Peace of mind is the backbone of our financial philosophy. Having two full-time jobs, and a toddler is enough stress for us, so we want to avoid financial stress if at all possible. I know that we could get better returns if we invested aggressively, especially into our 401(K) accounts, while we’re young, but having more money just for the sake of having more money isn’t our goal. We do want to retire, but also understand we have other things to take care of before that can become a focus for us. We also try to avoid placing any emphasis on having “nice” things like new cars, expensive clothing, or cable TV, and instead aim for making financial decisions that maximize our freedom to focus on our family and other areas of our life. That is why our #1 savings and investment priority is:
1. An Emergency Fund
This single item can put you more at peace than anything else you can do. As per Dave Ramsey’s book [LINK], $1000 is the initial goal for an emergency fund, and you should try to hit it as soon as you can. This means you can cover most unexpected expenses - car repairs, medical bills, and others - without having to set up a payment plan, or worse, get into credit card debt.
After that, you should begin working toward a larger emergency fund, though there are many different philosophies on what that should be. They range anywhere from 3-12 months of expenses, with the idea that if you lose your job, you can cover expenses during the time it takes to find a new one. We’re currently aiming for 6 months of expenses and slowly but surely working our way up. Since we both work it’s less likely we would be put in a situation with no income, but we still want to be prepared. That would be about $33,000 at current spending levels, but we would also be able to eliminate daycare costs if one of us was able to stay home with the baby. Our target is probably closer to $20,000, which is a bit more than the ~$16,000 we currently have. (Side note: writing this blog was great for us because we had to talk about how much we wanted to save. Talk about your finances!)
2. Making our money grow (at least a little)
Some of you who are more investment-minded probably hate the idea of having cash just sitting there doing nothing. Interest rates on savings accounts are abysmal right now - I think we get around 0.3%. If you look at our October Financial Situation [LINK], we only have about $10,000 sitting in a savings account with the rest spread out to a few different investments. Our $10k in the savings account is important because we have same-day access to it and it’s FDIC insured against loss. No penalties, taxes, or waiting periods, we can access that money whenever we need it.
With the money beyond that, we have it divided between three different accounts: a standard brokerage account, a Robinhood brokerage account, and about $100 of “fun” investments. Our standard brokerage account was a mistake. I felt rich a few pay periods after having both Nicole and I working full time and did far less research than I needed to before opening an account. The result was a small investment account where the balance was low enough that fees would eat up almost any gains on investments. The Robinhood account was a good introduction (no fees!) to investing for us, and we put a larger (~$3,000) amount of money there to start. We count this as part of our emergency fund because we can liquidate it in just a few days, though we would have to pay capital gains taxes if that became necessary. Our philosophy here is investing in lower-risk ETFs, mostly bonds and index funds with a few select stocks making up a small percentage. We know it’s very conservative, and that’s intentional. We’re just happy to get a better rate of return than the savings account.
3. Paying off debt
A lot of people might not think of paying off debt as an investment, but in some ways it is. By spending money now and paying off loans ahead of time, I’m guaranteeing I’m not paying 4-6% in interest on that principal anymore. It’s hard to turn down an investment with a guaranteed 4-6% return and no risk of loss. As we pay off loans one-by-one, we’re also freeing up cash flow that can help us pay off additional loans faster, or give us options to pursue other financial goals. Once we have this debt taken care of, that’s more money for us to put in our retirement accounts and save for other needs.
We weren’t always this focused with our financial philosophy. I had a tendency to spend money as soon as I got it, but Nicole was a bit more of a saver. Though we didn’t have much money at all when we first got married, there was a brief period of time after we both got new jobs that we spent what we had and didn’t save much at all. In the few years since, we’ve gradually cut back our discretionary spending each month to move more and more money to paying off debt. Saving is about making small sacrifices now to prevent disasters and have more free cash flow later on. It’s tough for some people to see that much money sitting in their accounts and leaving it alone, but being able to cover unexpected expenses without a problem is definitely worth it.
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