Emergency Fund, 401(k), Down Payment: Saving Too Much or Not Enough?

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One listener writes in, “I have my HYSA, my 401(k) plus employer match, a Roth IRA, and now am saving for a down payment. I’m worried I’m lopsided and over-saved for retirement.” But is she actually saving too much? Hear Katie’s hot take. (Reminder: We are not licensed financial professionals, and this is not financial advice. Please do your own due diligence.)

Rich Girl Roundup is Money with Katie’s weekly segment where Katie and her Executive Producer Henah answer your burning money questions. Each month, we’ll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• The Money with Katie Show episode on money dysmorphia

• Nick Maggiulli’s article on “Go Big Then Stop”

• The Money with Katie Show episode on the perfect save rate

• The Money with Katie Show episode on saving too much for retirement

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Katie:

Welcome back Rich Girls and Boys to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I’m Katie Gatti Tassin and on Monday mornings my executive producer Henah and I use this segment to talk through listener questions, interesting money stories in the news, and more casual financial topics…right after a quick break.

Before we get into it, this week’s upcoming main episode is about the top three numbers or stats that I think you should know about your finances in order to build wealth. So we’ll compare similar episodes that we’ve heard before with what I believe the kind of best numbers or biggest bang for your buck numbers to track are, plus a couple honorable mentions to keep in mind. My friend Brad Barrett of Choose FI is going to be joining to co-host this one, so that should be fun. Okay, Henah, what are we talking about today?

Henah:

This week’s question came from your name twin, whose name is also Katie. They wrote, “I can’t escape the feeling that I have overinvested in retirement at the expense of near term goals like buying a home. During the pandemic, I got started by opening a high yield savings account and a Roth IRA. I had already been contributing to my regular retirement account at the max matching value by my employer. Since I became employed, I started putting some money in my high yield savings account and maxing up my Roth IRA. But I didn’t have an individual brokerage account so I just opened one yesterday. Now I’m contributing $0 to my Roth IRA to try and save for a house. It makes me feel like I have Lopsidedly invested for retirement and not my actual life.”

Katie:

Dun dun dun.

Henah:

I think there is that two paths that we can go down one about her particular situation, one about the question more at large. But I did just want to talk about her particular situation to start, which is, first good on you Katie, the other Katie, for matching with your employer match early on. It makes a huge difference because I was reflecting on this morning, my employer didn’t really offer a match and my husband’s did and there was a difference of a hundred thousand dollars by the time that he was 30 and we all know that that compounds and adds up over time. And so he got very lucky and by extension I got very lucky. But even then I feel like you’re already doing something that’s good for you, which is great.

And the other piece of this is that we don’t know how old they are, so it’s not clear where they are lifetime wise on their journey or how many years they have until retirement, but I could understand their feeling of overwhelm because they’re laying their super solid foundation of all of these things and it’s a lot of moving pieces. But I know that you have a hot take and I actually agree with you.

Katie:

Okay, so before I say my hot take…

Henah:

Okay,

Katie:

The question that Katie’s getting at here is definitely a real risk. So I want to be really careful that I don’t downplay the sentiment that she’s expressing because we talk all the time about getting lost in the sauce and losing the plot with your retirement savings and basically sacrificing your present for a future that might never come. And I am conscious that this audience in particular might have an issue with this given the fact that the breakdown in feedback we got from the money dysmorphia episode was like 90% people being like, I don’t know how to spend money.

So I mean I just want to say I acknowledge that this is a very real thing that can happen, but I do want to break down this situation specifically for Katie because I don’t think that that is what’s happening here. My hot take is that I do not think Katie is behind at all and I think if she had told me, oh I just spent 20 years maxing out my 401(k), I saved not a penny for anything else and now I feel like I really oversaved for retirement and not the rest of my life, I’d probably be more inclined to be like, yeah, sounds like you should switch it up.

