I love these threads, how did I miss this one? I'll post some things that might go against your intuition, so I realize that you might not follow them. But, they are something to consider.
1) There is a big risk when people under-save. But there is also a problem with over-saving. Rule #1 of a successful person: pay yourself first. Life isn't about accumulating a mass of money. Life is about enjoying yourself to the fullest. If you undersave, you'll be miserable later on, so lets avoid that. But if you oversave, you never let yourself enjoy life; again lets avoid that. I think you are really running the risk of oversaving. Now is the time of your life when you can most enjoy certain things like a trip. You have two good incomes and no kids, so take your wife off to some exotic isle. Once you come back, then look at your savings/investments plans and post back here. I'm not advocating undersaving, but I want you to save well AND have a great life.
2) Stop the whole life insurance if you can without losing most of your money. There are many reasons to ditch it. (a) You have no need for any kind of life insurance at the moment - no dependants and you each can support yourselves with jobs. So if one of you die, there will be no financial hardship. Thus, you have no need for any form of life insurance. But if you really want it, get term life instead. (b) Whole life insurance is a mediocre life insurance combined with mediocre retirement investment both with excessive fees. Why settle for two poor products? Instead, get a great term life insurance and combine that on your own with a great retirement investment both with low fees. All you are doing now is taking your good money and padding the wallets of your insurance company and its salesforce.
3) Face the math. I assume you are in the 25% tax bracket (if you are not, change the numbers). That means you are really earning 5.25% * (3/4) = 3.94% interest on your savings (even less if you include state taxes). Inflation has been running near 3% (actually a bit higher not too long ago). Thus, your friend was correct. You are earning basically nothing at all on your investments. You are barely beating inflation when you could do far better.
4) I feel the old 6-month savings adage is now outdated. Why? We now have so many ways to pay for emergency times without needing liquid cash. Let me just assume your mortgage is at 6% (a reasonable number considering recent rates). Thus, to have $10,000 in savings at 5.25%, your mortgage must be $10,000 larger at 6.00%. You are in effect LOSING 6%-5.25% = 0.75% on all of that savings. So, for each $10,000 you have in savings, you lose $75 a year. If you have $30k in savings, you are getting $1575/year in interest but you are losing $1800/year in interest on your house. Instead of socking away $30k, pay off $30k of your mortgage and open up a $30k HELOC (but don't borrow any from it yet) for your unexpected emergencies. In the very worst case scenario, you can refinance and get that money right back out and probably still be ahead financially.
5) It is noble that you want to pay for your kid's education. But you don't need that money liquid this far in advance and you may be hurting yourself by doing so. Why? If this is for college, you won't need it for 20-30 years, so there is no point in being liquid now. Also, your kids will be ineligible for many scholarships and for federal aid. Heck, they might even be lazy in school and do poorly because "mommy and daddy will pay for college, I don't have to work now". Just a thought. My parents told us early on that we had to save for our own college or earn scholarships. So that is what we did - we as kids put any money we got into savings accounts and we earned scholarships (nearly full ride for all of us).
Basically, focus your money in riskier areas. Yes, it is a risk to get stocks (but historically they return far more than what you are getting now). Yes, it is a risk to drop your whole life insurance (but you can do far better with term life and good stocks separately). Yes, it is a risk to have less liquid money (but you are actually LOSING money as it is and that guaranteed lost money that is even riskier than stocks).
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