Monday, January 30, 2006

Financial Priorities

JLP from AllThingsFinancial got me thinking today about my financial priorities. The problem is, I was not sure exactly what they were. I hadn't really thought about them.

Before this year, I was pretty much in the mode of not paying too much attention to my finances. My wife and I have always put money into our 401(k) and ESPP, but it was basically the minimums, just to get the employer match. We also had bought a house already. Beyond that, we just spent on whatever we wanted pretty much. We are both currently employed and making good money, so we never really worried about it.

Last year, we sold our first house and built a new house. Since our new mortgage is a lot more than our old mortgage was, we had to start worrying a little more about our financial situation. I will admit that I did enjoy living mostly for the here and now...I did get a nice 54-inch TV out of the deal, but it has actually been fun looking into my finances more in depth. I enjoy looking at my investments and figuring out how to have more for retirement. The problem is, it is still hard for us to think that this money we are socking away is for us to use 30 years from now. My wife is always asking me exactly what our plan is for all this money we are putting away, and my answer is usually that I don't know. I know that we need to save for retirement and that is all. Many people talk about their short/medium/long term savings goals and how you use different savings vehicles for the different time-frames, but I think that we currently only have long-term goals...retirement. For example, we are already on our second house, we don't have kids yet, so we have no savings goals there, we don't need expensive/fancy I missing anything else?

So I guess our financial priorities right now are as follows:
  1. Taxes
    This has recently become an immediate goal. When we bought our house, they estimated that our taxes would be around $8000. Now we are hearing rumors that it will be closer to $11000 next year. That is going to hurt our cash reserves quite a bit. We are currently only paying ~$100 a month to our escrow account because it is still assessed with just the land, no house. This will go up to almost $1000 a month at some point, but first they will probably need us to immediately make-up the difference in our escrow. Which will be around $9000. So, this has become priority number 1 around here.

  2. Emergency fund
    We have saved about 3 months of expenses, but that could stand to be a little more. The problem is that I don't love the idea of that much money sitting in an account earning just 4%.

  3. Invest for retirement
    We are both currently putting 10% into our 401(k), I would like to see that be a little higher. We are also each putting 5% into our ESPP, but I am not sure if that is worth it. I have to get some more opinions about that (only 5% discount now, down from 15%). We are also saving some money each month that is being put into our Vanguard account in index funds.

  4. Save for kids
    We are planning to have kids someday in the future and from what I hear they require small amount of money. I am not sure where this money would be held exactly, maybe as part of our emergency fund.

  5. Save for new car
    I drive a Civic and my wife has a Corolla, so in theory at least, we can drive these forever. I am betting at some point though, at least one of us will need a new car. Even if it isn't an expensive new car, we will need some cash for that.

  6. Miscellaneous house expenses
    Anyone that owns a house knows what I am talking about on this one. Things can go wrong and get expensive very quickly when you own a house. I have a new home, but I still have to spend some money getting a new lawn to grow and getting a retaining wall put up in the front of my house. Those are just the expenses that I know about.
Those are our current financial priorities. These are subject to change at any time, depending on what is currently going on in our life and depending on what breaks. Anything that I am missing?


Blogger JLP said...

Thanks for the mention. It pleases me to know that I actually got someone to thinking about something.

$11,000 per year in taxes? Holy cow! And I thought $3,500 per year was bad. Personally, I think you are getting screwed.

About your priorities: Just thinking about them will help. Most people don't even do that much. When it comes to retirement, you have time on your side. So, although it may seem like a long ways off, thinking about it now can really pay off. Think about what you would LIKE to do during retirement. Be a teacher? Volunteer somewhere? Start a company? Travel around the world? Become a missionary? Start a second career?

With a goal to work for, your retirement savings will make more sense.

For your emergency fund, perhaps you could put 3 months in a liquid form and another 3 months in Vanguard's Index fund. That way, if something happened, you could access the first 3 month's money and withdraw from your Vanguard account when needed. It's just an idea. I'm sure lots of people would have a problem with that.

That's all for now. I see that this is getting to be a very long comment.



1/31/2006 5:04 PM  
Blogger RS said...

We are definitely getting screwed on taxes...that's the Northeast for you.

If I thought about my emergency fund that way...with 3 months MM and the rest in Vanguard, then I am set already. I already have 2 Vanguard index funds with about another 7 months worth in them. That is something that I often wonder, do I need my emergency fund to be totally liquid, sitting in a MM account? Or is it ok to have it in index funds?

2/01/2006 10:30 AM  
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