Hey all,

Wife and I have had a delayed start when it comes to career stuff; she lived in the 3rd world until 28 making pittance and had to re-credential here via PhD, and I had 5 years of entry level-ish work before going back to grad school.

We're now in a situation where we're 33 and 38, with basically no more than a few grand tucked away. Big monthly budget items are $1500 in rent, $1k in childcare (1 year old), $700 in student loans ($55k or so total), $600 in car payments and like a grand for food. 68 year old diabetic MiL lives with us as well.

The good news is that we're finally making adult wages. Long story short, after my 2nd job starts next month I think we'll be grossing about $135k as a household, which ain't bad for a 1st year college prof and a freshly minted licensed social worker. We also can count on a $13k annual gift from family every January, which this year was spent on paying off our yearly dues for car payments ($6kish) with the rest gong towards student loans ($4k) and my checking account ($2k).

I just started putting 7% away in a work IRA with the company matching 3%, totaling 10%. Possibility of a decent inheritance from my 70 yo mother is likely but not gtd, so I want to plan for it to not happen. My questions are:

1. How much should my wife and I contribute to our 401k / IRA?

2. How much should we have in a regular savings account?

3. Home ownership seems to have vexxed me, just not sure how to know if it's financially preferable for ppl in our situation financially to buy or rent.

4. How much of extra money each month should be saved versus put towards debt?

Any advice about the above or otherwise would be appreciated. TIA

You should contribute as much as possible into IRA and set-up a Roth IRA with either Vanguard or Fidelity. Buy low-cost index fund in total stock market like Vanguard symbol VTI with 85-90% and rest in bond fund. I suggest either corporate bond fund or total bond market fund.

If you want some risk you can buy some Berkshire Hathaway B shares as long as your time horizon is 10years plus.

Homeownership dependent on where you live and rents vs. cost of purchase. Here is a link to calculator designed to help make that decision.
https://smartasset.com/mortgage/rent-vs-buy

1. Put in the minimum amount needed into the 401k to get the company match. Putting more in the 401k depends on the fund selections available. If all you have is high cost options then you don't want to put any more in the 401k.

2. Conventional wisdom is 3-6 months of expenses in a readily available cash fund. The more solid your jobs, the lower that can be. I'd say in your case, with no house to provide an emergency expense, I'd settle for 1 or 2 months until the loans are payed off.

3. Home ownership is a great inflation hedge, as rents don't increase over the years and you build ownership equity. A lot depends where you live, the lifestyle you want, etc. If you don't want a house with yard work and other maintenance chores, then don't get one. If you think you might move to a different location in 5 years or less, then don't get one.

4. It's all about increasing your net worth. If the interest rates are really low, say 2% or less, then save as much as you can while paying the minimum. If they are higher than about 6%, then I would pay down the loans as much as possible while saving less. It's tough to beat a 6% or greater guaranteed return.

Sounding like $5k emergency fund and everything else going to debt is what makes the most sense, starting with student loans.

Think if we both maxed out our retirement contributions we'd have very little discretionary money left over but still it's surely advisable.

Crazy that student loans + daily costs w/ MiL and baby in family + health insurance costs make budgeting have to be so carefully managed even with mid 100s income. Man.

^ Life sux bro

Considering you mentioned being a social worker and professor one option you may want to consider for student loans is looking into Public Loan Forgiveness. Essentially you work in some sort of public service type job, pay a certain percentage of salary towards the loan and after 120 payments it's forgiven.

Not sure if past payments would qualify if you've already paid a decent chunk of your loan off.

I have a bunch of teacher friends on this program. Their loan balances have ballooned because their payments don't even cover the interest but are very close to making all 120 monthly payments. They will be debt free in a couple years.

Based on a quick glance at your monthly bills and income, you should be able to max both 401Ks without much difficulty and still have some decent discretionary income and still pay down your student loans. As an added bonus, almost all (maybe all) the rest of your taxable income will be in the 15% bracket.

I can't because I'm not working for the govt or a non profit, unfortunately.

****ty thing is unless you're almost exactly a teacher you'd theoretically get job offers you'd have to pass down the road that'd pay better and advance your career due you the equity you'd be giving up on your loan.

Can you imagine being 8 years in and accept a new job, only to learn it doesn't qualify for your loan forgiveness program? 8 years of minimum payments that might not have even been covering the interest for nothing, you're on the hook for the balance.

I've also heard they're pretty draconian with the 120 on time payments rule, reseting the clock if you're like 2 weeks late on your 98th payment etc.

Interest rate on the debts is a significant factor in whether you should pay them or save more. Don't spread payments out evenly - pay extra towards only the highest interest rate loan. As others have said, if they're 5% or below then don't even pay extra towards them, just max out retirement accounts. 6-7% is where it gets debatable. Can you tell us what they are?

This is true in general, but if one of the lower interest loans can be paid off in a relatively quick time there's something to be said for closing that loan out.

if you have access to credit cards then why do you need a 5000 dollar emergency fund ?unless all your current debts have tiny interest rates you're basically paying a lot of interest to one day not have to pay interest in the event of an emergency.it's a negative freeroll.

