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Ask Money

More on savings, part 2

Chris Farrell Jul 29, 2010

Question: Hello Chris: I just finished your new book and I’m delighted with your simple approach. Money management advice that I can understand! I am still in a quandary about where to put some savings my husband and I are accumulating. We’re able to save $1,000 a month and we’ve been putting it in a plain old savings account. Our only debt is a fixed rate mortgage. We have 2 older cars, thinking we’ll be buying in the next year or so. We have retirement funds added to each month with TIAA-CREF and a CD with our credit union. Our son is 3 years away from college, when he’ll use his Indiana 529 savings. From your book, I gathered that accumulating an income cushion is very important, but so is paying off a mortgage, and so is adding to the retirement money. Any insight? Thank you for your practical advice! Susan, Indiana

Answer: Thank you for reading my book. I’m honored. And I’m glad you like the mantra of simplicity.

All the things you want to do with the money are good, from paying down the mortgage to adding to retirement savings. But I’m going to lean toward hiking your cash cushion, despite today’s low interest rates. (Speaking of low rates, a friend of mine recently got a solicitation from a major bank to open up a “high-yielding” savings account–at 1.2%!)

Yesterday, in answering a similar question, I emphasized the importance of risk. I recommended that getting rid of their 401(k) loan would best bolster their finances.

With your finances, my emphasis is the other side of the savings coin: A healthy cash cushion gives you future freedom of choice.

The money can be used to help pay for a future known expense like new cars without taking on debt. But it also allows for you to embrace all kinds of transitions over time, from voluntarily downsizing to part-time work to getting the skills you need to start a long-dreamed of business. From a purely investment point of view parking money in savings accounts, bank CDs, and Treasury bills seems like a no-growth no-return strategy. But the eventual return-on-savings may be huge since the cash represents an opportunity fund to pursue dreams and passions, the wherewithal for reasonable risk-taking and adventure, while, at the same time, a way to stay out of debt when expected big expenses come along, as well when the unexpected setback happens.

By the way, after you’ve built up savings some more you may decide that the best use of the money is accelerating those mortgage payments and retiring that debt as fast as possible. And even tough the money isn’t in a tax sheltered retirement savings plan it can be used to help fund you retirement lifestyle.

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