J.S.
When I was a financial planner, we looked at a few major areas. That you have no debt and some emergency savings is wonderful. Does the $10K savings include the down payment on your house or is it above and beyond that? Is the $400 a month over and above what your increased expenses would be after you buy your home and factor in taxes, insurance, maintenance, etc.? If that's the case and your savings and extra monthly cash are over and above your home purchase, then you need to look at some key savings areas.
1) Do you have life insurance? If you do, great - you should each have a term policy that will provide for your children and surviving spouse if one or both of you die while your children are minors or while one of you is reliant on the other's income. If you don't have life insurance, find a reputable agent and shop around for what you need. While we're on life insurance, take some of that extra that you have for a couple of months and invest in setting up a will, living will, health care proxy, and revocable trust (which would be funded with your life insurance and provides copious details and crystal clear instructions to your survivors on how you want that money spent to care for your children). A good plan might cost $1000 to set up but it's worth its weight in gold.
2) After being debt-free, having emergency savings and life insurance, your next goal is retirement savings. If one or both of you works for an employer who sponsors a retirement plan, and that plan offers a company match, then that's where you put your money. A typical employer match is something like you invest up to 6% of your salary - pre-tax - and your employer matches 50% of that, or 3% of your salary. So you are automatically earning 50% on your investment, which far exceeds what you will earn in the market. So you should invest enough to maximize your employer match at the very least. At an annual salary of $35K, 6% of that per month (if that was the match rate) would $175 a month. After that - or if there is no match - it would be up to you to decide whether or not to invest the rest in that retirement plan. For most people, the answer to that would be yes because an employer-sponsored plan usually offers lower-cost investments than what would be available to you on your own. Most people think their retirement plans at work are "free" because they don't pay a fee. In those cases (which is most plans) the investments in the plan pay for the recordkeeping costs of the plan. When you invest in the funds, some money is taken off the top to pay for all of the servicing and this is known as share class. In most plans the share class available to employees provides a higher rate of return than the share classes available to the public. Some people have lousy plans though with expensive investments that perform poorly and for those folks, investing via another avenue makes more sense. If you have access to a plan at work then there should be a website that helps you calculate your retirement savings needs. For most people, $400 a month would be a good start but you would eventually need to save even more. I think that putting that towards retirement until you build a substantial nest egg makes sense, but everyone's retirement situation is different. If you are expecting a pension or an substantial inheritance, that changes the picture dramatically but for most of us average folks without pensions, we need to save well over a million to be able to retire.
3) If by some crazy reason you still have money left over after life insurance and retirement savings, your next step would be college savings. The best college savings plan hands down is a state-sponsored 529 savings plan. The benefits are too lengthy to list here but it beats insurance-based savings plans or accounts like UGMAs and UTMAs every time.
I hope this helps - you are taking the right steps and asking the right questions - congratulations on being financially responsible even in these tight times.
Jen
