Saving Priorities

[snshijuptr]

So there was a thread before on what your priorities were for spending money, but my question is, what are your priorities for saving money, especially for specific goals?

We have several savings goals right now (home down payment, car purchase, baby e-fund, retirement, vacation, etc), and I'm a little torn as to how to allocate my money. Here are some options I've considered:

- By time (soonest first)
- By importance (needs/wants, personal preference)
- By amount to save (highest or lowest first)

Then there are two methods I can think of:

- One item at a time (save quickly until you reach a single goal, then move to the next)
- Many at a time (save a set proportion/amount to each of many goals)

Obviously money in fungible, but one purpose of savings is to allocate money to a particular purpose. How do you allocate your savings?

[dczech09]

As for right now, my largest priority is paying off my car loan. I also have student loans that I would like to free myself from, but I will get to that later. I am aiming towards being debt free by the end of 2012. After that my priorities are to save for a few things:

- Retirement (about 15% to 20%)
- Home downpayment
- Emergency fund of 6 months
- Miscellaneous savings (vacation, new car, etc)

I have made a promise to myself that I will not take on a home mortgage without 6 months of expenses, a downpayment of 20% or more, and being completely free from all other debt.

The way I see it, getting rid of debt will ultimately result in future savings!

[TheStreetCeo]

Here is the order I found works best for me and my family. We already own (have a mortgage) our home so I have not included it here, but it would be listed third.

1. Emergency fund 6-8 months-we have 8 months saved and in a high yield savings account. This is for emergencies only. it is not to supplement vacations or needs. See number three for that.
2.Debt reduction-credit cards, personal loans, student loans etc. This does not include a home mortgage. With refinancing rates as low as they are, I see virtually no need to pre pay the mortgage.
3. Discretionary account- I always fund this at a slow rate, slower if I have debt, but I still fund it. It is used for vacations, cars, wants, school supplies for the kids, etc. It will also be used to supplement pre retirement living. Which I think is very important and doesn't get enough attention with PF guru's.
3. Retirement-You can never start saving too early or save too much.

[snshijuptr]

So do you all put all your money into a single item? How do you choose your allocations to each item? Is it a simple allocation = total needed / months till need? Is it even (each gets $500) or arbitrary ($300 to this, $500 to that)?

For example right now our money is fairly arbitrary. We put $300 toward retirement, $800 toward house, and $580 toward car...I can't remember why or how I chose these numbers. The only thing that makes sense is putting any extra money at the end of the month toward a house because that is the most important to us monetarily right now.

Does anyone have any reason behind the amounts they allocate?

[TheStreetCeo]

Well, the emergency fund speaks for itself. I have 8 months of cost of living in an account. Once it got there, it just stays there and I stop funding it.
Debt reduction is the same. Once I paid it all off, that was it, unless I incur more debt which is rare due to the discretionary account.
With regards to the discretionary account, I generally just fund it with the money I have left over each month so there is no need to separate it or keep track of what goes where. As a cash buyer for nearly everything, it doesn't matter if it's allocated because it's all I have to spend anyway. With that said, I keep mental zero balances and don't go below it once I reach that goal. This is done in part to keep money in the account and also to fund my pre-retirement.

My retirement account is simple. I max out my IRA and my wife's each year. I max out my 401k to my companies contribution limit, and I invest in an some stocks on my own that have a monthly withdrawal from my checking account and if I want to add more I can but I usually just put it in my discretionary account.

It seems to work for me, and I think it's important to keep it simple.

[feh]

Here is the order I found works best for me and my family. We already own (have a mortgage) our home so I have not included it here, but it would be listed third.

1. Emergency fund 6-8 months-we have 8 months saved and in a high yield savings account. This is for emergencies only. it is not to supplement vacations or needs. See number three for that.
2.Debt reduction-credit cards, personal loans, student loans etc. This does not include a home mortgage. With refinancing rates as low as they are, I see virtually no need to pre pay the mortgage.
3. Discretionary account- I always fund this at a slow rate, slower if I have debt, but I still fund it. It is used for vacations, cars, wants, school supplies for the kids, etc. It will also be used to supplement pre retirement living. Which I think is very important and doesn't get enough attention with PF guru's.
3. Retirement-You can never start saving too early or save too much.

Personally, I'd prioritize them as:

1. emergency fund
2. retirement
3. debt reduction
4. discretionary

I could see situations where 2 and 3 could be swapped...

[jIM_Ohio]

Priorities depend on long term vs short term vs need vs want.


For example my kids need diapers and my long term goal of retirement are both requirements, and one cannot trump the other.


For me my long term priority is financial independence as young as possible. This implies my investments generate enough for me to live off of, and would allow me to retire or start a new career (more enjoyable than this one) or spend more time doing things which might not be profitable.

So when it comes to "savings", retirement gets priority. Savings is measured in many ways- debt repayment, investing, even renovating a house or a house improvement (if it reduces costs) would be a way of saving.

When it comes to spending, need vs want enters into the equation.

It could be said I do not "need" to save, but that is my point- if there is enough money you do a broad approach if long term goals are "long term".


If you focus on one goal at expense of all others, one of two extremes is probably true.

1) Your situation is bad, or negative- meaning without focusing on the one goal and only the one goal, your situation gets worse (hole gets deeper). This usually implies a lot of debt and you are correcting behavior (spending patterns) while also paying down the spending you already did.

