In light of Shane’s new job, we’re evaluating our current savings goals and what we’d like to change.
So we can hit certain goals faster, we’re going to take a “savings snowball” approach (sometimes called a savings bucket).
Quite similar to a debt snowball, we’re just going to focus on one primary savings goal at a time for the bulk of our savings, with smaller regular contributions to other goals.
Once we hit a goal, we’ll move our savings snowball to the next goal and so on.
Shane’s new paycheck will be different. He’ll get a base salary, but he’ll also get a bonus flat dollar amount for every billable hour he works during the week. Some weeks he’ll have fewer hours and others he’ll have more — it’s the nature of the gig. The base salary will cover our expenses and the bonus can be used to throw at our savings goals.
That’s another reason why I want to primarily focus on one goal at a time — some paychecks will be smaller and if I do a high flat dollar amount per goal, I could be stretching it too thin at times.
:: Goal #1: Refinance our mortgage. Rates are way low. We can get a 15-year for 2.875% today with closing costs under $400, if not even lower. That is crazy! I’ve submitted our docs and we’re waiting for paystubs from Shane’s new job so the lender to move forward.
:: Goal #2: Bring emergency fund to 9+ months of expenses. Our e-fund’s purpose is to cover expenses in the event of a job loss, or to cover a car or house insurance deductible. We could also tap it for unexpected car or home repairs but I want to have separate car and house savings accounts going because it’s only a matter of time before SOMETHING breaks.
Our current emergency fund would cover about 6 months of expenses — but I left out one important cost: health insurance. If Shane left his new job, he wouldn’t be eligible for COBRA (it’s a small company) so we’d immediately need private insurance, or for him to start at a job that had a group policy. I’d also need to bump our e-fund to cover the cost of our new mortgage payment.
We hope Shane’s job works out for a long time, but we feel like a larger emergency fund is better than a smaller one.
We’ll focus on getting this goal finished before we concentrate our efforts on our next goal.
:: Goal #3: Hit the 529s hard. We have until the end of December to make contributions for the year. Indiana has that super-sweet tax credit of 20% off our state income tax, so throw in $100, get $20 off your state taxes. Woo! We want to get a nice tax benefit and we also want to catch up a little since we haven’t been contributing a whole lot yet.
:: Goal #4: Load up our IRAs. We’re already contributing some money with every paycheck and we’ll keep it at that same level for dollar-cost averaging’s sake. But we won’t add more until the first 3 things have happened. We have until April 2013 to make IRA contributions for 2012 so it buys us an extra few months. We can withdraw our Roth IRA contributions penalty-free in future years should something catastrophic happened and we’ve exhausted our liquid savings.
I view the Roth IRA as tax-advantaged savings for retirement and a bonus e-fund that I hope I never need, but will be glad it’s there.
That’s it for now. Once we get those things going, we’ll create a priority list of savings goals for other areas and we’ll tackle that.