Quote:
Originally Posted by Anya7
I’ve just started out doing the whole work full time, live on your own thing, and while I’m pretty good in other financial areas (like keeping track of expenses and not having a ton of credit card debt), I’m not sure what to do with all the money I’m saving – either the “leftovers” at the end of each month, or the money I already had saved up to start with. It’s all just sitting in my checking account at the moment, which isn’t really doing me any good.
Future plans and goals include being able to afford to keep myself alive after I retire, buying a (modest) new car in about 3-5 years, and eventually buying a house (maybe in 5+ years or so). Future plans may include receiving an inheritance from my grandmother that would go toward a house down payment. Future plans may NOT include getting married so I can’t assume I only need half of that down payment.
I work for a small company that does not currently offer any 401(k) plans. They are thinking about it (possibly sometime the end of this year), but there’s no guarantee about this and I also don’t know what they would do about matching. It’s likely that I will always end up working for small companies that have the same sorts of problems.
I don’t have any debt except for two Stafford loans: one at 6.8% fixed interest with a $5,340 balance and one at 7.22% variable interest with a $5,400 balance. The payments come to about $128 per month for both combined.
I generally have about $400 per month left over (though that’s just an average). I was thinking that I would allocate 10% of my take-home pay (about $200) to retirement savings every month, regardless of how much money I actually have left over to save that month, and then divide the remaining money between 80% going to large purchases (house, car) and 20% going to extra/fun money (for things like vacations and possibly backup emergency funds). Does this sound like a reasonable plan? Too much/too little money in certain areas? Something I forgot about entirely?
I also have about $11,800 in savings that I need to do something with. For this I was thinking to keep $1,000 in my checking account as padding, basically, and set aside $1800 for emergencies. That leaves $9000 to work with. I see basically three options for this:
1) Split it between retirement & house savings and use it to start those accounts
2) Use $5400 of it to pay off one student loan (freeing an extra $65 per month for monthly savings), and then invest the remainder as savings
3) Use $5400 of it to pay off one student loan now, and then set the remainder aside and use whatever money I might put into other savings besides retirement to add to this amount until I get $5400 again (probably 8-9 months), and then pay off the other student loan as well.
Then of course there is the problem of where to actually keep all of this money, which I really don’t know much about. My dad keeps telling me to just go to the bank I have my checking account with and open a couple of CDs, but I’m not sure if that’s the best thing to do.
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Anya- good detail and welcome. Here is my take:
1) I would keep around 3k of the 11k you have saved up and use this as emergency fund. Based on your post, I am assuming monthly expenses are between $800 and $1000 each month. The 3k should represent at least 3 months expenses. Keep it in the bank (maybe a savings account, money market account or CDs). I use CDs.
2) I would use the other 8k to open an IRA for 2007 (4k) and 2008 (5k limit). The 8k will help you get started with retirement savings. Roth IRA or deductable IRA would work. At 30k gross/year, you are in 15% tax bracket, so I think a Roth makes sense for now. I have a Roth IRA and my wife also has a Roth IRA. That is good advice from others on that.
3) I would save 10 to 15% of gross pay for retirement. T Rowe Price recomends 15% of pay go towards retirement. I save around 17% of my pay. At 30k gross, 15% is $4500 per year. If that seems high, then use a deductable IRA in #2 above, and you will realize setting aside $1 before taxes is like setting aside $.85 after taxes (maybe less, depending on what state you live in).
4) for the house, car and similar, I would start a second taxable investment account. Use this account to do 2 things
1) compliment retirement holdings
2) track rates of return.
4.1- if retirement accounts are heavy on domesitc stocks, maybe this account focuses on bonds or foreign stocks, for example.
4.2- if this account grows at 8% and car loan can be borrowed at 3%, then take out a loan and let this money in the investment grow. Your net gain is 5% (8% gain-3% interest=5% difference).
For 4.2 I use a moderate risk mutual fund -PRPFX. It takes on much less risk than my retirement accounts, but gives a much higher return than savings accounts, CDs and similar cash investments.
5) My advice after you put $4500 into retirement funds is to commingle the car and house savings into one investment pool, which compliments the retirement holdings, but has less risk and is in a taxable account. This could be a secondary emergency fund (in addition to 3k I suggested you keep in cash) and serve for car purchases, house purchase and similar.
If you get a house, know that your tax situation probably changes, and you will get a much higher tax return with all other factors being equal. I would spend some time using turbo tax or similar to do your taxes the next few years to start learning how taxes work.