2) Your long term goal is no longer long term. Retirement is good example. The decisions I make now (invest instead of pay down mortgage) have as much to do with retirement being far away as they do with rates of return (9% investing vs 7% debt). However there is an "inflection point" where when retirement is not 16 years away that its clear to me that priority changes (it becomes more about risk than it does about returns). College savings would be a second example. When your child is age 2 you have one set of priorities because the goal is to save "as much as you can" and you think you have 16 years to save. The child starts High school, you realize the "timeframe" changes your line of thinking, and it might be better to pay down other debt (like a mortgage) to free up cash flow for college payments.

[jpg7n16]

I thought about this some more, and kinda came up with my true savings priorities:

1) Small amount of cash to have on hand (say 1 month expenses)
2) Retirement
3) Rest of the EF
4) Save for anything like a home or car
5) Saving to buy stocks (aka other personal investing)


I tried to convince myself that I care about the EF more, but I really don't Part of me just wants to know that no matter what- I'm on track to be okay in retirement.

[TheStreetCeo]

I tried to convince myself that I care about the EF more, but I really don't Part of me just wants to know that no matter what- I'm on track to be okay in retirement.

And when we suffer through another recession what are you going to do if you lose your job like millions did this last recession if you don't have an emergency fund? Use your riterment and pay the penalties?

[jpg7n16]

And when we suffer through another recession what are you going to do if you lose your job like millions did this last recession if you don't have an emergency fund? Use your riterment and pay the penalties?

Maybe I should clarify then - I build up 1 months expenses, then I fix my 401k contributions so that I am deferring enough each month to be on track for retirement. Then I'd build up the rest of my emergency fund through whatever remains from my paycheck.

I do not mean that I am going to build and build and build my retirement account until I have enough to retire on... and then finish my EF.

But if I found that my EF was too low, I wouldn't lower my retirement savings until the EF was full. I'd personally keep retirement high enough, and slowly build the EF.

If you want to sleep better at night, I already have a 3 month EF I have the low end because my job industry is really stable. I do financial analysis for private equity funds - which have a fixed life of usually 10 years. If the whole economy goes south, someone still has to do the accounting and analysis for the funds - and that would be me So I'm pretty secure for at least the next 10 years, unless I change jobs.

[TheStreetCeo]

Stable but not untouchable. There are approximately 76,000 people in your industry, and since the beginning of 2008 over 45% of private equity firms worldwide made job cuts. In the UK alone, the top three private equity firms cut over 110 jobs per company. -Reuters.

With that said, making the move to increase your 401k was a great idea and you should be applauded for that. Funding your EF is only temporary. Once it's funded the balance can go to your retirement. The point is not to get stuck without a satisfactory EF.

[jIM_Ohio]

And when we suffer through another recession what are you going to do if you lose your job like millions did this last recession if you don't have an emergency fund? Use your riterment and pay the penalties?

If I used this logic, I would never have enough saved for retirement until I had an EF equal to about 8 years expenses (because it will take 8 years before Obama might be out of office LOL).

[TheStreetCeo]

If I used this logic, I would never have enough saved for retirement until I had an EF equal to about 8 years expenses (because it will take 8 years before Obama might be out of office LOL).

Lol, nice, you may be right there.

[jIM_Ohio]

Stable but not untouchable. There are approximately 76,000 people in your industry, and since the beginning of 2008 over 45% of private equity firms worldwide made job cuts. In the UK alone, the top three private equity firms cut over 110 jobs per company. -Reuters.

With that said, making the move to increase your 401k was a great idea and you should be applauded for that. Funding your EF is only temporary. Once it's funded the balance can go to your retirement. The point is not to get stuck without a satisfactory EF.

I treat 401k as a tax savings issue (financial efficiency) as much as an investment vehicle and tax shelter.

Meaning once retirement contributions (Roth+401k)=15%, then anything after that should
a) lower tax bracket into 15% territory
then be
b)invested in taxable accounts
or
c) used to save in other ways (lower mortgage balance, energy efficiency of house, other)

Maxing 401k is a decent goal, but I focus more on other things than increasing 401k right now.

We save close to 25% of gross pay to retirement
Both Roth IRAs are maxed
my 401k is about 12% I believe (been a while since I checked)
My wife's 401k was just changed to a Roth because we were far enough under 15% bracket

New savings for us goes into taxable accounts (we pay taxes at just under 15% bracket, no reason to hide from the tax man at this point).

We are paying off a car this month which is $700/mo. I plan to keep saving that money, just in taxable accounts.

$500/mo to boost EF (unemployment appears looming, so increasing duration to 6-12 mos)
$100/mo to pay down 2nd mortgage
$100/mo to PRPFX which is a secondary portion of EF

Once EF is where it needs to be, that $600/mo goes to the 2nd mortgage and then that $1100/mo goes to 1st mortgage 4 years later.


I am sure someone could post a case where $700/mo added to my wife's Roth, or $700/mo added to my 401k (no Roth option) might save us "a little", but those risk adjusted returns don't look so good to me.

So even if industry unemployment is present, it does not make sense to skip 401k, or force oneself to have a high EF. The unemployment around me makes me think things for our house might get worse, but that does not mean I should stop my 25% retirement savings just to get an EF to 12 months expenses or 24 months expenses.

If bad things happen, we will work thru them. It's the American way for 45% of us LOL.