What to fund next?

My husband and I are 22 and 23. We're putting $~1,500 per month into debt payment and savings. In August, we'll be out of debt and by January we'll have funded a 3-month emergency fund. (One month of expenses in savings in the same bank we do checking in, two months in an online bank for higher interest.)

After that, I'd like to start a second account at the same online bank as a new car fund. I figure paying off our financed car early and then financing the next one isn't as good as continuing payments and paying cash for the next one. Any comments on that logic?

My husband takes a new job once a year or so and I don't think he'll be at his current job long enough to qualify for their 401(k). What's our next best bet for long term savings that can be used for retirement or for a house? (Retirement in 30-40 years, house in 5-10?) We live in Southern California so we'll need a big chunk of change as a down payment to ever buy a house.

First, I want to commend you for asking the right questions. You and your husband seem to have your heads on straight and are on the right track.

Paying for your next car in cash will be an improvement over financing it. Think of it this way: if you pile up the money, then buy the car, the interest on your investment will be paid to you, rather than paid by your to the bank. :-) If you can stand it (many Americans can't), buy a three-year old car with 30,000 miles or so -- they're just about as reliable as new cars and cost much less. New cars are a horrible investment -- they bleed value like mad.

You say that five months at $1500 per month (7500) is three-month's emergency fund, so I assume your expenses are 2500 a month. If you're capable of setting side 1500 a month (and probably paying 2000 in taxes), then you're doing that on a $6000-per-month income. BRAVO! Investing a quarter of your income will be a tremendous achievement and there will be many couples who are envious of you.

The suggestions are pretty simple: 401k and Roth accounts, as well as owning your own home. SoCal makes home ownership difficult, especially for first-time owners. If he can't fund a 401k but you can, fill it up. If you can't, then you'll want a Roth IRA for $4000 per year (and that amount is going up). Invest in index stock funds with low expense ratios; at your age and a 30-40 goal, that's the only reasonable choice).

Finally, for home ownership, sock away $500 or so of your investment into a taxed fund. You might want to choose an REIT (Real Estate Investment Trust) such as offered by Vanguard -- your investment will be able to track with real estate costs, more or less. Five years of that gives you $30,000, and with any luck it'll go up in value to $40-50k. Look into special programs for mortgages for first-time home-owners -- in Vermont, for example, "VHFA" loans are made available with extra-low rates, buy only to first time buyers. Given that your husband changes jobs a lot, consider moving to a more reasonably priced housing area.

Good luck -- I wish more Americans followed your plans,

Doug

REIT's are 1 of thousands of investment vehicles and must be researched carefully before buying and are much more volatile than an index fund. Report It

If you or your husband do not qualify for a 401K with company matching funds, then your next best option is an IRA. If you're making under $50K, go with a traditional IRA, since it is tax deferred contributions.

If you're making more than that and do not qualify for a tax deferred traditional IRA, then go with a ROTH IRA.
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You are asking two questions which makes answering more complicated.
1) Re your first question, the answer is yes. Pay cash for the car. Why pay interest when you do not have to? Also put all your emergency funds in the Internet a/c for max.interest.
2) Re your second question on long term savings
I recommend investing it in an equity income type mutual fund, such as those offered by Vanguard, a first class low cost company. Talk to them first about their range.

Purchase stocks/mutual funds through a Traditional IRA or a Roth IRA.

Both offer tax advantages. See an investment adviser you trust!