How should I save?

[KennesawNemo]

We are fortunate enough that DH’s pay check alone is enough to cover all our expense and we already have a good-sized emergency fund and no debt. We currently own a house and have about 35% equity in it. The rest is a 30 yr fixed interest rate loan.

I just recently start a new job and should be able to save most of my take home income.

Our next goal is to upgrade our house, not to a bigger one, but to a better school district. Ideally speaking, we want to be able to do so next summer. We want to do so in such a short time frame because we don’t want to miss the low housing price and low financing rate. But if the money is not there, we could also wait a little bit longer.

We would like to put down 20% for the next house when we buy it and have some extra money for furniture and small upgrades. That means, we need to sell our current home, use the equity we have and also we need to save my take home income for the next 12 Month.

So my question is how we should save my take home income:

1) Put in a saving account. This option gives me the most liquidity. The money will be there when I need it. The down side is the interest rate I earn is almost next to none and there is no tax benefit.

2) Pay off extra principal on our current mortgage. By doing so, we are able to cut down the part of our monthly mortgage that goes in to interest and build up more equity. The down side is the money is stuck there and we won’t have it if we can’t sell our current house at a reasonable price.

3) The third option is actually on top of the first two. I am not able contribute anything to 401k yet. I will be able to do so in a month of time with no employer matching and will be able to get employer matching in a year. If I contribute to 401K, I am able to take advantage of the tax saving, but I won’t be able to save as much. We might need to save for another 12 month. I am afraid that housing price will start to rise again in 2 years of time. DH is already contributing a decent percentage o f his income into 401K, 15% including employer match, and we are only in early 30s

So what do you think? Any advice is welcomed, thank you!

 

[2disneyboys]

seeing how you are actually looking at selling & moving within the next 12 months if possbile I would go with option 1 or something similar. Paying down equity in your house is a good ideal, however you are right that your xtra money is locked into your old house & it's equity... if you were going to stay there a while (like years) I would go w/ #2 but with the housing market as volitale as it is in some areas, I would hesitate to put my xtra cash into equity right now.

as far as #3, it would depend... are you talking about putting the $ in your 401k and just "forgetting" about it until retirement? if so, that's always a good option, but if you are talking about putting it there & then pulling it out to put down on a new house, I would only do this as a last resort as there are all types of rules/penalties/ and things to take into consideration before you withdrawal $ from a 401k type account.

 

[Irin997]

Option #1. This is what DH and I are currently doing. We are living on his paycheck and banking mine so we can save up to buy our first house. Unfortunately we'll only have 10% to put down but we want to move districts before DD10 does into middle school next year. And we don't want to wait any longer either. Hopefully we can find our house next May-July and be moved in before school starts.

 

[Shelly F - Ohio]

I agree with PP the 401K options means if you take the money out you will have to pay 20% to the government for early withdraws if you are younger than the age requirements set by the gov.

Since you are only planning to save money for about a year or so, your interest gains are going to be very small. Now a days in order to get a higher interest rate you must commit to tieing up your money for 5 years or longer in a CD or mutual fund and even those are not paying that high of an interest rate.
That being said I would look at the banks in your area and see who as the best rate and set up to direct deposit into the acct.

 

[KennesawNemo]

Op here. Thank you all for the above replies.

I'll never take money out of 401k. I was wheter I should put money in 401k and save longer for the house.

I guess for now, all the money will go into a saving account. I won't put money into 401k until I am able to get employer match. Then I will put money to get the maximum match. Once we saved enough money for the next house, I'll put more money into 401k.

 

[Abhay]

I think can have better planning.

 

[JaymeC]

I would do #1. The only other option I can see you haven't mentioned is doing a Roth account. I don't know if you qualify for one since there are income restrictions, but if you put the money in there you could take the principle back out if you needed to, and I tend to prefer Roth's over 401(k)s unless there's an employer match.

And this is just a side note, but in your early 30's is a great time to be saving for retirement. You don't want to get to your 50's and wonder why you didn't save more

 

[akcire]

I would start contributing something to your 401K.

I am not saying you need to max it out, but for most people there is a point where the contributions will offset tax liability and keep the "real cost" of your 401K contributions at zero. By that I mean, you need to figure out what percentage you currently pay in income taxes, based on your combined income. Then you need to figure out how much money you can contribute to get your taxable income to the next lowest tax bracket. Once you know that number you can divide by your number of pay periods and find a % contribution that will essentially be free since it is saving you an equivalent amount of taxes.



Once you have set that up for automatic withdrawal. Then you should set up a separate account and have your entire paycheck direct deposited. That will allow your funds to grow at the quickest rate.

 

[hsmamato2]

I would do #1. The only other option I can see you haven't mentioned is doing a Roth account. I don't know if you qualify for one since there are income restrictions, but if you put the money in there you could take the principle back out if you needed to, and I tend to prefer Roth's over 401(k)s unless there's an employer match.

And this is just a side note, but in your early 30's is a great time to be saving for retirement. You don't want to get to your 50's and wonder why you didn't save more

yes...that! if you qualify,the Roth is great...

 

[GOOFY4DONALD]

Just tossing in my .02. When we purchased our first home the home came up before we had enough saved up. We took out a loan (not withdrawl) against DH's 401K. This was a last resort (besids they will only let you take out 50% of whats in there). There was no tax penatly but there was some interest. They took the money out of each paycheck and it ended up costing about 160.00 per month. Since we were using it to buy a primary residence we could have taken up to 20 years to pay it pack but we wanted to get it paid back quicker than that. During the paypack time DH and employer still contributed to the 401K. We were told we have to assume the debt and pay it back a lot quicker if DH lost his job but we did have confidence that this was a remote possibility. Now it's not a plan for everyone but it did work for us and although it should never be the first option it is not as horrible as it can seem.

 

[ski_mom]

This is sort of a variation of option #1 - we have a high interest checking account. It earns 3.3% for the first $35,000 in the account as long as you have a direct deposit, use your debit card 10 times during the month and receive your statement online instead of through the mail.

We have at least 3 banks in our area that offer these types of checking accounts, but I kind of stumbled on them (the don't heavily advertise them), so if you're interested, maybe do an online search for high interest checking and if nothing comes up in your area, try calling around to ask and see.

 

[FoodLover]

Ally Bank has an 11-month "No Penalty" CD paying 1.09%. You can pull the money out anytime after the first 6 days (yes, days) and pay no penalty. That's about as good as it gets for a totally liquid and FDIC-insured way to hold your money these days. You could just open a new CD online each month as your paycheck arrives, and when you're ready to buy, cash them all out.

 

[prncess674]

If you are planning on the kids being in the new school district by the following school year, then don't underestimate how long it takes to sell a house. I would get my house on the market after Christmas and assuming you have a savings plan in place I would just borrow more on your initial mortgage on a new house if your house sells quicker than you anticpated. You can always continue to make prinicple payments on the new house assuming you have a savings plan already established.

 

[keholman15]

you can plan it better, i think