ASK A FINANCIAL PLANNER: How do I balance saving for my retirement and saving to buy a home?

Samantha Lee / Business Insider

Certified financial planner Sophia Bera answers:

Between two high-yield savings accounts, a 401(k), and a Roth IRA, I have about $43,000 in savings. I'm contributing 9% of my income to a 401(k) and another $500 per month to a savings account.

My Roth IRA is through Betterment, where I'd also like to set up an investment account to save for a down payment. I probably won't be able to purchase something for about five years, though I'd love to do it sooner.

Should I put a chunk of my liquid savings into a down-payment investment account, since I have more than six months' worth of my spending as an emergency fund? How should I balance contributing to my retirement accounts and my house fund?

You are quite an impressive saver! I’m so glad to hear you're thinking about how you can better strategize your savings. This is some of the most important work I do when helping my clients manage their money more effectively.

I would start by setting aside three months of net pay for emergencies and also earmark a portion of savings for travel if you have some upcoming trips planned. I am also assuming that you don’t have any debt. If you did, you might consider using a portion of your savings to pay off your debt to free up additional cash flow.

After getting your company match on your 401(k), max out your Roth IRA. This money is actually quite flexible, so make sure you’re maxing out your Roth IRA each year. The maximum contribution is $5,500 per year. Then go back to your 401(k) and adjust those contributions. As a rule of thumb, aim to save around 15% of your income for retirement.

The reason why I love Roth IRAs so much is that you make your contributions with after tax dollars and your money grows tax free! When you withdraw it in retirement, you won’t need to pay taxes on it since you already paid taxes before you put the money into the account.

In addition, you can withdraw your contributions from your Roth IRA at any time tax and penalty free. (Just be careful about taking out the earnings, because then you might get hit with a penalty, however there are a few ways to avoid it, one of which is being a first-time home buyer).

I’m seeing a lot of Baby Boomers fund college for their children this way, since Roth IRAs are not taken into account on the FAFSA. Ideally, the money in your Roth IRA should be earmarked for retirement. However, you could tap the contributions for a down payment on a home if needed. Just remember to increase your retirement contributions significantly after that, since you’ll have some catching up to do.

If you are thinking that the goal of buying a home is at least five years away, then I would start a conservative investment account at Betterment (since you already have your Roth IRA there) and fund it with any excess savings. Then redirect that $500 a month to this account now that you have adequate savings. As your goal of buying a home moves closer to three years, I would shift this money to a savings account like Ally Bank where you can earn 1%.

The other thing to consider is the type of mortgage you’ll be taking out. There are a lot of first-time home buying loans that only require a 3% or 5% down payment. If you can put 20% down on a home, that is ideal because you’ll avoid paying Private Mortgage Insurance (PMI). However, don’t raid your emergency fund for a down payment. I would rather see people make a smaller down payment and keep their emergency savings intact (and pay off debt) than cobble together 20% only to have a major home repair come up months after moving in.

To recap:

• Set aside three months of net pay for emergencies plus money for travel costs
• Get your match on your 401(k)
• Max out your Roth IRA
• Contribute at least 15% of your income toward retirement
• Start a brokerage account and set up a monthly contribution

You are already off to a great start! A few small adjustments will hopefully, help you reach your goal of homeownership even faster.

This post is part of a continuing series that answers all of your questions related to personal finance. Have your own question? Email yourmoney[at]businessinsider[dot]com.

Sophia Bera, CFP® is the Founder of Gen Y Planning and has been quoted in The New York Times, Forbes, Business Insider, AOL, The Wall Street Journal, and Money Magazine. She tweets, travels, and loves helping millennials manage their money more effectively. Curious? Sign up for the free Gen Y Planning Newsletter.

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