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Ask Dave

Park the Cash

Kaitlyn just found out her husband's startup is being acquired, and they expect to get about $250,000. They'd like to pay cash for a house, so should they park this money or put it toward retirement?

QUESTION: Kaitlyn in San Francisco just found out her husband’s startup is being acquired, and they expect to get about $250,000 from that. They’re from Minnesota and would like to move back there within the next three years or so. They’d like to pay cash for a house, so should they park this money to buy a house there or put it toward retirement?

ANSWER: What we would do with this money is finish your emergency fund of three to six months of expenses, and we would move on to Baby Step 4, which is start saving 15% of your household income into retirement. If you’re doing that, you’re going to be just fine. Then I would set this money aside, as you said, and just park it in a money market account and don’t touch it for anything—for any reason—live out of your $120,000 salary, and then when you move to Minnesota, buy a house for cash for $250,000.

I think if you start saving $15,000–20,000 a year when you’re in your 30s, you’re going to be just fine. Plus, let’s fast-forward a little bit. When you get to Baby Step 7, which is a paid-for house, no debt and the full emergency fund is in place, there’s nothing left to do but invest and give. What you do at that point is you load up every bit of retirement. By now, you’re in Minnesota with a paid-for house, you don’t have any house payment, and you’re making whatever you guys are making when you move there. Then you start saving more than 15% because you’ll max out your 401(k)s, Roth IRAs, and you’ll just start investing. Whatever little bit you’re behind, you’ll be catching up big-time starting about four or five years from now. When you’re 35, you’re going to be really chunking it away because you’ll have no house payment.

It’s good that you’re nervous enough to think about it. Most people are just kind of watching TV and they don’t even know that they’re going to retire, and then they wake up and go, “Oh, crap.” At least you’re thinking about it. That’s the big thing here, but I don’t think you have to worry. I would go to 15% of your income into retirement, a fully funded emergency fund, park the $250,000, then when you buy the house for $250,000 in Minnesota later, jack up all of your retirement and all your investing.