Need help on how to allocate a large sum of money

[moneymama]

Here's some background: I'm a stay at home mom, we have a 4 year old and a baby. My hubby's salary is about $53,000 a year and we live in a low cost of living area. I do bring in some extra income by babysitting but it's not tons and it's not consistent. I'm 32 and my hubby is 39. We owe $110k on our house, the interest rate is 3.75% and we have 18 years left. We have in retirement (with Vanguard): Me: about $49k and him $10k. I freak out because I feel like we are so behind with retirement savings!

Here's where I'm confused. We have $73k in savings because when I worked I saved all my paychecks in anticipation of being a stay at home mom. I don't know if we should take some of the money from savings and put it in retirement (our ROTH IRAs) , on the mortgage, or put it in some other type of investment account. It's not making hardly anything from interest in the savings account.

BUT that money includes savings for new cars for us (his car is 14 years old and mine is 11 so we'll have to replace them eventually), our emergency fund, and money for house expenses like new roof, windows, HVAC etc that we will eventually have to replace.

What would you do? I hate to put a lot of money in retirement and then need it, or put it on the mortgage and then not be able to access it. I just feel like that money sitting in savings is not working for us like it could. Maybe I'm just being crazy.

[secondcor521]

It's a hard problem when you have multiple competing goals and you're trying to optimize them! :)

Here's how I would approach your question:  I'd make a list of goals, then I would prioritize them, then I would fund each in turn.

So here are your goals arranged in the order I would arrange them if I were you:

1.  Maintain day-to-day living
2.  Pay off high interest debt
3.  Emergency fund
    a.  house expenses (roof, windows, HVAC)
    b.  car expenses (maintenance, repair, replacements)
4.  Retirement
5.  Kids' college
6.  Mortgage

So can you afford to maintain your day-to-day lifestyle on the $53K+babysitting?  If not, I would start working on fixing that problem ASAP by cutting expenses or raising income and temporarily use some of the $73K to cover the gap.

It doesn't sound like you have any high interest debt, but if you did, I would take whatever from the $73K to pay those off.  If you don't, you're just guaranteeing that you're wasting money (unless you're in a cash flow crisis, see previous paragraph).

Emergency fund should be 3-6 months of expenses.  For you, probably the higher end is needed for several reasons - you're a one-income family with two small kids, and you seem to value security (a trait I share with you).  You could add into this an amount for replacement cars also.

A word about cars and houses - you should economize in these two areas as best you can.  Buy used reliable cars and take care of them.  I personally am of the opinion that paying to maintain and repair an existing vehicle is almost always cheaper than buying a new one.  I'm retired and drive a 1993 sedan worth about $2500 and plan to keep it for another 5-10 years.

Back to the list.

You're welcome to rearrange the list in terms of priority if you want.  The point is, you fund things in order of what is valuable to you with the $73K until it runs out.  When it runs out, you've done the best you can with what you have.  The trap to avoid is to say that everything is important and to then throw money willy-nilly at your goals randomly without any sort of plan.  Prioritize ruthlessly.

What I did is I fully funded my retirement if I had extra cash at this point, knowing that I had my job to cover day-to-day, and I had an emergency fund cushion I felt comfortable with.

Kids' college is a pretty personal choice, and whether that comes before or after paying down your mortgage is up to you.  Other than kids' college, I'd leave the mortgage until last because you've got a ways to go and have a reasonably low rate.

Try not to freak out about retirement savings just yet.  You two have a decent amount saved for your age and should feel proud of that.  Keep working hard, making good choices that align with your values, and you'll get there.

Good luck!

[moneymama]

Thank you so much for your advice! We are debt free and able to live on my husband's salary.  I think I go over our priorities and will end up taking some money and put it in our IRAs.  Great advice, thank you for taking the time to reply!

[TomTX]

Thank you so much for your advice! We are debt free and able to live on my husband's salary.  I think I go over our priorities and will end up taking some money and put it in our IRAs.  Great advice, thank you for taking the time to reply!

Thinking about your expectation on car replacement - you don't have to buy new.

