23 y/o: Sold Car ---> 20k to Invest

[SlickWallet]

I just sold my car and now I have 20k to invest. Like many others my age (23), it is hard to know where to start when it comes to investing wisely. A little background info. I've been working at an entry level job for approximately 4 months now at about $2,200.00 per month. I just started putting 3% of my income into the company's 401k plan. The company matches 3% and I am allowed to contribute up to 25% of my income. Living expenses include: $500.00 rent, $500-600 on food/restaurants, and about $300-700 on luxury expenses like clothing, movies, electronics, etc. I have another car that I rarely use and that is being insured by a relative's autobody shop. Free to me for now...

I saw a plan that recommends saving 6 months worth of living expenses (emergency fund), then taking $3k to start a vanguard roth ira. I have enough in my savings to start on that plan, but now I have an extra 20k sitting in my savings. My question is where else can I go to invest this money? I am not sure how liquid I need the 20k to be yet, but I am open to all options for now. Short term plans may include a 6 month trip to Asia before Grad school. Long term plans: buy a nice car (under $100k), buy a house, retire comfortably.

[bjl584]

Quite impressive that you cleared $20K on a car being so young. What kind of car was it? Anyway, you can open up a high yield money market acount with your new found money. You can leave the entire amount in there to earn interest or you can purchase mutual funds and/or stocks within the account with part of the money if you choose. That way you can keep some or all of your money liquid. Any investment firm can set you up. I currently have an account with a firm. At this time I have approximately have half my money as cash and the rest as mutual funds and stocks.

[lgslgs]

I'd max out the Roth, and put the rest into fairly assertive mutual funds with at least 1/3 of it international (I personally like keeping a chunk in international emerging markets.) Go with no load funds and if you want to use it for something else after it sits there for a year you won't have a fee.

I'd actually go ahead put my 6 month emergency fund right into no load mutual funds because the odds that I'd actually have to pay the first year fee if some disaster does strike is pretty low - if your life isn't a wreck and you are managing you money well in general, you probably won't need to tap your emergency fund in the next year.

I'd steer clear of individual stocks. Just my preference.

Plan on making the max Roth contribution next year as well. Try to save it out of earnings, but consider the option of using part of this $20,000 for it. In fact, I'd most likely just save it all and trickle it into the Roth each year, and save fresh money from my earnings for things like vacations and housing. That way I wouldn't risk falling into "windfall mentality" and thinking of the $20,000 as anything but true savings.

Lynda

[Broken Arrow]

Originally Posted by SlickWallet

Long term plans: buy a nice car (under $100k), buy a house, retire comfortably.

Um... yes. We'd all like that, wouldn't we?

Well, first thing's first. I'd recommend figuring out what your budget looks like. Based on that, you can figure out what your emergency fund should look like (roughly 6 months of living expenses). Sock that away.

Then, I would open and max out a Roth IRA.

I would also pay off any junk debts you may have. Credit cards are a good example.

If you still have money left, I'd recommend plowing more money back into 401k.

If you're maxing your 401k, I suppose you could use your Roth IRA as your "house fund" when the time comes.

[sweeps]

OP, congrats on selling your car -- that's a good short term boost, but based on your post I'm not very positive about your long-term prospects. Selling a car is fine, but it sounds like you're going to need/want another one soon (and you want to spend "under $100k" for another one?!?!). So this money isn't really long term money.

Also your expenses seem pretty high to me given your income, while your savings is only at 3%. I would see if I could cut some of those expenses and either jack up your 401k contribution or open and fund a Roth IRA.

It seems you want to live a rich lifestyle -- fancy trips, expensive cars, etc. -- which is all fine, but unless you stand to inherit some big money you're going to have to save and invest fairly aggressively to finance that lifestyle.

[SlickWallet]

Hmm, lots of good advice going on here. Lots of options too. Thanks guys!

Sweepsplayer: You definitely make a good point. I have been on a spending spree lately ever since I got my new apartment (been filling it up with furniture and electronics). For a while, I also had a second job that paid $1k per month. I guess I'm spending like I still have that $1k income source. Since I live in San Francisco, I really can't cut down too much on rent and food. However, I will be cutting down greatly on all other expenses.

I don't need or want another car soon. Realistically, it will be another 5+ years before I even begin to look into that.

Aside from setting aside an emergency fund, maxing out my roth ira, and boosting my 401k contribution, I would like to keep my money fairly liquid. Assertive mutual funds or a high yield money market account sounds like fairly solid ideas. I definitely have a lot more research to do.

[Ima saver]

You can get a high yield money market fund that pays over 5% and allows you to write 3 checks a month. The first thing I would do is open a Roth IRA. Contact Vanguard and ask for a prospectus on the retirement 2045 fund and fund it for the full $4000 allowed for the year.
You do need to curb your spending and start saving more.

[disneysteve]

Originally Posted by Ima saver

You do need to curb your spending and start saving more.

I agree! You are spending a ridiculous amount on food - $600! What the heck are you eating? That's $20/day! We spend about $400 for a family of 3. I'd work on getting that down to maybe $200-300/month pronto.

And up to $700/month on luxuries! That's 32% of your income.

You need to sit down and figure out how much you actually need to cover your basic needs and a sensible amount for fun - maybe 10% of income would be a good starting point. That would make that "luxury" category $220, still a good amount and a whole lot better than $700.

