Consider how long it will take to find a reasonable job if he loses a job during an economic or industry downturn in his industry.
The common financial advice of 3 months living expenses does not cover the worst case where it may take much longer than that to find a job during an economic or industry downturn. People who would be looking for less common jobs (including those with considerable seniority looking for scarce senior level jobs) may find 3 months to be unrealistically short even outside of an economic or industry downturn.
Thatâs what I meant by a âbasic cushionâ. He already has 4 months living expenses saved (and this is a relatively new graduate not a âsenior levelâ executive, who could move home if need be).
The challenge is that the amount needed for a downpayment is 5-10 times more than that and would obviously take many years to accumulate. So he wonders if itâs even worth bothering to save with buying a home in mind, or if he should just put any spare money (after funding his Roth IRA) into his 401K.
Deferred gratification is not always the reason for delayed savings. In my case it probably appears we are behind in savings based on income, but started out behind with college loans that were pretty significant. Then we made a decision for my wife to stay home with the kids. We are playing catch up. It has been a balancing act to save or spend.
I found this interesting - I believe the âmistakeâ these parents/grandparents made was paying off their childrenâs home mortgage. But that is my view.
We didnât receive âmultiple inheritancesâ but a decent one from my parents (split 5 ways, it was still a 6 figure amount). We ended up using some of it with auto replacement and educational spending on DDs (which included student group travel abroad for DDs). DH also had a while where his earnings were a bit frozen, and it helped with the increase in cost of living.
We have one child (almost 30 yrs old). I always tell her she is the funnel for inheritance. She is the sole beneficiary for my husband and I (besides each other) and my sister-in-law (who has no kids of her own). She is very frugal, has a well paying job, no debt, and sizeable savings (matching 401 and 403 plans, other CDs as investments, etc.) I have no problem being generous with her now (why not have her enjoy while we are alive). But I never, ever hand her a check. I prefer to cover costs instead (pay for nice meals, pay for trips, etc.) I do occasionally throw her cash (small amounts like $100 to pay for incidentals). I feel that handing over big checks to your adult children is not a great idea.
My bias would be toward saving in a Roth 401K, if his company offers that option.
Having lived in cities post-college, I didnât buy a house until nine years after graduation, but I am still living in that house so the 20% downpayment was significant. As in, the starter house was large enough that I never had to move.
His income should probably continue to increase so that he will have more disposable income in the future that he can direct toward a down payment. His tax rate will also be higher then, so stashing the money in a Roth 401K will âhurtâ less now than when he is in a higher tax bracket.
He can also withdraw from the Roth 401K but will pay tax + a 10% penalty on the earnings portion of the withdrawal.
I agree completely.
Sometimes we make choices that mean we canât save as much as weâd like, and are thoughtful about it.
But we know young people who go out three nights a week, order multiple drinks each time, order in other nights, go on multiple not cheap vacations, etc., and they put zero in retirement and Iâm sure have no idea if their employer would match anything if they were saving.
I would rather see them making what my financial values would call âbetter choices.â We were having some conversations about choices, but they said they didnât want anymore âtough love.â
My son is one who has maximized his retirement account every year since heâs been working, and even tried to put retirement savings away when he had an internship (which was sad because he sold stock to do so, and then found out that since it was a stipend it didnât count as income, or something like that, and he had to pay cap gains on the stock sale). He realizes that once he has kids he will likely not be able to save so much, but his money will still be compounding. He also realizes that he was lucky not to have student loans, and to have the ability to save quite a bit right away.
Out of interest, within those nine years, how soon did you start saving for the downpayment, and how long did it take to save 20%? Did you buy as soon as youâd saved enough?
I started saving as soon as I enrolled in my companyâs 401K and post-tax saving plan, but I cannot recall how quickly I was eligible to participate. The enforced payroll deduction saving worked for me as I would have spent the money otherwise. As it was, I carried a CC balance and paid insane interest, mostly because I was saving too much in the company savings plan! (I forget the exact figures but I was saving maybe 10% & 13%, but cannot recall which was pre and which was post-tax.)
Wanting to ensure that my children never paid interest on CC, I had them set their cards up to auto-pay the statement balance on the due date. One child is spending far too much money and the other has more than he can stash in tax-deferred accounts, but at least neither one carries a CC balance as I did.
