Learn how to balance your savings needs

In addition to retirement, you also need to save for shorter-term goals, such as college, a house, or a rainy day fund. Here’s how to balance all your savings needs.

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Amy Chain: Okay, Kristy from Colorado is asking us about how to balance retirement savings against every-day spending decisions. Can we offer her some thoughts?

Maria Bruno: Sure, I mean we talked a little bit around cash and the role that cash plays. Certainly, you want to prioritize retirement savings, but everyone needs some type of rainy day fund or an emergency reserves. I like to think of a good guideline as having three to six months’ worth of living expenses in a cash investment. Cash can be a checking account or a money market mutual fund, something that’s very liquid and stable. So, anything more than that, Christine had mentioned, there’s an opportunity cost to not being invested, so you certainly want to prioritize retirement.

Now there’s one thing to think about; and, Christine, I would appreciate your thoughts on this as well, because I know that you’ve written on this in terms of some multitasking accounts, you call them.

So, one of the things I like to talk about are Roth IRAs. So, for someone like Kristy who is saving for retirement, you can maybe accomplish both goals. So, if you prioritize retirement and invest in a Roth IRA, for instance, since the contributions are being made with dollars that have already been taxed, because you don’t get a tax deduction when you make a Roth IRA contribution, those dollars, actually, the contribution dollars can be access income- and tax-penalty free.

So, there’s a liquidity feature to a Roth IRA that you really don’t get with any other type of tax-advantaged retirement account; and I want to be clear, the priority should be retirement, and you invest accordingly. But there’s a flexibility there that if you are pinched a bit, you can strategically have access to those monies as well.

Christine Benz: I like that strategy a lot. The Roth, I think, is a great starter, multitasker vehicle and one that you can use, really, throughout your accumulation years, so I think it makes a lot of sense.

Maria Bruno: Yes, particularly for young investors.

Christine Benz: Absolutely.

Amy Chain: We’ve got, in fact, a lot of questions coming in. Gene is asking about how to consider retirement savings in relation to college savings. We’ve got Meredith asking about how to prioritize retirement savings versus buying a first house. What do we think?

Maria Bruno: But the reality, I mean that’s a reality to investing, right? I mean we all have multiple goals.

Christine Benz: Absolutely.

Maria Bruno: Yes, so it’s, and it doesn’t have to be all or nothing. In many situations it shouldn’t be. But the fact of the matter is retirement should be a priority. We are responsible for subsidizing our own retirement. The days for defined benefit plans or pensions probably are going by the wayside, right?

Christine Benz: Right.

Maria Bruno: So, taking advantage of employer-sponsored plans, company match, those types of vehicles and starting the retirement clock, the retirement investing clock early are the keys to long-term success.

But, you know, many of us have other goals in terms of either shorter-term goals of funding a child’s education or purchasing a house or a marriage or things like that as well. And it’s a balancing act. It’s not necessarily all or nothing, but in terms of a home purchase, the thing to think through is, “well, how much of a house can I afford?” There’s some guidelines there in terms of a debt-to-income ratio.

Christine Benz: Right.

Maria Bruno: And that should probably be between 20% to 30%, right. So really think about what type of house and what that mortgage would look like, and can you really afford to do both? If not, you might need to make some decisions in terms of scaling back a bit, at least initially on a first home purchase, for instance.

Christine Benz: I think that’s right, and the other point I would make about homes is that you really need to think of this as, first and foremost, a home versus some sort of investment vehicle. So even though homes maybe in certain communities have appreciated perhaps even ahead of the equity market, you need to be careful because there may not be a time when you are able to tap that equity. So, you might get used to living in a home of that type, and even when retirement rolls around and you want to move to a condo or something like that, well you might find that a lateral move where you’re taking all of your home proceeds and moving it into the new home is, it’s just going to be an even split. So, you need to be careful about thinking about the home as a savings vehicle. It’s really not.

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