Two kids, a mortgage, scattered accounts: putting a working family's savings in order

The short answer: which account gets the next dollar

If you are raising children, paying a mortgage and unsure where your savings should go, fund them in a set order. Build an emergency fund you can reach without a penalty. Contribute enough to your workplace plan to collect any employer match, then clear high-interest debt. After that, open IRAs for both spouses, start college savings, and put long-term money beyond that into investments with a clear purpose, such as a managed account.

I have worked with families like this in Dallas since 2003, and the pattern is the same regardless of income. The problem is rarely a lack of money or intelligence. Nobody has helped them put the pieces in order, so every account feels like a separate decision and none of the decisions get made. The fix is a sequence, and this guide walks through it.

• An emergency fund you can reach without a penalty
• Enough in the workplace plan to collect any employer match
• High-interest debt paid down
• Traditional or Roth IRAs for both spouses
• College savings, such as a 529 plan
• Further long-term investing, such as a managed account
• A review after every major change

Why your accounts never seem to add up to a plan

Most households did not design their savings; they collected them. A 401(k) came with a job, an IRA was opened one April years ago, a grandparent started a college account, and a savings account holds whatever is left at the end of the month. Each one made sense when it was opened, but nobody asked how they fit together. The result is a family that may be strong in one spot and exposed in another.

I see a solid 401(k) next to no emergency fund, so the first car repair goes on a credit card. I see generous college contributions while neither parent saves for retirement. The way through is to make it concrete: write down what the household spends each month, what it owes and at what rates, and every account you hold with what it is for. Those three lists turn a vague worry into a specific plan.

Step one: cash you can reach without a penalty

The goals-based approach I use starts with an emergency fund, because a savings plan that collapses at the first job loss or hospital bill is not a plan. That money belongs in a savings account you can reach quickly, not in a retirement account. The IRS notes that deductible contributions and earnings taken out of a traditional IRA are taxable, and before age 59½ may face an additional 10 percent tax unless an exception applies. That is the price of using retirement money as a rainy-day fund.

How much to hold depends on the household: one income or two, how steady the work is, how many people depend on it. I do not give a single number. In my experience, a smaller first target you can reach within a few months works better than a large one that feels out of reach, and you keep building it while you move on to the next steps.

Step two: the employer match, then the expensive debt

FINRA notes that many employer plans offer matching contributions up to a preset limit, most commonly a match of some portion of what you put in. If your plan has one, contributing at least enough to collect it is, in my experience, worth doing even while you still carry credit card balances. Read your plan summary or ask the benefits office for the exact formula, because the match is part of your pay.

Next comes high-interest debt. Paying down a credit card balance is money you keep rather than money you send away, and the saving is certain in a way no investment is. Once a card is paid off, keep making the same monthly payment, but send it to the next account on the list. Families who do this often find the savings habit is already built.

Step three: IRAs for both spouses

FINRA explains that you can put money into an IRA every year you are eligible, even if you are also enrolled in a retirement plan at work. The IRS describes the main difference: traditional IRA contributions may be deductible if you qualify, and withdrawals are taxed later; Roth IRA contributions are not deductible, and qualified distributions are not taxed. Roth eligibility also depends on your modified adjusted gross income. I compare the two in more depth in traditional vs. Roth IRA: which one fits.

A household with one paycheck can still build two retirement accounts. FINRA describes an exception to the earned income requirement for a nonearning spouse, called a spousal IRA, so a parent who stays home with the kids does not have to go without retirement savings of their own. The details are in how a spousal IRA works for a one-income household.

This is also the moment to find old workplace plans. A 401(k) left with a former employer still belongs to you, and you can leave it, move it to a new plan or roll it to an IRA. I explain what a rollover of an old 401(k) involves and how long it takes.

What to gather, and when to sit down with someone licensed

You can do the groundwork yourself this month. Pull the statements for every retirement and investment account either of you holds, including old 401(k)s. Write down the mortgage, car loans and card balances with their rates, and your monthly spending, including irregular bills like school costs. Then ask one question: if one of us lost a job tomorrow, how many months could we go before we had to borrow?

Where most people stall is turning those facts into decisions: which IRA, how much per month, which account for college, what to do with the old 401(k). If you have a new baby, a new home, a new business or an untouched account from a previous job, that is the moment to talk to a licensed professional. You can look up anyone registered to sell securities on FINRA's BrokerCheck before you meet, and you should ask what they can and cannot discuss under their registrations.

• Every retirement and investment account, including forgotten ones
• Your workplace plan's match formula
• All debts with balances and interest rates
• Monthly spending, including the irregular bills
• Any college accounts and whose name they are in

Step four: college savings, once retirement is moving

Parents often want to fund college before anything else. In my experience that order is backwards: there are loans for college and none for retirement, and parents who reach retirement without savings may end up depending on the children they meant to help. Many families save for both at once, in amounts they can sustain.

The IRS describes a 529 plan as a tax-advantaged account operated by a state or educational institution, and you are not limited to your own state's plan. Earnings are generally free from federal tax when used for qualified expenses such as tuition, fees, books, and room and board, though contributions are not deductible. You can also change the beneficiary to another family member, so the account may still serve a sibling. Texas families have more than one state-run option, which I compare in saving for college in Texas.

Step five: long-term money beyond the basics

Once the emergency fund, the match, the debt, the IRAs and the college account are moving, some families have more to invest for the long term, or would rather not pick funds one at a time. That is where a managed investment account can fit. I offer managed investments as an investment adviser representative with Primerica Advisors, the trade name under which PFS Investments Inc. provides advisory services. Not every representative is authorized to offer them, so ask anyone you meet.

In a managed account, the investments are looked after on an ongoing basis around your goals and time horizon. Ask how the fee is charged, what it covers and how often the account is reviewed, and read the agreement before you sign. I explain the mechanics in how a managed investment account works. Mutual funds are another route, with their costs disclosed in the prospectus you receive before buying.

Any investment carries risk, including the possible loss of principal, and nothing is promised about what markets will do. What I can promise is that each account will have a purpose you understand.

Mistakes I see in Dallas households every week

Treating a retirement account as the emergency fund, then paying taxes and penalties when the roof leaks. Leaving part of the employer match uncollected for years. Funding college generously while neither parent saves for retirement. Leaving an old 401(k) with a former employer without knowing what it holds. Opening accounts because a coworker did, with no idea what each one is for.

I also see families who start strong and never revisit the plan. A contribution set at a lower salary, a college account opened for the first child but not the second, a beneficiary form on a retirement account that still names a former spouse. Life changes faster than paperwork, and a yearly review catches most of this. The worst mistake is the quiet one: knowing something is missing and letting another year pass.

What happens after you reach out

You can call my office on LBJ Freeway in Dallas, send an email or book an appointment online. I will ask you to bring, or send ahead, the documents from the list above. The first meeting is a conversation, not a sales pitch: who earns what, who depends on whom, what you owe, what you already have and what worries you. It ends with a clear list of gaps in priority order, and there is no obligation to buy anything.

If you want to move forward, we take the steps in order. Accounts are opened and funded at a monthly amount you can sustain, old accounts are consolidated where that makes sense, and we set a date to review. Products are offered only in the states where I am licensed. My aim is for you to leave knowing what each account is for, what it costs and why it is in the plan.

Questions people ask me