Emergency Savings? Home Ownership? IRA? Brokerage Account? Now what??

[Anonymous]

I've paid off my debt and now I am broke. Completely broke. All debt is gone, but I'm starting at Zero. No savings, No retirement plan, Renting month to month.

I need some advice--where do I go from here?? I can now afford to save, but where is the best SAFEST most liquid place to do it--Money market account? Tax-exempt money market fund? How much should I save?

Should I think about buying a home in this market? Go for a really really cheap fixer-upper in a decent neighborhood, or get the most expensive one I can afford?

When does it make sense to think about getting into the stock market? Should I have a house before doing any of this, or should I keep renting for dirt-cheap and save as much cash as I can?

Older, wiser, more experienced peoples of the world, I need your advice!

[Anonymous]

In order:

1. Emeregency savings. Preferably a money market that pays a little something- but is available immediately.

2. Retirement account. If your employer matches 401K- max it. If not, a Roth or traditional. Ask a tax accountant which offers you a better tax scenario. A good retirement account gets two jobs done: saving and investing.

3.Personally - I put homeownership down the list a few notches. Now that's just me. I saved a whopping $300 on my taxes after paying $10K in interest and $2.5K in property taxes. BUT- if homeownership is an important goal- GO FOR IT! I can go on about fixer VS max what you can afford. That's just a numbers and lifestyle question that you can answer best.

Good luck and congrats on being debt free!

[Anonymous]

Well said-

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TexMontana wrote:

In order:

1. Emeregency savings. Preferably a money market that pays a little something- but is available immediately.

2. Retirement account. If your employer matches 401K- max it. If not, a Roth or traditional. Ask a tax accountant which offers you a better tax scenario. A good retirement account gets two jobs done: saving and investing.

3.Personally - I put homeownership down the list a few notches. Now that's just me. I saved a whopping $300 on my taxes after paying $10K in interest and $2.5K in property taxes. BUT- if homeownership is an important goal- GO FOR IT! I can go on about fixer VS max what you can afford. That's just a numbers and lifestyle question that you can answer best.

Good luck and congrats on being debt free!

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[MattH]

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Quoth TexMontana:

In order:

1. Emeregency savings. Preferably a money market that pays a little something- but is available immediately.

2. Retirement account. If your employer matches 401K- max it. If not, a Roth or traditional. Ask a tax accountant which offers you a better tax scenario. A good retirement account gets two jobs done: saving and investing.

3.Personally - I put homeownership down the list a few notches. Now that's just me. I saved a whopping $300 on my taxes after paying $10K in interest and $2.5K in property taxes. BUT- if homeownership is an important goal- GO FOR IT! I can go on about fixer VS max what you can afford. That's just a numbers and lifestyle question that you can answer best.

Good luck and congrats on being debt free!

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Sound advice. To OP, congratulations on digging out of debt, it's all uphill from here! Main thing is, DON'T CUT LOOSE on spending yet, keep the belt tight and you'll be able to accumulate savings. As for buying real estate, I would suggest saving till you have at least 15% of the purchase price saved up, of which 10% becomes down payment and the rest is reserves (you MUST have some cash reserves after making the DP) which are ESSENTIAL if you become a homeowner. Since buying in 2002, my wife and I have had to replace (among other things) one furnace, two toilets, one A/C compressor, one water heater, and one dishwasher. Life happens, and an emergency fund is the only way to avoid surprises turning into new debts!

There are several reasons why a DP is so important. First, as the current subprime mess demonstrates, a buyer who finances over 90% of the price is at severe risk of becoming upside-down should the market drop. Second, establishing a habit of savings is excellent preparation for assuming the financial responsibilities of ownership.

One excellent way to prepare yourself for homeownership is to run the numbers on what it would cost each month (mortgage, taxes, utilities, and MAINTENANCE at maybe 3% to 5% of the purchase price annually depending on age and condition, monthly fees if a condo, etc.) to own the place you have in mind. Open a new account and set up an automatic transfer of that much (minus your current housing cost) per month. Do this for few years, and you have your down payment, PLUS you have demonstrated to yourself that you can manage the running costs of ownership. If you end up having to dip into this account to make ends meet, well then you've learned you cannot manage as much house as you had thought before learning it the hard way and must adjust your plans accordingly.

