K but your fund options are limited: "*The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. A $3,000 minimum applies to most other funds. Details are provided in each fund's profile."
posted by pie ninja at 6:06 AM on August 5, 2015


Ah, got it. You can buy whatever fund you want in a Vanguard IRA, but you have to invest at least $3,000 for most funds.

Hermione, I wouldn't let that influence your decision very much. If you don't want to be in a target fund, you can always just switch over once you have $3,000 in your account. Because it's a tax-sheltered account, switching to a different fund is not a tax event. Choose your provider based on other factors.
posted by sudo intellectual at 6:11 AM on August 5, 2015


In the mean time, my parents want me to come home and live with them for a while so I can start saving up, which I'm all for. However, my parents insist that the primary thing I should be saving for right now is a house,

You say this, but then the other stuff you say about your parents is more negative (live with them, ugh and your parents 'insist') .... sorry if projecting but these sound a bit like parents who are too pushy into their 30 year old child's choices.

The whole point of retirement is that the money grows over time. The best time to start saving is at 22 (most people don't have that luxury), the second best time is today.

If you want encouragement from a fellow 30 year old, I'm 30 and still don't have a "house fund". I put paying off loans, saving an emergency fund and retirement WAY before that. I am married, and we probably do want a house in a few years, but in the meantime - we don't DEFINITELY want or need a house, but we do definitely want to retire someday, you know??

I think the Dave Ramsey/Suze Orman types recommend that order too. Emergency fund always comes first.

If you are unable right now to get money into a 401 or IRA, you can get a high yield savings account through Ally bank, or others, that do about 1% interest. It's nothing near what you could make investing in a 401, but at least it's something, and that way the money is still accessible if you do have an emergency.
posted by nakedmolerats at 6:33 AM on August 5, 2015 [1 favorite]


"I don't want a house" --> This is easy. Don't prioritize saving for a house if you don't want a house. There are lots of expenses in home ownership and you will be stuck with this financial commitment with little flexibility if things change in the future (like you get laid off or want to move). You can save money, and if you want to buy a house in the future, you can use your saved-up money for that.

Anyway, you don't have to argue with your parents about what you're saving for. You can happily agree with them that living with them will enable you to save up for your future goals. A house would be far away anyway if you don't have savings already, so there's no point in getting into it with them now. When they talk about buying a house, you can just acknowledge that a house is their goal for you and is one of the things you could be saving for in the future.
posted by chickenmagazine at 6:34 AM on August 5, 2015


I'm in camp 1. Emergency fund, stat. 2. Get whatever 401k/403b match is available, that's money on the table. 3. Roth. 4. Repeat steps 2 and 3 until you hit the max limits.

You can withdraw $10k of the contributions (but not the interest) from your Roth for a home purchase, so you can tell your parents you're saving for both at the same time.

Early money is always the most advantageous in terms of compounded interest. Start saving regularly now, and you won't regret it ever. Index funds -- Vanguard target retirement funds. Simple, done.

Your parents, as mentioned above, are likely Boomers. So are mine. They wanted me to "settle down" and buy a house too. Why? For them it worked out great. They bought in the 70s and made bank in the 80s. The house they bought in the mid-80s for $175 is now worth close to $500k. They benefited from a huge and overall steadily booming economy in the 90s. Of COURSE your parents want the same thing for you!

For us -- not so much boom. I made the mistake of giving in to the parental pressure, and "stop throwing your money away on rent!*", bought in 2004, could not sell in 2007 when I moved for a job change, was a long-distance LL for 8 years, and sold last year -- just breaking even after 10 years. There's a house in my neighborhood that someone bought in 1999 for $150k, and they just sold it, after 15 years: for the same $150k. Real estate has not been the big boon that it was for boomers for a while, and you cannot expect it to be again. While many Boomers saved for retirement via their real estate, real estate can, and has, lost value. Don't fall for Boomer psychology on buying a house. If you buy, do it for your reasons that are right for you.

*As a longtime tenant and LL I can tell you: your rent money is buying you housing. It is not "thrown away". It is also buying you flexibility, and protection from much bigger costs. You pay for a service and receive it. By all means, be watchful of what you spend, but don't be thinking it's money down a toilet. I hate that cliche.
posted by Dashy at 7:20 AM on August 5, 2015 [6 favorites]


A few points.

1. Dashy is incorrect in implying that you can only withdraw a maximum of $10,000 from a Roth IRA. You can always withdraw an amount equal to your contributions (or the balance in your account, whichever is lower). That is a big difference between a Roth IRA and a traditional IRA (which does not allow early withdrawal except in limited circumstances). It is true that you cannot withdraw your "interest" or "gains" from a Roth IRA except in certain circumstances (or by paying a penalty).

