How much is too much (investing/saving)

[codename47]

So I've been getting some flack about saving my money but here is my current situation.

Wife and I both have good jobs, and do the matching company 401K 6% (company matches 100% of the 6%) so we are saving for retirement. We also have whole life policies that are "suppose" to be pseudo savings for retirement.

I'm currently using E-loan for my banking with their 5.25% interest on my savings and I'm saving pretty much my wife's salary every month which is starting to really add up. So I'm wondering how much is too much in a "high" interest savings account. A friend told me I'm doing what is called getting poor slowly but ?? I don't know if I agree. He said I need to be making 8-9% on my money for it to be considered making a profit due to fees, taxes, and inflation.

We are eventually going to have kids so I wanted to stock pile some cash that was liquid for their education. We also want to build a home one day and I thought it would be great to have money to put into a home and not just do all mortgage. We do currently own a home and have good equity in it.

So what do you guys think? I'm currently making a CD rate in my savings so??? Is it ok to save this much in savings and not invest it in stocks or mutual funds? Would I be smarter to do that for the short term and if I needed the cash get hammered by uncle sam?

 

[leftyman]

You have come to the right place.

 

[Queasy]

What I've always been told and what I always try to practice (not always successfully):

1) At least 10% of your income towards savings/retirement.
2) Keep enough money in your savings account to cover you for 3 months worth of bills/living expenses.
3) Invest the rest of the money into stocks, Roth IRA, etc.

 

[vi edit]

Everyone has different goals and risk aversion. You've done the first part right -maxed out your 401k's to the match level.

Your next step would be to build up the rainy day fund - ~6 months of expenses squirrled away in a high interest account like you are already doing.

Your next step should be opening and maxing out Roth IRA's for you and your wife. Check into Vangaurd.com for options available. This is a tax sheltered retirement account that you can use to buy various mutual and index funds for long term investing. Historically, a balanced investment in the stock market will net you around 10%.

You can put in $4,000 a piece each year. Max these out then if you still have money left over, you can either bump up your 401k's, or go into other tax sheltered savings vehicles like Ibonds(great for college savings!) or tbills/bonds.

Short term (less than 3-5 years) I don't really suggest mutual funds/stock market. There is just too much risk if you don't know what you are doing (and sometimes even if you do know) plus the fees can eat away at your earnings. I'd personally just stick to a money market or high interest account like you are already doing.

 

[NogginBoink]

My opinions (worth what you paid for 'em):

1) Ditch the whole life. You're making other people rich.
2) Up the contributions to 401K
3) High yield savings account is good for your emergency fund but isnt' returning you the rates you probably want for investments.
4) Max out contributions to Roth IRA's for both of you

 

[LS20]

1. max your free-matching
2. have a rainy day fund (ie 2/3 months pay)
3. personal investment vehicle... half speculative.. half fun.. can be taken liquidated for toys

 

[Winchester]

Google Dave Ramsey

I assume that you have absolutely no debt since you are putting a lot into savings. Correct?

I agree with Queasy on all except the 3 months, if you can do 6 months, do it, especially wanting children, then start investing the rest, and obviously remember to diversify. You need to be making more than 4-5% to be gaining any ground on inflation. Our checking account pays 6%, which is good for us for now as we are building the funds up and we still have our funds readily accessible. We have a child on the way and I plan on being able to invest some $ by the due date.

 

[ghostman]

Along with what everyone else has said... 401k, savings, IRA, more 401k, more investment if possible...

And I know nothing on the topic, but you might want to look into a Coverdell ESA when the little ones are born:

http://www.bankrate.com/brm/itax/tips/20010404a.asp

 

[thomsbrain]

you do not need liquid cash for your unborn kids educations! that's 20 years away at the earliest!

you need 3 to 6 months expenses in that savings account, plus any "savings" that are going for specific near-term purchases (a car, a TV, a new/increased investment, whatever). the rest you should have invested already, starting with maxing out your Roth IRAs and investing within those.

as for how much to save every month, the answer is always "as much as possible," and it sounds like you're doing great on that. but keep in mind that if you aren't maxing out your 401k's yet and have savings to burn after maxing your IRAs, you should be increasing your 401k contributions. you just can't have enough for retirement, especially when you figure in inflation!

 

[Queasy]

OP also, if you are interested in saving money for your kid's education, look into 529 plans. They offer a good savings vehicle for college. Check out http://www.savingforcollege.com.

 

[codename47]

Wow thanks for all the comments! I'll look into vangard b/c I've heard of that particular company before from some friends that use it.

I have zero dept besides house and a car on zero percent so small payments for those but besides that and utilities I'm set. That is why my wife and I can live off my income. I'm going to lookinto the college savings and Coverdell ESA as well. Thanks for all the help and I'll let you know what I end up doing. I've got about 30K in the eloan account so I need to divy that out a bit the way it sounds... it is really nice though having that much money at the tips of my fingers

 

[SoulAssassin]

up the 401k % till you're putting in max (15.5K)

 

[MustISO]

I've been wondering the same thing. 85% of our cash is in high yield savings. I was thinking about doing 50% savings and 50% investing.

 

[Ameesh]

my 2cents is this is that your mortgage is probably your single biggest expense on a month to month basis, your car after that. my goal is to make my monthly free cash flow so high i can do anything with that money. whether its save it, buy another home, buy stocks, pay for my education, etc. if you dont have a lot of financial obligations to deal with a month your ability to be agile with your money is a lot greater.

