"Your kids can borrow for college. You can't borrow for retirement." | YNAB

"Your kids can borrow for college. You can't borrow for retirement."

piggy bank

It’s been a fun week on the blog, with Bill’s Big Budget and Bill and Wife’s spectacular reply. In the middle of all that, I snuck in some questions about my financial goals, and the community gave me a couple thousand words of great advice. I wanted to acknowledge the quality of the advice by following up with my revised thought process about the goals.

1. $5,100 Buffer, followed by a $15,000 Emergency Fund

The comments on the post the other day helped me finally sort out in my head how I can distinguish between my buffer and my emergency fund. The difference is the intended use of the money. Buffered money, as soon as there’s enough of it, will be used in your budget. Emergency fund money ideally will not be used in your budget. That’s why I’ve now broken them out as different categories.

I think some people have questions about the sequence: buffer or emergency fund first? Until I’m fully buffered there’s really no difference, right? If I’m in the process of building a buffer, and then I have to spend $1,400 fixing my car, the buffer is the emergency fund.

So the goal is to fight like crazy to build the buffer (using tax refunds, work bonuses, extra paychecks, proceeds from selling stuff – and maybe even a freelancing gig), then use that buffer to live on last month’s income…then apply all that cash hoarding energy to building the emergency fund.

So my plan is to get fully buffered, then save up the full emergency fund, then…

2. Attack Debt

As one or two commenters pointed out the other day, my debt is an emergency. So why wait to attack it until I’d saved up the buffer and the emergency fund? Won’t that cost me (at least) hundreds in interest I’d have saved by going after the debt first?

I could go either way on this one, but I’m leaning toward saving the emergency fund first for two reasons:

  1. I’m a pro at paying off debt. In 2010 I paid off about $75,000 in balances. In spite of that crazy year, I still managed to stay stressed, close to red line with cash, and a poor money manager. I want to learn to be a saver, and I’m willing to pay a few hundred dollars more in interest as my “tuition.”

     

  2. Emergencies happen. I’ve spent over $4,000 at the dentist this year. A $1,000 emergency fund would have been no help to me, and I’d have been swiping the Visa if not for the business sale proceeds sitting in the bank.

With no ugly debts, I’d be moving on to…

3. Save at least 15% of my income for retirement.

The snowball required to achieve pay off the debt will make it easy to transition into putting away a big chunk for retirement.

The interesting mental switch for me with this goal was to not think about it in strict sequence with other goals. For some reason, I always want to put things in order, ie “once that’s done, I’ll move on to the next thing, then the next…” Maybe it’s part of being an awful multi-tasker.

The point is, you’ve set me straight and once the debt is paid off I’ll think about retirement savings the same way I think about tithing. Tithing is the first 10% off the top, retirement is the next 15%. Automatic.

I realize that’s common sense to most of you, but it wasn’t until I read through the comments the other day that it finally clicked for me.

So why not start saving for retirement before the debt is paid off? Math. The interest rate on the residential lot is ~10% and the Deep Shame 2nd Mortgage is at 8.625%. Doesn’t make sense to be paying a blended 9% interest while earning 7-9% in the market, does it?

Where does that leave my last two goals?

4. College savings goes on the back burner.

The best line in the comments the other day was “Your kids can borrow for college. You can’t borrow for retirement.”

That’s good stuff. I don’t know if that’s a Dave Ramsey quote, but it’s quality.

Another smart commenter pointed out that I don’t really need to save up for the kids’ education if I’m serious about my goal of earning $200,000 per year. If I manage to reach that income, sending $50,000 per year off to school for the 6-10 years I have kids at college won’t be a big issue, especially if all my debts are paid off. Great point.

Bottom line is I shouldn’t prioritize college savings ahead of retirement savings. Thanks for walking me through it.

And finally…

5. Finishing the basement and other home improvements.

It will happen when it happens, and it doesn’t have to happen all at once. With the debts paid off, the emergency fund built, and the retirement saving habit established, the improvements to the house can happen as cash (and bartering opportunities) become available. A third (and especially a fourth) kid will make this house feel a little cozy, but I have a friend who has eight kids in a 3-bedroom, so I think my little family could manage without a finished basement for a while.

That’s my thought process. Thanks again for helping me get some clarity. Hopefully the conversation benefited someone other than me. :)