You mentioned, we don’t know how old she is. That’s correct. But we do know when she started investing because she told us it was during the pandemic, so I’m assuming at the earliest we’re talking about 2020 or later. So at the most she’s like four years in. She said she opened a high yield savings account. So I’ll assume this means her emergency fund is ready to go and that’s obviously definitely something you’d have to do before you start saving for a house. You can’t buy a house without an emergency fund. She mentioned that she’s been contributing to her 401(k) up to her match. So I’m going to assume that’s, I don’t know, somewhere in the ballpark probably of like 4% to 6%. Definitely something that I would basically always recommend doing because that’s a 100% ROI. So again, I would not have changed that at all.

And then finally she mentioned that she contributed the maximum to a Roth IRA. And so we’ll assume that if the emergency fund and the 401(k) matching and what have you started first that maybe she’s been maxing out that Roth IRA for three of these years. So call it around $21K.

Henah:

There’s the Money with Katie deductive reasoning.

Katie:

Again, lemme set up all the pieces that are going to allow me to make the point that I want to make by filling in all the blanks that this person didn’t tell me. So when I hear this breakdown, I think awesome, this is someone who has probably just set themselves up really well to start thinking about their other goals. Not “wow, this is someone who just ****ed up their life forever, XOXO, you’re going to rent for life.”

You would’ve had to do the first two things no matter what because it would’ve been sketchy to buy a house having not done those things. So really what we’re talking about is the difference between having $21,000 in tax-free retirement money, which is super valuable assuming you’re still early in your career or $21K toward a down payment. And considering we’re in the most unaffordable housing market in history, I feel almost a hundred percent certain that you made the right call up until this point by prioritizing those Roth dollars then whatever you would’ve overpaid for with a $20,000 down payment.

So not to gloss over it, but even at this point I probably would not. I’m not a financial advisor. This is not financial advice at this point. I would probably not be like, yeah, totally throw the brakes on the Roth, IRA a hundred percent, fuck the Roth IRA, because those IRA contributions are use it or lose it every year. There is a lifetime limit on what you can put in that Roth IRA by the nature of the fact that there is an annual limit. So once that time passes, it’s not like you can later down the road when you own a home, go back and be like, alright, I’m going to make up for all those years of Roth IRA contributions that I skipped. You can’t do that. So I would still be contributing something. I would probably say, can you split the savings between a house fund and the Roth IRA because I would just really hate for you to lose all that ground that you can’t make up later.

Henah:

I feel attacked because this reminds me that I need my Roth dollars. So good reminder for me.

Yes. And to your point, I think she is building the foundation that all of us maybe later a little bit later on in our journeys usually do. I started all of this when I was 30. I hope that this person listening is in their early twenties and has the value of extra time on their hands. If so, you’re already going to be farther than 90% of people. Katie, you have talked about the importance of starting early and so do you have anything you want to add to that piece of if I only have this much that I can save, what do I do? How do I prioritize?

Katie:

So the episode that’s going to go out on Wednesday is going to go into more depth about how to think about savings rates or rather how I think about savings rates and that difference between long-term and these more midterm savings. But I do think it’s just nice to say explicitly that it doesn’t have to be all or nothing. If you know that overall you can afford to save 10%, then maybe you’re putting 5% toward retirement right now and 5% toward the other thing, especially if you’re feeling stressed that you might be paying too little attention to one.

But on the note of starting early, I think because of compounding it is really, really important to as much as is possible for you given your circumstances and what you are financially capable of doing. It’s important not to fall victim to that temptation to ignore retirement or underfund retirement early in life. I think Nick Maggiulli’s “Go Big Then Stop” article makes this case really saliently more so than anything else I’ve ever seen, because he basically maps out two different people. One who invests early in life—basically if you’re saying you have a 40 year career, the first person invests years 1 through 10 and then stops, and then the other person delays the first 10 years, starts investing in year 11 and invests years 11 through 40. The person who started early and just did the first 10 years then stopped ended up with more money than the person who invested for the latter 30 years.