Both DDs are probably now in the cities they will be in long-term, but we will know more on âfinality of itâ in maybe 2025, 2026. And right now DD1/SIL have stopped with having more children (they have 4 now with both working FT) - DD1 got a 25% pay increase in this new city, and child care and childrenâs education is taking a good portion of discretionary income. They have a good situation; SIL will need to be out of town for training, and when that gets scheduled, I can fly down and help with managing kids and household.
While we were there, SIL wanted to have the family all go to a destination and then have a large meal (at a more upscale restaurant). I objected as we were not going to pay for an expensive family meal with the two younger children who would be needing a lot of an adult managing them (28 month old and 6 month old) and the disruption at the restaurant. SIL gave an inappropriate answer âwell people need to get over a large family being at a nice restaurantâ - ugh⊠That evening, DD1 privately convinced SIL that that âdestinationâ needed to be saved when the kids were older. On New Yearâs Eve, SIL and DH picked up Chinese food (DH paid the tab).
I have an interesting perspective on this. My wife and I both came from blue-collar families. We graduated college had debt and really got no help from either set of parents. No cars or down payments. My in-laws bought my wifeâs wedding dressing and my folks paid for the rehearsal dinner. Throughout the years no monetary help was given.
In many ways that was good. We learned to be independent and if we wanted something we knew we had to earn it and save for it. One nice thing was we were never beholden to our parents. They didnât hold anything over our heads.
Ironically my Mom has started to give some money each year to us that is significant. Basically enough for a nice vacation. My FIL has even upped his Xmas gift of cash to my wife. Both of them have lost their spouse.
We are fighting with ourselves internally on how much to help our two Dâs. Both will graduate with no debt partially because of their scholarships and us funding the rest. Well the one still in school got a full ride. She gets to keep her 529 money for her future. Neither are going into professions that will be high paying. So I do see some struggle in their futures. But we always made them pay for some stuff. I was a big proponent when they were kids if they asked for something I would offer to pay for half. I always wanted them to have skin in the game. We will probably be able to help them out earlier than our parents started helping us.
There is something to be said for making 100% on your own. I really liked not be asked questions by my parents on things I did with my money. They had no say in what I did.
When determining how much we needed to retire, we included any potential gifts we wanted to make to our two kids while we were still alive. Our financial planner specifically asked if we wanted that included.
Each family can make their own decision about thisâŠwe expect our kids to be self supporting, but we love seeing them enjoy the gifts we are able to give them now.
LEO son, at 23, is off to a very good start with his savings. If he stays in this line of work heâll have a good pension through the stateâs retirement system. He also has a deferred compensation plan that he funds to the level that triggers a surprisingly good matching contribution from his agency. On top of that, heâs putting a fair amount into a Roth as well. Heâs well ahead of where I was at his age.
But what about saving for the downpayment? Was that outside the 401K and âpost-tax saving planâ? What vehicle did you use (mutual funds? cash savings?) and when did you start/how long did it take to accumulate 20%?
The post-tax savings plan was via payroll deductionsâthe same as a 401K and probably enjoyed the save investment choices as the 401K. I have absolutely no idea what it was that I invested in.
Think of it as a brokerage account. I could have deposited the exact same amount of money in a brokerage but I wouldnât have because I never would have transferred the funds from my checking account and would have spent the money.
I donât think is a widely available option, but savers have so many more options now.
In terms of how long: Less than nine years but I do not remember when I started contributing to the post-tax plan. Probably not the first year as I was just one step ahead of kiting checking at that time. (Not actually kiting checks, but say opening a new store credit card if I needed to buy a suit!)
What is wrong with saving more than you need to spend right now? If you have that money in savings, you will then have it there when you want or need it.
We had a specific amount direct deposit into savings that was not linked to our checking account or our ATM card. That meant it wasnât all that easy to just withdraw it. When we needed that moneyâŠit was there.
We advised our kids to have extra money in addition to their emergency fundâŠbecause you just never know when you might want it.
I know this is a retirement thread, so everybody is always stressing 401 K and IRA savings. However, nobody should save only into retirement plans. Put a percentage of your savings into some liquid investments. This way you will have that money when you decide to buy a house or need to cover some other big expense. I am talking about more than the cushion (6 months spending in case of unemployment or other crisis).
If one has extra income to saveâŠthe choices are just spending unnecessarily or saving. We vote for saving rather than just spending every single penny because you have it.
That was my question. How much should you save outside of a retirement account? Once you have built up a cushion, should you save as much as possible in your retirement account ($30K total in 2024 for 401K plus IRA if under 50) before making further savings in a non-retirement account? Or should you split the savings and increase both retirement and non-retirement savings in parallel?