When I replaced my trusty 1995 Saturn this year, my "new" car was a luxurious 2009 Ford Crown Victoria with 147,000 state-maintained miles on it. Plush ride, cold AC. Full size spare tire and kevlar trunk box to hold it included. Windshield cracked on the passenger side, various small dings and plugs where lights and such were mounted. Okay, and a distinctive black & white color scheme.

$2,200, and I expect to get at least 10 years out of it. Nice thing is that the fuel filter is WAY easier to access than on the Saturn. :)

[Radagast]

Thank you so much for your advice! We are debt free and able to live on my husband's salary.  I think I go over our priorities and will end up taking some money and put it in our IRAs.  Great advice, thank you for taking the time to reply!

Thinking about your expectation on car replacement - you don't have to buy new.

When I replaced my trusty 1995 Saturn this year, my "new" car was a luxurious 2009 Ford Crown Victoria with 147,000 state-maintained miles on it. Plush ride, cold AC. Full size spare tire and kevlar trunk box to hold it included. Windshield cracked on the passenger side, various small dings and plugs where lights and such were mounted. Okay, and a distinctive black & white color scheme.

$2,200, and I expect to get at least 10 years out of it. Nice thing is that the fuel filter is WAY easier to access than on the Saturn. :)

Sounds like it needs a luggage rack on top.

[mxt0133]

Are you able to save anything at the end of the month from your husband's income?  I ask because if you can then I would recommend he contribute to his 401k if he gets a match, as much as you put in.  Keep some of your cash liquid as and emergency fun and put the rest in CDs that earn slightly more than in a savings account.  If you need the money the only penalty is the accrued interest. 

Normally I would recommend putting some of your cash savings into Roth IRAs for you and your husband since you are in the 15% tax bracket but your effective tax rate is close to 1.3% which is like $700.  But I don't know how comfortable you are with your money potentially decreasing in value, although you already have 50k with Vanguard.  Also you seem to have a lot of expenses coming up.  However, I would look at your past years expenses and estimate from there.

+1 on the recommendation of keeping your 14 and 11 year old cars.  Even if you spend another 1-2k in maintenance to make them last another 2-3 years it will be cheaper than getting newer cars that will require maintenance anyway.

Personally I think you should put more emphasis on saving for retirement. However, if your family of four can continue to live on $53K a year, assuming you go back to work when the kids get older and your husbands keeps until full retirement age or beyond.  Social security should replace the majority of your income.  But you never know if you can continue to work until full retirement age.

[TomTX]

Thank you so much for your advice! We are debt free and able to live on my husband's salary.  I think I go over our priorities and will end up taking some money and put it in our IRAs.  Great advice, thank you for taking the time to reply!

Thinking about your expectation on car replacement - you don't have to buy new.

When I replaced my trusty 1995 Saturn this year, my "new" car was a luxurious 2009 Ford Crown Victoria with 147,000 state-maintained miles on it. Plush ride, cold AC. Full size spare tire and kevlar trunk box to hold it included. Windshield cracked on the passenger side, various small dings and plugs where lights and such were mounted. Okay, and a distinctive black & white color scheme.

$2,200, and I expect to get at least 10 years out of it. Nice thing is that the fuel filter is WAY easier to access than on the Saturn. :)

Sounds like it needs a luggage rack on top.

Unfortunately the holes are not appropriate for a luggage rack. They came with plugs. I pulled the plugs, sanded and primed the bare steel where it was cut to make the hole (slight rust at the cuts) then after the paint cured, I shot some expanding foam inside the holes and replugged. A tiny amount of foam came out of one hole, so everything should be REALLY well sealed now, and a moderately better insulated roof... I then painted the plugs.

I have a rooftop luggage bag from a long-gone vehicle. I think it came with the doorframe anchors, so I may try to use that if we ever need the space.

However, we did a weeklong road trip with luxury camping* and it all fit inside the cabin and trunk.

*LUXURY. We brought a stove, folding chairs for all 3 of us, walking sticks, folding table, lanterns, large outdoor lounging mat, didn't even use half the clothes we brought.... Very indulgent.