And he points out, the higher your annualized returns, the more dramatic this outcome is going to be. And it’s also worth stating that this is assuming the same investment contributions and most people earn a lot less earlier in their career than they do later in their career. So it’s not as apples to apples in real life.

But what I always think about is if you think about it through the lens of exercising and someone tells you, okay, if you can get six pack abs by the time you’re 30 years old, then you would never have to do another sit-up, and by the time you’re 60 you’re going to have an eight pack. It’s like that type of, oh, you can front load all the effort, you can do it when you’re young and then forget about it and you’re going to end up with way more later. It just defies our intuition to an extent that makes it really easy to be like, I’ll worry about it later. But I think that that’s kind of the rub is that the money that you’re putting in now and that $20,000 I’m estimating assuming the $20,000 that’s already in that Roth IRA is going to be worth so much more by the time you retire. That was such a good decision that you made already.

Henah:

The thing though that I wanted to point out, because you also said a lot of our audience is on the side of I save too much and I don’t know how to spend, there is a point of that Nick Maggiulli piece at the end where he goes, “Finding the right balance will never be an easy task. That’s why I don’t recommend go big then stop for everyone. Some people will find the strategy too stressful and will miss too many lifetime opportunities trying to pursue it. I only know this because I followed the strategy a little bit too much when I was younger. The best advice I can give is to find what works for you and worry a little less about your finances. After all, it’s just money.” And I think his point is that money is a tool for your lifestyle and living your life.

But I do think that’s also something important to keep in mind is that some people may be saving too much for retirement at the sake of living today. And so I guess Katie, what are the things we would point to someone to know that they’re over saving and not enjoying their present? For me, I’m thinking of the 40% save rate episode where we kind of looked at diminishing returns that shortens your working timeline and then you might be saving 30% too much for retirement episode. Like the social security which pulls in other income resources that you could think about.

Katie:

Yeah.

Henah:

What are the barometers you would tell people to look at to be like maybe you are saving too much for retirement?

Katie:

I think that I would probably point to the more emotional indicators of sentiment, and that’s a tricky one because I do think that our emotions are not always accurately reflective of our financial situation. So I want to caution there that a lot of times the way you feel about money isn’t informed by things that are far outside the scope of what you’re physically doing with it.

So that caveat aside, I think if you feel like the amount that you are saving for retirement right now is constraining you to the point that you really don’t have a life right now. If you are consistently and frequently skipping out on things that you would like to be doing because all of your money is going into a retirement account, that to me would signal that maybe you’ve taken it a little bit too far. And again, that requires a level of discernment, right? Because some sacrifices will be necessary. That’s just the nature of the game. You can’t save for the future and buy everything you want today in most cases. Most people do not make enough money to do both of those things. So some sacrifices will be necessary.

But I think thinking honestly about am I really, really kind of hamstrung right now by the amount that I am saving, do I feel as though it is meaningfully disrupting my ability to make the decisions that I want to be making right now?

Henah:

It reminds me, actually, my husband and I, we bought tickets for an international trip and last year when I needed to buy tickets for an international trip, I messaged you Katie, and I was like, it’s $2,500 for two people. I won’t be able to save for my house fund this month. What do I do? And you were like, he, you have the money to live your life right now. It is okay.

And so this time when I had to spend $2,000, I was like, okay, that’s just one more month I won’t add to the fund, but I’m going to live my life.

Katie:

Yeah.

Henah:

And it was a really, really salient and good reminder. And I think to add to that, because most of us do only have a set amount of money that we can put aside to different things, I also want to make sure that you’re rewarding yourself today with everything that you’re doing for the future and so that it might help make you feel more balanced. And so the reward doesn’t have to be monetary. It could be the dopamine menu that you and I talked about is every time you make that investment, can you put on your favorite playlist and go for a walk with your dog? Can you go take a nap? My favorite thing, or even—

Katie:
Henah’s like, may I recommend bed rotting?

Henah:

I mean it is my favorite thing to do and it’s free so pro tip. But even just buying yourself a nice $5 bouquet from Trader Joe’s, you know what I mean?

