Understanding tradeoffs is key to strategy

QI'm selling my house and buying a new one, something of an upgrade. I'll have about $100,000 left from my sale, and the new house is $250,000. I earn $90,000, I don't have much other debt, but my retirement savings are not great.

Would you recommend that I put all of the equity into the new house (with the idea of paying off as much debt as possible as quickly as possible)? Or hold some back to invest (with the idea of diversifying investments)?

I'm currently contributing the max to my Roth, but not my 403(b). A couple people have also suggested I open a brokerage account.

JENNIFER

AWell, I always I hope I have words of wisdom. But I'm more confident that I can offer a framework for deciding what's the right decision for you. Your issue isn't a money question where one strategy is right and another is wrong. Instead, it's understanding the tradeoffs between one strategy and another.

Your home purchase is conservatively financed no matter what. I'm assuming you're locking in a low, fixed rate on the mortgage and that you'll make a substantial down payment. 

However, I would lean toward putting some of the money aside. One reason is I'd like to see you take full advantage of your 403(b) and build up your retirement savings. Moving into a new home always comes with hidden expenses, too.

Another concern I have is diversification. As Don Quixote de la Mancha said: "Tis the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket."

With the idea of diversification and financial safety in mind, I like the idea of creating a healthy savings fund in taxable accounts. Considering all the insecurities of jobs and careers these days, it's wise for most people to increase their emergency savings.

Your emergency fund would get an immediate boost with the extra money going into it. You could always add more to the fund by putting your savings on autopilot. Tell your bank or credit union to automatically move a sum of money every month from your checking account into your savings account.

Here's the kicker: The cash portion of a healthy savings account isn't only an emergency fund. At some point it becomes your "opportunity fund" -- money that lets you take advantage of intriguing developments that may come your way, such as a different job or career, more education, a long-dreamed-of trip. You can pay for these transitions and desires without taking on debt. 

I would put the savings for now into a safe parking place like an online savings account, credit union CD, U.S. Treasury bills and the like. You could invest some of it into low-cost mutual funds on a regular basis, too. I wouldn't go the brokerage account route unless you're familiar with trading and you like coming home from work and studying the markets, reading SEC filings, and so on.

The more savings you have, the greater your financial freedom. By the way, you can always decide after a few years that the best use of the savings is to accelerate principal payments on your mortgage.

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.

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