 

[Matthias99]

Originally posted by: MustISO
I've been wondering the same thing. 85% of our cash is in high yield savings. I was thinking about doing 50% savings and 50% investing.

Most people realistically only need enough 'cash' to cover expenses for 3-6 months in the case of an emergency (job loss, car asplodes, etc.) Unless you're planning major expenditures soon, or you don't have much savings right now, holding 85% of your assets as cash sounds way way too high to me. Even 50% seems excessive unless you for some reason absolutely cannot tolerate losing much in the short term (for instance, if you're going to retire in just a few years).

If you're saving for long-term goals, you probably want to be invested much more heavily in stocks/bonds. If your goals are 10+ years away, you can invest very heavily in riskier investments now and shift to safer investments over time. Even a 'high-yield' savings account is usually only returning 2-3% after inflation -- better than nothing, and there's essentially zero risk, but there's very little upside either. If you have time to ride out short-term market fluctuations, stocks and bonds will almost certainly do better.

For savings specifically for future education expenses, look into 529 plans as mentioned above. For retirement, IRAs and Roth IRAs are a good choice if you have maxed out a 401(k) already.

 

[LS20]

saving money from your paycheck to go towards varying investments is never too much

maxing your 401k, having multiple IRAs is too much!!! some people here advocate ridiculous amounts locked into a retirement account. uh, id rather not live like a miser while im in my 20s so i can have an rv that's 7ft longer when im 85 years old. thnx

 

[Elbryn]

what we do is have the bucket system for taxable, follow what everyone else said for tax differed retirement moneys.
1st bucket- tax exempt mutual fund with 1 year savings, this is used for emergencies and big ticket items and is replenished as soon as possible if used
2cd bucket- balanced fund, 50/50 equity/bond with 1 more year of savings. this is a bit more risky to get a better return based on theory it wont be needed immediately if needed.
3rd bucket- 100% equity, 50% in total stock market fund, 50% in international fund. both indexes that are relatively tax efficient.

always put bonds designated for retirement into your tax deferred vehicles.

 

[Elbryn]

what we do is have the bucket system for taxable, follow what everyone else said for tax differed retirement moneys.
1st bucket- tax exempt mutual fund with 1 year savings, this is used for emergencies and big ticket items and is replenished as soon as possible if used
2cd bucket- balanced fund, 50/50 equity/bond with 1 more year of savings. this is a bit more risky to get a better return based on theory it wont be needed immediately if needed.
3rd bucket- 100% equity, 50% in total stock market fund, 50% in international fund. both indexes that are relatively tax efficient.

always put bonds designated for retirement into your tax deferred vehicles.

 

[EKKC]

i do 50-50 between stocks/funds/investments and high yield savings (online now. it beats most CDs)

 

[TallBill]

I must be the only Anandtech user with no interest in IRA's. I have no intentions in working untill I'm 60, so I want access to my money before that. Then again, hopefully I'll be federally retired at 45 without any need whatsoever of outside savings.

 

[vi edit]

Originally posted by: TallBill
I must be the only Anandtech user with no interest in IRA's. I have no intentions in working untill I'm 60, so I want access to my money before that. Then again, hopefully I'll be federally retired at 45 without any need whatsoever of outside savings.

Not many of us have "20 and out" gauranteed Federal Pensions. That makes a big difference in retirement planning/goals.

 

[cKGunslinger]

Oh, I think you need the Van Campen lighthouse...

 

[TallBill]

Originally posted by: vi_edit

Originally posted by: TallBill
I must be the only Anandtech user with no interest in IRA's. I have no intentions in working untill I'm 60, so I want access to my money before that. Then again, hopefully I'll be federally retired at 45 without any need whatsoever of outside savings.

Not many of us have "20 and out" gauranteed Federal Pensions. That makes a big difference in retirement planning/goals.

True enough. Dont get me wrong though, I hope to have enough to actually retire regardless of the retirement income. Then I can live it up!

 

[BigJelly]

Originally posted by: TallBill

Originally posted by: vi_edit

Originally posted by: TallBill
I must be the only Anandtech user with no interest in IRA's. I have no intentions in working untill I'm 60, so I want access to my money before that. Then again, hopefully I'll be federally retired at 45 without any need whatsoever of outside savings.

Not many of us have "20 and out" gauranteed Federal Pensions. That makes a big difference in retirement planning/goals.

True enough. Dont get me wrong though, I hope to have enough to actually retire regardless of the retirement income. Then I can live it up!

First thing I thought was "lazy government worker" then I saw the "posting from baghdad" in your sig. So hope you can retire then, you deserve it.

BOT:
OP given that you can live off your salary and your wives is gravy, I would look into diversifying. Keep some in HYMM savings the 5.25% (inflation is around 3% so it is making you money). Then buy low cost no fee mutual funds but diversify them; small, medium and large cap blends (combination of growth and value), then get some foriegn stock from different regions.

For instance, I have 5k in HYMM and 20k in mutual funds that are from Europe, Mediterrian (spl), Asia, and American small and medium cap stocks. Anything else I save is going into my HYMM; as my short term risk is too high. Maybe I should have followed the 50/50 rule, only time will tell.

But becareful listening to other people giving finacial advice; people then to be more risky when its not their money

 

[b0mbrman]

Originally posted by: codename47

A friend told me I'm doing what is called getting poor slowly but ?? I don't know if I agree. He said I need to be making 8-9% on my money for it to be considered making a profit due to fees, taxes, and inflation.

That sounds familiar. Does he usually offer hot stock tips after he says this?