So for instance, imagine you've put $20,000 into a Roth IRA, and it is now worth $25,000. You can withdraw $20,000 at any time penalty-free. The remaining $5,000 can only be withdrawn under limited circumstances, or by paying a penalty. (Whether you should withdraw the $20,000 is a separate question, which will depend on the circumstances.)

2. Not only did house prices appreciate in the last quarter of the 20th century, there was also an unexpected bout of high inflation. That tends to be good for borrowers and bad for savers. Anyone who got a mortgage in 1970 and made the last payment in 2000 probably made a considerable amount of money simply by virtue of (unexpected) inflation. (Expected inflation is simply baked into the interest rate, and so it has no redistributive effect.) This got coded in people's minds as evidence that buying a house is a good move, but it was really due to a highly unusual fact pattern unlikely to repeat itself. (Much like building cities in the West in reliance on rain patterns that, in retrospect, turn out to have been abnormally high.)

3. One tip to remember is that if you are ever being questioned by law enforcement, don't simply tell them that you've "contributed a lot to the IRA over the years." Specifically tell them that the money has gone to your individual retirement account, not the Irish Republican Army.
posted by sudo intellectual at 8:05 AM on August 5, 2015 [5 favorites]


In order to boost your cash flow, there are only two options: increase income and/or decrease spending. Usually it's best to do both.

+1 to jdroth for this advice. I followed it when I was more or less in your position... 30 years ago. Now I'm retired.

Thirty years sounds like an eternity, but it goes faster than you'd think.

Another forum with often-good financial advice is earlyretirementextreme.com. Frugality is a philosophy and way of life there, something to celebrate.
posted by Short Attention Sp at 8:39 AM on August 5, 2015 [1 favorite]


Nthing shrieking violet: automation is your best friend. Set aside the amount you save either through direct deposit via payroll, or automatic transfers from your checking account.

Whether work offers a retirement plan or not, what I found key was getting stuff automated early. Get automated deductions started and then try to forget about them. You'll be glad you did.

30 years later, whenever I'm down or sad? I go look at my savings and retirement and it perks me back up.
posted by doctor tough love at 9:30 AM on August 5, 2015


Also dont get complacent in your savings, especially if it comes out via direct deposit or automated transfer If you start saving $100/check for an emergency fund, see if you can push it to $125 after a few checks. Then $150, etc.
posted by nathan_teske at 11:26 AM on August 5, 2015 [1 favorite]


You're going to need somewhere to live when you retire.
posted by w0mbat at 4:08 PM on August 5, 2015


It seems likely that your parents' push is coming from the boomer experience, as other people have mentioned.

But maybe it's also coming from feeling like, while they want to help you out now and are happy to have you back at their home, they'd also like to know you're moving towards getting back out again. And their best formula for that is home ownership (boomer experience).

It might be effective to share with them how your longer term financial/life plans will lead to you moving back out, on what timeline, and how that will be more realistically long term feasible than your situation is right now.

If that doesn't work, then I agree with Metasyntactic's suggestion. Savings is savings and this is probably not worth a fight with your generous and hospitable parents. Thank them for their input, tell them you're saving assiduously (and make it true), and worry about how you end up using that savings much further down the road.
posted by Salamandrous at 5:01 PM on August 5, 2015 [1 favorite]


Lots of great (and probably some not-so-great) suggestions up here, but I haven't seen this one:

When I needed to create an emergency fund (which needs to be liquid) but also wanted to take advantage of the Roth IRA, I decided to put my emergency fund money in a Roth savings account. It doesn't earn a lot of interest (see, for example, the Capital One 360 Roth Savings account), but it allowed me the freedom to move all the money I'd stored away in the Roth savings to a better Roth account after I'd had a chance to build up a normal emergency fund separately. That way, I didn't miss a couple of years of Roth contributions, but I still had a liquid emergency fund. (As others have pointed out, a Roth IRA allows you the benefit of withdrawing your contributions any time you want, with no penalty, so just keep track of how much you've contributed.)

Just a thought -- it sounds like you're in a similar position to where I was when I decided to go that route!
posted by nosila at 10:18 AM on August 6, 2015


Thank you guys so much for all this advice! Emergency savings first it is, then retirement asap.

I wasn't kidding when I said I really don't understand/know anything about retirement, though. Are there any primers you guys would recommend? Roth IRA and a lot of the concepts some of you are mentioning are really nebulous to me as a newbie.
posted by Hermione Granger at 6:44 PM on August 7, 2015


One place you can look is on the Bogleheads wiki here, for their Retirement Planning Start Up Kit. It's free and links to other great resources.

A book I found hugely influential and very easy to read was Ric Edelman's Ordinary People, Extraordinary Wealth. It's not perfect but it's a great entry point.
posted by MoonOrb at 9:05 PM on August 7, 2015


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