Yeah, way too many people overstate the size of "emergency funds" that people should have.

Should these emergency funds be in cash/savings account or is it okay to have them in an index fund?

Latter is fine.

This would not be the consensus advice from most advisors, especially depending on what 'index fund' means.

Most advisors would recommend putting emergency fund cash into something SUPER conservative, the point is it is there for an emergency. For example, if you put it into a stock index fund, you just have to be prepared for a significant (40%+) draw down.

This is a potentially bad outcome if your emergency fund is there to help you through a period of unemployment, since unemployment can be potentially correlated to a large market draw down. :P

If 'index fund' means a short term high quality bond fund, then sure, go for it. You still have to be prepared for some level of swings due to bond pricing.

Yeah, if its an "emergency fund" it shouldn't be in an index fund.

But, as I mentioned above, I think many people don't need a very large "emergency fund" and so should have most of their money actively invested.

Student loan percentages are low but amount is high, reverse for car loans.

I put $3k towards each car and $4k in a savings account. Plan to keep putting my monthly $700 or so towards our student loans.

I've got a 2nd 1099 job that I'll have direct deposit into the savings account and not touch. Every quarter I'll pay taxes on that income and then split the after tax earnings between loans and my savings acct until savings hits $10k, at which point all 1099 post tax earnings will be shoveled towards loans on a quarterly basis.

Sound good? Will require that I can get my family of 4 by on about $5k per month, including recurring debt payments, child care, food and rent, everything.

I've also settled on 7% IRA contributiins w 3% matched, totaling 10. If I can get by reasonably comfortably on that I'll bump it up to the max of 12% or whatever it is.

Fact. The issue is mainly getting it out of negative real return placement like your bank account.

Slamming it into a sub-saharan gold fund is a bad idea. But keeping it literally in your checking account is pretty atrocious advice. (Which to be fair is geared mostly toward idiots not harming themselves.)

There just really isn't much reason to keep money in a negative real return vehicle like your bank account.

NB: Emergency funds are kinda lol, since they only really apply to poor people who don't carry a large amount of money (IE >6m or whatever expenses) in non-advantaged investments they can easily liquidate. You can probably scrap the entire issue of ever having one as soon as you pass something like 12 months of easily liquidated investments that don't carry a huge liquidation burden (IE retirement accounts).

ETA: Shoulda read OP. He def does not fall in what I described above.

The reason is for simple convenience. I'm certainly not advocating having 12 months of expenses sitting in a bank account, but I've personally got ~3 months chilling there, just because it's WAY more convenient if I need it for something than having to touch my investment accounts.

I'm 100% fine with losing some tiny amount of annual EV for the simple convenience factor of having some readily available funds. I suspect most people who have large easily liquidated non-advantaged instruments are similar.

I keep a decent amount as well because I'm avoiding bank fees. (Prob somewhere around 4-5)

I think you're VASTLY overestimating the hassle. Its literally just a few automated clicks and waiting a couple days.

You're underestimating how lazy I am.

And in seriousness...it provides ALOT of comfort to my wife too.

Any good bond funds that can be easily cashed out in an emergency that you'd recommend for this purpose? I feel like I'll go on tilt if I just have big piles of cash sitting in a savings account not being productive.

The thing for me is that many people wouldn't even need to liquidate investments for the majority of things that they would use their "emergency fund" for.

If you're regularly saving money and earn a decent income (aka your fixed expenses aren't a large percentage of your income) than you should be able to pay off a lot of emergencies using credit (CC, home equity line of credit, etc.) and pay off that credit through your typical income (forgoing new investment or perhaps by cutting spending for a month or two) without incurring any or very minimal borrowing fees. And not having a bunch of money sitting around earning nothing, is more than enough to offset the rare times you do need to incur some borrowing cost.

Obviously there are still the big events that would need investments to be sold, but some percent of the time those are big enough that you'd need to liquidate investments anyway because it would have been silly to have an "emergency fund" with that much money in them.

So in your case, I'm curious how long it would take you to save ~3 months of living expenses? If your fixed expenses eat up something like 90% of your income, it may make sense to have an emergency fund. But if your fixed expenses eat up something like 50% of your income or less, it just doesn't seem like its necessary.

That being said, I get the "peace of mind" argument.

Hey all:

Relying on credit as your "emergency fund" is an extremely foolish thing to do in my opinion...

If the power is out, what do you do? You NEED CASH. I've been through hurricanes, tornadoes, power outages, etc, and when the power is out, YOU NEED CASH.

Another potential problem is what happens if the magnetic strip on your credit card gets damaged? Then the machine can't read it and your are out of luck.

What happens if there is a hold on your account? Identity theft? Server SNAFU?

With cash, you simply don't have any of these problems. There is no counter party risk. You've got cash, you are good to go.

Credit/debit cards work fine the vast majority of time, but I've had numerous times when they didn't. Heck, just yesterday was one of those times. High winds in my area cut power to a lot homes/businesses. I needed to make a purchase and the merchant was taking cash only.

Always keep a couple of hundred in your wallet, have a couple thousand hidden at home and you are likely set.

To be extra safe, I would also keep an amount of physical silver/gold and a stash of food/water.