Author Topic: Prioritizing my money - maxing 401k vs saving DP  (Read 1952 times)

monkeytree

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Prioritizing my money - maxing 401k vs saving DP
« on: July 08, 2016, 11:11:05 AM »
So I've been reading a few similar posts of people asking how they should be spending extra money, and it seems like the standard answer is to max out all your tax-deferred accounts first, then pay down debt depending on the interest rates. I realize everyone's situations are different, but I'd like to get your opinions on whether this would make sense for us.

We are about 1 year away from paying off a $19k (as of now) student loan at 5.2%. Not maxing out our 401k yet, but I am doing the company match and contributing about $13k/year - I have about $70k in there now. Our plan had been to pay off the student loan (our last debt, woohoo!) then just save all the extra money in a regular savings account (which will be about $20-30k/year) for our down payment to buy a house in a few years.

However, some of the posts have me thinking, should I be maxing out the retirement account first, then saving the rest for the DP? This will delay our house-buying for probably another 2 years or so, which seems too long, especially with a 6-year old and baby on the way. Also is a savings account the best place to save for 2-3 years? I tried looking at other options but it just seems like a hassle when we would be needing to use the money relatively quickly.


chemistk

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Re: Prioritizing my money - maxing 401k vs saving DP
« Reply #1 on: July 08, 2016, 01:02:57 PM »
You have to look at what is more important to you.

On paper, the clear answer is to max out all tax advantaged accounts (after shedding debt) and then focus on other priorities. Life is flexible like that and you'll still have a roof over your head while you take the extra time to save the money required.

Or, would you find yourself happier in a house earlier rather than later (even if it means delaying whatever form of retirement you're seeking)? Nobody can answer that but you.

For perspective, my wife and I are saving towards a house right now (and consequently our other accounts aren't being maxed out). The reason? We're the types of people who find it important to have roots in one area - and we're planning on timing our purchase just before our son starts going to school. The area we intend to move to has few rental options right now and consequently it's cheaper to buy.

Keep in mind that you may find your goals change in a year or two and delaying the purchase will further you down your new path.

Lagom

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Re: Prioritizing my money - maxing 401k vs saving DP
« Reply #2 on: July 08, 2016, 01:16:56 PM »
My wife and I are also prioritizing a house over optimal savings (finishing off some loans in the next year or two and then save save save!). The way I personally see it is that the value of owning my own home in an area I love and will never leave >> having the maximum possible retirement balance. Yes, I could maximize savings and buy the home later, but for us those years lost are worth more than the $ we would gain. It's not just the satisfaction of owning a home, but also of slowly tinkering with it to make it truly yours, of establishing memories that are reinforced daily rather than dimmed by a future move (we're perfectly happy to never move), of truly becoming a part of a community, of having a place our children and grandchildren can return to time and again, of knowing that come hell or hyperinflation, we'll have a solid roof over our heads. And so forth.

Many of the math > all folks seem to think the above reasoning is befuddling, but I personally don't find enough satisfaction in watching my account balances go up to prioritize that over all else. I recently started a (controversial, but interesting) thread about getting a tattoo. Other things like artwork, vacations, etc., were (fairly, imo) brought up as comparable expenses. So far I've seen no compelling argument as to why any of those things are any different than buying a house when it's the sub-optimal play. Ultimately, I would argue that whatever provides the largest amount of sustainable happiness with the least negative impact on others will always be the most mustachian choice.

Besides, I don't anticipate FIRE being delayed by more than a couple years at most if we take this approach, and that is a trade-off we are more than willing to make. 
« Last Edit: July 08, 2016, 01:35:31 PM by Lagom »

therethere

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Re: Prioritizing my money - maxing 401k vs saving DP
« Reply #3 on: July 08, 2016, 01:25:42 PM »
I max out my retirement accounts but have no immediate plans to buy. Mainly because the market is too expensive here but I know we will buy somewhere someday. The compromise I have is that I could pull my Roth IRA contributions for a downpayment if desired. You have limited chance to put it in money but you can remove contributions whenever. In my mind, even though it would be the sin of pulling from a "retirement" account (big PF no-no). If I was saving for a downpayment specifically I wouldn't be putting money into the Roth IRA and the balance would be zero. If I don't end up needing to pull from it to buy in the future then my money stays in a tax-advantaged account for longer. Win-win. If you're worried about losses you could put it in the money market fund within the Roth IRA.

tonysemail

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Re: Prioritizing my money - maxing 401k vs saving DP
« Reply #4 on: July 08, 2016, 03:07:22 PM »
yes, you should max out your 401k
it would suck to pay 18% taxes and then earn 1% interest in a savings account.
remember - you're buying your freedom.
every bit as priceless as those cherished memories in a house you own..

Sibley

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Re: Prioritizing my money - maxing 401k vs saving DP
« Reply #5 on: July 09, 2016, 07:06:50 PM »
As hard as it is for some on this forum to understand, sometimes we make decisions that are not financially optimized. Sometimes decisions are made to accommodate family or life, and we do the best we can with the finances. And sometimes that's actually the right decision.

I'm doing that. I'm planning on buying a house next year. Yes, the math says I should wait a few years. Real life says things can't wait that long. This is why I have a car loan and a student loan still and my 401k isn't quite maxed out. Because real life is saying that I'm going to NEED that house soon, so make it work, somehow. So I am, and I'll catch up on the rest of it. I'm planning on buying in an area which is significantly less expensive and has lower taxes, which will help. And I'll cut corners where I can. But I'm buying next year.