‘We consider ourselves fairly good with money but have little knowledge of investing’: We want to buy a home soon and my wife plans to take a career break. How do we wisely invest our savings?

Hi Money Minder,

Hey Money Minder!

So, here’s the deal. I’m 32 and my wife is 34. We’re trying to figure out the best way to handle our savings and get started with investing. We’re pretty decent with money, but investing is a whole new ball game for us, and we think we could do way better. Here’s our current setup:

My paycheck: Around $4700/month after taxes, with $410/month going into my 401k.

Wife’s paycheck: Also around $4700/month after taxes. She puts $200/month into her retirement account through her county job. Plus, she makes an extra $600/month from tutoring.

We spend about $5900/month on everything – rent, insurance, credit card bills, you name it.

$220k is stashed in a 6-month Treasury bill – earning 5.36% interest $135k is chilling in a HYSA – getting 4.25% interest $10k just hanging out in our checking accounts

Quick note: Yeah, we know, that’s a lot to have in savings, but we’re looking to buy a house in the next year or two.

Here’s a bit more context: My wife’s pretty burned out from teaching, and we’re planning to try for a baby this summer. She’s thinking about taking a year or two off from teaching to focus on tutoring and potentially exploring other kid-related professions. My plan is to put a big down payment on a house to keep our mortgage low so we can manage on just my income while she takes care of the baby and does some tutoring on the side. I get that this will mean using a big chunk of our savings, leaving less for investing.

Now, I need your take on our plan:

Put $250k down payment for the house (we’re in a high-cost area) and keep it in the treasury bill/HYSA until we’re ready to buy
Hold $60k as an emergency fund
Invest the remaining ~$70k into low-cost index funds – thinking VTSAX and VBMFX as options

I’m still learning about different investment accounts and making the most of those tax-advantage perks, so I know this is a pretty basic plan. Does this seem like a wise move, or could it land us in trouble? Any insights would be super appreciated while we figure this all out.

Thanks!

Trying to Figure It Out

Response from THE MONEY MINDER:

Hello There,

Hi there,

First off, I want to acknowledge that you’re taking a very responsible and proactive approach to managing your finances, especially considering your desire to purchase a home and start a family soon. It’s commendable that both you and your wife have put a structured plan in place to ensure financial stability.

Given your current situation, your overarching strategy seems quite sound. Holding a significant portion of your savings in high-yield, low-risk accounts until you purchase a home is a prudent move, particularly since you mentioned the volatility of the real estate market in your high-cost-of-living area.

Your plan to allocate $250k for a down payment not only reduces the monthly mortgage burden but also aligns with your goal of potentially managing on a single income stream should your wife decide to take a break from teaching. This is a very practical step given the pivotal life changes on your horizon.

Keeping $60k as an emergency fund is also an excellent idea. This amount provides a solid cushion for any unforeseen expenses, especially with the added responsibilities that come with homeownership and raising a child. It’s always wise to have liquidity available for emergencies.

Regarding the $70k you plan to invest in low-cost index funds like VTSAX (Total Stock Market Index Fund) and VBMFX (Total Bond Market Index Fund), this is a balanced and diversified approach. It’s encouraging to see you look towards low-cost index funds, which historically have provided better returns over time compared to actively managed funds with higher fees.

One thing to consider is the use of tax-advantaged accounts for these investments. Since both you and your wife have some contributions to retirement accounts through your employers, exploring options like IRAs or Roth IRAs might provide additional tax benefits and compounding growth over time. It might be worthwhile to gradually increase these retirement contributions if your budget allows, especially since long-term retirement planning is critical.

Given that you are still learning about the nuances of different investment accounts and tax benefits, consulting with a financial advisor could be invaluable. They can offer personalized advice tailored to your specific situation, helping you navigate the complexities of investment strategies effectively.

In summary, your plan is well-thought-out and reasonable given your current goals and financial position. Transitioning to a single income temporarily, while your wife pursues her passion for tutoring, seems feasible with your strategy. Your dedication to prudent financial planning will undoubtedly pay off.

Best of luck on your financial journey and future home purchase!

Warm regards,

THE MONEY MINDER