Katie:

Something that might help to tactically speaking that I just thought of is something that someone in our money dysmorphia episode recommended, which was if you are the type of person that has a hard time spending, that’s not our entire audience. We also heard from people after that money dysmorphia episode that we’re like, yeah, that’s not my problem. I’m spending a lot of money and I got to reign it in. So that’s not everybody.

But if you are maybe wondering a little bit, maybe I am over saving for retirement, maybe I’m overdoing it. There’s something about this description that is resonating a little bit uncomfortably with me right now. If you’re having that experience listening to this, you might consider taking a step back looking at the percentage that you are investing for the long-term and shaving off a couple percentage points and redirecting that money to just a high yield savings account that is labeled short-term fun, or this account is for things that I want to do this year. That way it feels like the money is set aside for that purpose and you’re not every month being faced with that uncomfortable like, oh, should I maybe put a little bit less to use your example, Henah, in the house fund, so I can take this trip. Maybe that’s just something you should bake into the fabric of your money system such that there is just always a little bit of money being set aside for whatever you want to do with it in the metaphorical present.

Henah:

It’s actually a good example because we heard from someone in our family who’s sick over the weekend and we want to be able to give them some money. And my husband was like, okay, well if we don’t have enough in our regular budget, I’m just going to take it out of my fun fund. And I was like, no, that money is money that you have saved all year for something that is going to be fun. We will find that money elsewhere because otherwise you will deprive yourself in the present thinking like, oh, I ran out of money for that. And so I think the person who shared that they have their own fun fund that’s a high yield savings account and their savings and a high yield savings account. I really like that idea too.

Katie:

Perfect. How about a money story? Because I think this week’s kind of touches on a situation that might end up having you go, might’ve saved too much.

Henah:

You might end up with more than you think. So this person reached out, I wish it were me, it is not me, but they asked for it to be anonymous, so we’ll pretend it’s me. They said, I just found out I’m listed in a very close family friend’s will and I am due to receive an incredibly sizable inheritance at their eventual passing, totaling assets north of $9 million. Absolutely bonkers. So some factors—

Katie:

Can you ****ing imagine? Can you imagine?

Henah:

No. Well, they can’t either.

Katie:

That’s why they writing in. That’s why they’re writing in. Alright, keep going. Sorry.

Henah:

They said some factors to consider about my situation: I’m 33, I make about $130,000 a year. I’m a single homeowner in a high cost of living city. So my income feels good but not great. I have an emergency fund, no debt besides my mortgage. I would max out my 401(k), but I’m not putting much else into savings right now. My retirement investments are currently behind where I’d like them to be at about $125,000.

So that has been my focus, but I have a goal to one day own short-term rentals and investment properties at the beach as a second stream of income investment and retirement household. Babe, you can buy the whole beach with $9 million. Okay, they said

Katie:

She said, dream big baby.

Henah:

The family friend is in their mid-fifties and healthy. So this isn’t expected for several decades and mentally I have weird feelings about financial success based on someone else’s mortality. I can’t believe this generosity is true despite seeing the legal docs. And there’s a small thought in the back of my head that this will could be changed. So I cannot fathom that kind of money one day I’m overwhelmed and not sure what to do with this new information. If you were in my shoes, would you change your current path, invest less than a 401(k) and start saving towards investment property down payments or stay the course and ignore this completely?

Katie:

That’s so hard. I just experienced something like this recently. No, not like that—I also just found out I’m going to be inheriting eight figures. No, I wish. I recently was speaking with someone who is in their late sixties who is rich basically, to put it simply, and said, I don’t want to tell my children what they should expect. I don’t want to give them a sense of what I intend to pass down my children.

Henah:

Parents in their seventies. So I guess that’s not them sending that message.

Katie:

Yeah, unfortunately it’s not Vikram. Vikram on WhatsApp got me like, Hey, so…

Henah:

No, in exchange for your astrological information.

