Extra Savings

Q: My wife and I just purchased a house for $129,000 at 6.375%. We currently plan to pay $2,000 per month, and expect to have the house paid off in a bit over 7 years. At the same time, we can possibly save $1,000 per month. We currently have $20,000 in savings that we do not want to touch, for emergencies. What is your best advice to get the most out of our emergency savings (I am guessing a savings account is not the best answer), and the $12,000 a year we can save?
- JD, Moore, OK

A: Wow, you guys are really doing great! And, let me guess...you have a budget and stick to it! All good things come from a well thought-out budget. I hope everyone will read your e-mail and see how great life can be with a reasonable mortgage and no additional debt! It gives you lots of options.

Okay, let's talk about your extra $1,000 per month. First, make sure you are both taking advantage of any matching contributions through retirement plans at work. Next up, if you are eligible, max-out Roth IRA contributions for both of you (a total of $8,000 or $10,000 if you both are age 50 or older). Consider using a balanced mutual fund (a fund with a mix of stocks, bonds, and cash) as the investment within the Roth. A salaried financial advisor will be able to help you pick the right mutual fund. If there is still money left over after these steps, I suggest either contributing more to your employer-provided retirement plans (few things work as well as tax-deferred compounding to grow your wealth!) or setting up a systematic investment into a non-IRA mutual fund account owned jointly by you and your wife. A so-called taxable account gives you the option of using the money for other purposes prior to your retirement years.

Regarding your $20,000 in savings, you're right, the average savings account is likely the wrong place to stash your cash. There are, however, high yield savings accounts available. What you want is your money to work as hard for you as you did to earn it. So ensure you're getting a good interest rate either in a savings or money market account. Currently, a fair rate of interest is about 4.8%. Keep up the good work!

The preceding discussion is not tax, legal or estate planning advice and is specific to JD's situation only. Consult with your tax, legal or estate planning professional regarding your specific situation.