Question: We are in our 30's with three kids ages 7 and under. We live simply and have been able to get by on our income around $24,000 per year, plus our tax return which is usually several thousand. Though this seems like pennies compared to what others mention saving and investing, we have over the last 7 or so years managed to save over $10,000. We now find ourselves in a situation where we don't need to buy a house (which is what we originally thought we were saving for) but feel like that $10,000 should be put to use for us somehow. We like the idea of starting 529 plans for the kids' college funds. But we have nothing in the form of potential retirement. Should we invest it in some other way? Or, should we just keep it in our savings account, which is what we have done in the past. Often we have had to dip into several thousand a year between car trouble, and slim employment income. Kari, Eau Claire, WI
Answer: You're terrific savers. Congratulations. I understand your desire to set money aside for your children's college education. But I wouldn't if I were you. Several years ago I interviewed the head of admissions at the University of California, Berkeley. He made several points that have stuck with me. When you have a slim employment income and have to worry about keeping the car running you shouldn't set money aside for college. Instead, focus on making sure that your kids get a good education, one that prepares them for college. But with your income and three kids there will be plenty of money available from the federal government, state government and colleges to help defray the cost of college.
I'd rather you continued to save for a rainy day and for your retirement. You can accomplish both with a Roth IRA. I've written a lot about the Roth on this blog. In essence, a Roth is a retirement savings plan funded with after-tax dollars. When you withdraw the money during retirement it's free of taxes. That's right, Uncle Sam doesn't tax Roth savings. Here's the thing: You can take out your contributions at any time without paying a penalty or taxes. You just can't withdraw any gains (you would pay a penalty and income tax on the gain if you take it out early).
So, a Roth is both a pot of emergency savings and a retirement savings plan. This is a nice article from Kiplinger's that goes into more detail about a Roth.