Katie:

We’ve got a little quid pro quo horoscopes for financial advice. No, but they said, I am wary of telling my children how much they should expect because I’m 70 years old and a lot can happen between now and my eventual passing. And I don’t want them to make different decisions in their life based on this information because if something changes and for some reason they don’t inherit that money, I don’t want to be the reason that they are now under prepared because they were expecting to get this huge amount of money that now they’re not getting or it’s in some way diminished or I don’t want them to be disappointed. That type of thing.

And I think that that’s a really interesting, in some ways this is a second Rich Girl Roundup, but I think that it raises this interesting question of do you not tell somebody because you want it to be a surprise and you don’t want them to make different, you don’t want to put them in the position that this individual is now in where paradoxically, there’s news of this potential windfall someday and you’re suddenly seeing your entire life differently.

And in a weird way, it is a bit of a burden like, well shit, now everything that I thought I was going to do and my whole plan is kind of upside down and based on not certain information, they rightly pointed out this will could change. It’s not a guarantee. The money is not coming tomorrow. And at the same time, there is an argument to be made that if you are someone that is so wealthy that you are passing down tens of millions of dollars to heirs. I have heard some planners say it’s better to actually start making those disbursements before you die in vitro giving…in vivo. In vitro. So each embryo receives…

In vivo giving that you are basically going to still be alive and you’re giving people the money that they would get when maybe this person, if this person dies 40 years from now, this individual that’s writing into us is going to be in their seventies. So it’s not like that money is really going to materially change. Most of their life is going to bypass them before they see any of this money.

Henah:

Yeah, that’s a fair point.

Katie:

So I think that that’s a really important thing to remember is if you are on the giving end of this and you’ve got that much money to give baby, you might decide like, hey, actually it makes more sense for me to start passing out some of this now so that it can actually impact this person’s life for the majority of it not in the last 10 or 20 years that they’re alive.

Henah:

I’m so mad at you, Katie. This is what I was going to propose for a future episode.

Katie:

Oh, well we can still do that. But…

Henah:

Yeah.

Katie:

I guess my general thinking is I would probably ignore it only because if you think about the life path, the way that it will change your life, even if you get all $9 million of it, if it’s 30 years from now, it’s like you’re going to get $9 million when you’re 60 or 70 years old.

Henah:

And the purchasing power of $9 million later is only like $3 million today.

Katie:

So maybe what it actually does for you is reminds you of your own mortality and goes, well, hey, if I’ve got these goals to own these investment properties, what am I waiting for? I don’t want to end up giving away $9 million bucks. I’d rather start working on this. Now whether I get $9 million from them later or end up just saving my own nest egg, I would rather start making moves on this stuff now and you can’t take it with you. So that might be the shift that I would take versus like, oh, my retirement’s taken care of completely, so I’m just going to ignore it. Yeah, what do you think?

Henah:

So when I was reading about some stuff earlier, I was reading someone had posted about Die With Zero and how it motivated them to give their children their inheritances earlier for this exact reason. And I think that this was the episode I was going to propose. I think that that’s an interesting conversation to your point about how does that energize you to live today, even if you don’t end up seeing a penny of that $9 million or even if it’s 40 years from now that you see it. I was also going to say that I would not change most of my current path. I’d probably give myself a tiny bit of more flexibility. But wouldn’t…

Katie:

You wouldn’t slam on the brakes.

Henah:

Yeah, I wouldn’t slam the brakes for my retirement or anything else, especially because she said they’re healthy, they’re in their mid-fifties, so this is not going to happen for several decades. And that there’s, I’ve talked about this, there’s so many things that could happen to you between now and then that nothing feels like a short bet until it’s in your bank account. You know what I mean? I a hundred percent agree with you.

Katie:

Well, there are no words I love hearing more on the planet than I a hundred percent agree with you. So with that, that is all for this week’s Rich Girl Roundup, and we will see you on Wednesday to cover the three most important numbers to know in your financial life.

Henah:

Bye.