Good luck!

Take a look at www.daveramsey.com for excellent personal-finance advice.

[llecs]

Ramsey is great.

And to add to the other comments, 90-95% of the folks out there have to earn money actively in order to survive financially. What is working for us is to have multiple sources of income. We incorporated anything that helps from being self-employed, to biz ownership where I get paid if there or not, to investments. Thankfully we are at a point in our household income where if I lost my job today, I wouldn't have to rush to get a new one. I would have to get one eventually at this point, but half of our income comes from other sources outside the job.

I guess the point I'm trying to drive at is we often accept our income as being linear with the 3% raise each year if lucky. We then try to budget and live within those means. Instead of living within those means, why not try to figure out a way to increase the income?

[haulingthescoreup]

Great comments here!

I'd say number one priority is emergency savings, AT LEAST 6 month's worth of needed income. You can do double duty on this if you like by opening a Roth IRA, starting with a taxable money market account, getting the 6 months worth in there, then diverting your deposits to a straight MMA for your real emergency fund, letting the Roth continue to quietly grow.

The great thing about a Roth (well, one of them) is that you can pull out the money you've put in, but not the earnings, without taxes and penalties. You can't replace it again for your year's allowed funding, but at least it gives you an accessible cushion.

So if you start by having a Roth double as your emergency funds, and then do the true emergency funds, you have that much more time that the Roth can grow, assuming that you didn't have to raid it. (Hope that makes sense! )

And if your employer matches contributions in a 401k, 403b, or whatever, be sure to put in every penny it takes to get full matching. Otherwise, you're throwing away free money. Even when the market is flat-lined, you can think of your employer's contribution as profit, so it's like making a 50% - 100% profit, depending on the level of matching.

[Anonymous]

I understand completely about the Emergency fund and the Roth--although I'd be reluctant to count a ROTH IRA as PART of my emergency fund--I definitely don't want to rely on the IRA for anything other than it is--which is a retirement vehicle. But I get your point.

I will Do the Emergency fund and get the Roth IRA rolling--hopefully max out the contribution by the end of this year. I fooled around with compound interest calculators, and it is insane what a difference 2-3 years makes. So I see it's imperative to get that started NOW rather then wait another year or two

Also, what you said about increasing your income makes sense...Unless you're exceptionally passionate about your main occupation you'll probably just get 3% average increase a year, and you probably can stand to increase income through other means--which I shall investigate.

Meanwhile, I will continue researching real estate market, learning about it, etc. If a great deal came around I wouldn't want to miss out.

[Anonymous]

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@Anonymous wrote:
I understand completely about the Emergency fund and the Roth--although I'd be reluctant to count a ROTH IRA as PART of my emergency fund--I definitely don't want to rely on the IRA for anything other than it is--which is a retirement vehicle.

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I think the point people are trying to make is that if you don't have enough money to fund both an emergency fund and a Roth IRA, put the money into the IRA.

The thing about an emergency fund is that it may never be used...you want to have one "just in case." If you put all of the available money into an IRA, and there is never an emergency, your IRA gets funded early, and it starts growing -- and your calculations have shown you how valuable that is. If there is an emergency, and you need to take money out of the IRA, you're no worse off than you would have been if you'd never had an IRA to begin with.

If you have enough spare money to fund both an emergency fund and an IRA, then by all means, do so!

[ptilda]

Congrats! You're ahead of me in the debt department (student loans, ugh), but I'm JUST ahead of you in the investment game.

I absolutely agree with the previous advice. Once thing I'd add is that you might consider keeping your emergency fund someplace other than your regular bank, so that you don't see that it's there whenever you log into your bank. And set small auto deposits into CDs and your emergency fund so it keeps growing. Also, having your emergency fund in a bank with a high yield savings account (i.e. Barclays which is currently 0.9%APR), you'll be earning money on that slowly too, and it's totally liquid.

If I was to get a house, I'd start either with a fixer-upper, or a rental property (duplex+). Just me.

[wa3more]

in many areas of the country, the RE market is still a buyers market and rates are lowest in a generation.

Buy the worst house in a good neighborhood, something that needs a little paint and landscaping.