How to Invest in Your 20s - Rainy Day Fund, 401ks & Roth IRAs

TL;DR

A young couple in their mid-20s is struggling to balance savings and investing goals due to multiple financial priorities.

Transcript

Alison Southwick: The next question comes from Morrell? Morel? I'm not quite sure how to pronounce it. Robert Brokamp: One of those. Southwick: I'll pronounce it many ways. "My wife and I are 26 and 28 respectively. I just started a new job with what I feel is great pay and I'm trying to start good savings and investing habits. I'm getting aggravat... Read More

Key Insights

• 🧑‍🤝‍🧑 Three months of must-pay expenses is a reasonable emergency fund for a young couple without a mortgage or kids.
• 😨 Consider buying a reliable used car rather than aiming for an expensive new car.
• 👪 Putting down less than 20% for the first home purchase is an option, and PMI can be eliminated once enough equity has been built.
• 👪 Prioritize financial goals and consider alternatives, such as renting, if necessary.
• 🚕 Using a Roth IRA as an emergency fund can be a tax-efficient strategy.
• ⚾ Focus on saving for immediate goals and adjust expectations based on current finances.
• 👨‍🏫 Be patient in the housing market and consider factors like commute and school districts before buying a house.

Questions & Answers

Q: How much should the couple save for an emergency fund?

Instead of three-to-six months of income, experts suggest aiming for three months of must-pay expenses since they don't have a mortgage or kids yet. The $10,000 they have saved is likely sufficient.

Q: What options do they have for a car down payment?

They can lower their sights and consider buying a good used car instead of aiming for a $45,000 car. With $4,500, they can find a reliable used car that suits their needs.

Q: Should they prioritize buying a house?

Homeownership is not necessary, especially if they have uncertainties about their job and future family plans. Renting can be a more flexible option, particularly if house prices are high in their area.

Q: How can they invest while saving?

Experts recommend contributing more to a Roth IRA since the money grows tax-free and can be withdrawn without penalties if needed. They can consider transferring some of their $10,000 savings to a Roth IRA.

Summary & Key Takeaways

• The couple has multiple financial goals, including building an emergency fund, saving for a down payment on a car, saving for a down payment on a house to avoid PMI, and saving for future baby expenses.

• They feel overwhelmed by the amount of savings required to meet their basic goals and are unsure how to invest while saving.

• Financial experts suggest reevaluating the size of the emergency fund, considering a lower-priced car, putting down less than 20% for the first home, and prioritizing financial goals.