Ask Money

A frugal strategy

Chris Farrell Jun 1, 2011

Question: My husband and I are in our 30s and we have a young son. My husband worked as a high school science teacher and I’m a museum curator. We didn’t make a lot of money so my husband has gone back to get his graduate degree. We have sold our house and moved closer to our family for support. We have no credit card debt and paid off our car. We do have $25,000 left on our student loans from my graduate degree and my husband’s undergraduate work. I took a major pay cut when we moved but we are very frugal and cover all of our expenses. I am still able to put away 10% for savings. This next year we are setting up a 529 account for my son and encouraging family members to contribute instead of lavish gifts. My question is should I put any extra money above my 10% towards a down payment for another home or put it towards my retirement fund? Gwen, Fargo, ND

Answer: One reason I’m posting your question is that we can all learn from your example. I really admire the creative way you and your husband have managed to minimize the cost of getting his graduate degree. It takes work, but embracing strategies that keep expenses down is a financially better approach than going all in and borrowing as much as possible.

I’m assuming the 10% you’re putting aside into savings is either emergency money or a combination of emergency funds and retirement money. What should you do with anything above that? Now, this is one of those questions where you can’t go wrong putting any additional sums toward a down payment for a home or into retirement savings.

My vote is to put the bulk of any extra savings into retirement for the simple reason that time is incredibly valuable when it comes to setting aside money for retirement. The longer your diversified retirement portfolio has to compound, the better. I would put the rest into safe savings.

However, you could reverse the ratio if owning a home is really important to you and your family. In that case, put most of the money into a parking place for cash. You won’t make much money on your savings, but that isn’t the point. The money will be there when your husband graduates and gets a higher paying job. I would then invest the remaining money into retirement savings.

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