MONEY-SMART KIDS


Saving Matters

Janet Bodnar

How can you get a spouse excited about saving? Where should you stash emergency cash? And when is it okay to tap your reserve?



I have a stubborn spouse who says that saving is great, but is not getting the point that saving early pays later. How can I get through?

A few weeks ago, several twenty- and thirty-something staff members here at Kiplinger were sitting at the lunch table talking about what they wished they had learned earlier about money. Tops on the list: The magic of compounding, or how fast money can grow when you start saving early. That lesson might have a big impact on your spouse, too. For an illustration, see the letter below.

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Worth the sacrifice

My mother and I are having a disagreement. I'm about to start a graduate program for which I'm taking out loans, and I'll be a poor starving student for the next couple of years. But she thinks I should still add a couple of thousand dollars to my Roth IRA. I told her I don't have that kind of money. What do you think?

Listen to your mother. Let's say you kick in an extra $2,000 to your IRA. If you earn an average of 10% per year -- the historical return for the stock market -- that $2,000 would grow into more than $107,000 by the time you're ready to retire. (Try our How much will my savings be worth? calculator.) That's a nice piece of change. Plus, stocks are a bargain right now, so it's a great time to invest.

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And if you're really desperate for cash, you can always withdraw your Roth IRA contributions without penalty.

Still think you don't have that kind of money? Perhaps Mom (or some other generous relative) could come up with the cash.


Handling your emergency fund

I have been working for almost two years, and I've built a good-size emergency fund in a savings account with an online bank. Is there someplace better to put my money? Also, I need money for an engagement ring and a down payment on a house, which would tap out my emergency fund. Should I do this?

Keeping your money in an online savings account is just fine. With an emergency fund, you're looking for safety and accessibility, and you're probably earning a competitive return on your money.

As for using the money, the whole point of an emergency fund is to have cash when you need it -- the car dies, your computer crashes, you have an unexpected medical bill. Tapping out your account on an engagement ring or a down payment defeats the purpose.

I'd keep a minimum amount of cash -- three to six months' worth of living expenses is often recommended, but even $1,000 would be fine. If your "good-size" account is more than that, you'll have to set some priorities.

If you want to splurge on a ring (which I don't recommend), the down payment may have to wait. If you want to buy a house, your fiancée may have to settle for a smaller gem, or none at all.



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