September 10, 2007

Balancing Act

My wife and I are trying to find the balance between long term investing (retirement) and short term savings (emergency fund, house, etc.).

I tend to focus too much on investing for retirement, and am eager to put all of our spare money into either our Roth IRA’s or 401(k). The power of compounding is amazing and time is the most important element. The more money we can invest now, the better off we should be later. This simple table demonstrates that a person who invests early and for just eight years will have more money at 65 years old than will someone who starts late and invests for nearly 40 years.

My wife, on the other hand, reminds me that we can't keep all of our money tied up in retirement accounts. We want to buy a house in a few years and need to save for a down payment. We also need to have cash on hand for unexpected emergencies. We had a real world example of why this is important when my wife was recently laid off. The value of an emergency fund, even the smallish amount we had in our savings at the time (~$3,000), provided a great deal of peace of mind. Thankfully, my wife found a new job within a week, and we did not have to dip into our savings.

Like most things in life, we have to find a balance. Currently, our retirement investments represent 78.30% of our total liquid assets. We’ve agreed to work on increasing our savings, but not at the expense of fully funding our Roth IRA’s. In fact, we have already added another $1,300 to our savings this month, while simultaneously investing another $200 in my wife’s Roth IRA.


Louise said...

I think you make some really good points here, trying to weigh up the best option is not easy at all.
working out how much to put away for retirement so that you get the effects of compounding effects is tricky,
when i was younger i had put money away for retirement which I later withdrew to help purchase our first home. I wish that I could have left it there, but without it we would not have made the gains we have in real estate value. it is a tricky decision

1MansMoney said...

Yes, it's a very tricky decision, and when I add in paying down debt, it makes it an even tougher balancing act for us.