So if you knock $300 off your food budget and $400 or more off your luxury budget, that frees up a whopping $700/month for savings. That's how you are going to get to that comfortable retirement you hope for.

[SlickWallet]

Haha, reading over my first post, it really does sound like my spending is spinning out of control. Which is not entirely untrue.

Here's the budget I'll be sticking with now that my apartment expenses have cooled down:

Income: $2,200/mo
Rent & Utilities: $600
Food/Restaurants: $480 (This is pretty good considering where I live)
Luxury Expenses: $100-300 (I really do buy way too much crap!)
Max Total: $1380

That leaves about $820 to lock up into investing and saving. Not bad imo.

[disneysteve]

Originally Posted by SlickWallet

Food/Restaurants: $480 (This is pretty good considering where I live)

That leaves about $820 to lock up into investing and saving. Not bad imo.

I think being able to save 37% of income is great. Take full advantage of that while you are young without all the responsibilities and costs that come later.

However, I still think spending $480/month to feed one person is nuts regardless of where you live. I've been to San Francisco. I didn't think food was any more costly than it is anywhere else. Like I said, we spend about $400/month to feed the 3 of us here in NJ. So I'd still suggest taking a good look at why this figure is so high.

[tinapbeana]

Originally Posted by SlickWallet

Income: $2,200/mo
Rent & Utilities: $600
Food/Restaurants: $480 (This is pretty good considering where I live)
Luxury Expenses: $100-300 (I really do buy way too much crap!)
Max Total: $1380

That leaves about $820 to lock up into investing and saving. Not bad imo.

SW:

awesome job getting started on a budget! it's really the hardest part, most folks won't do it b/c they're afraid of what will wind up on the paper. your rent & utilities are, IMO, dirt cheap for san fran. don't know how long you're going to be in that situation, but definitely take advantage of your low cost of living while you have it.

b/c your food budget is a bit high, i'm guessing you do all your eating out. yes, no? if yes, you may want to alter your approach a bit and you can still shave some money. eat at places that offer loyalty rewards (e.g. buy 9 burritoes and the 10th is free). if you're eating at a sit-down restaurant, order something that you know you won't finish and immediately get a box to take half home: now you have lunch for the next day. there's always value menus at fast food joints, too.

if you have friends in the area, maybe try to set up a pot-luck night once a week where everyone goes to someone's house and everyone brings a dish except the host. make it game night/movie night/whatever. cheap entertainment and pretty inexpensive food (or free the nights you have everyone over to your place).

[kealina]

Originally Posted by tinapbeana

SW:

awesome job getting started on a budget! it's really the hardest part, most folks won't do it b/c they're afraid of what will wind up on the paper. your rent & utilities are, IMO, dirt cheap for san fran. don't know how long you're going to be in that situation, but definitely take advantage of your low cost of living while you have it.

welcome to the site. looks like you've made a good start just by being able to see that your budget could use some trimming without getting defensive. not everybody can even get that far. that's a good first step and it seems like you have a good attitude so .
the previous posters have all give you really good advice on what to do with your money so i don't have anything to add there but i do want to say a few things. don't worry about getting your budget perfect all at once. it sometimes can take awhile to cut your budget down and tweak it to a level that is comfortable for you. think about slowly cutting back on your food and luxury budget even more. try to cut it down by $10 or $20 every month until you figure out how much you need to be comfortable. just remember, whatever you do has to fit in with your personal priorities or it will be difficult to maintain.
i would spend awhile poking around the site and reading all the great advice posted. you can learn lots of things here. guess that's it from me.
=)

[SlickWallet]

Originally Posted by tinapbeana

SW:

b/c your food budget is a bit high, i'm guessing you do all your eating out. yes, no? if yes, you may want to alter your approach a bit and you can still shave some money. eat at places that offer loyalty rewards (e.g. buy 9 burritoes and the 10th is free). if you're eating at a sit-down restaurant, order something that you know you won't finish and immediately get a box to take half home: now you have lunch for the next day. there's always value menus at fast food joints, too.

if you have friends in the area, maybe try to set up a pot-luck night once a week where everyone goes to someone's house and everyone brings a dish except the host. make it game night/movie night/whatever. cheap entertainment and pretty inexpensive food (or free the nights you have everyone over to your place).

I like how practical and basic the advice is getting here. Makes it all feel very doable. Yes, I really do eat out A LOT because of where I work (downtown SF) and because I just like to try the different restaurants in the city. I'm not a fan of leftovers but I do know multiple places I eat at regularly that are offering loyalty reward cards. I'll start collecting them immediately! Thanks for the resourceful ideas!

[disneysteve]

Originally Posted by SlickWallet

Yes, I really do eat out A LOT because of where I work (downtown SF) and because I just like to try the different restaurants in the city.

Another thing to do is not get full meals. Just get a main course. Or maybe get 2 or 3 appetizers as your meal. Bring some friends and share meals so you get to try different things without having to pay for all of them. And drink tap water. If you get soft drinks or alcohol, that really inflates your bill.

Another thing to consider is getting a credit card that pays good rewards for dining. Our Marriott Visa Premier card gives double points for restaurants. I know there are some other cards that do too.

[tinapbeana]

[quote=disneysteve]Another thing to do is not get full meals. Just get a main course. Or maybe get 2 or 3 appetizers as your meal. Bring some friends and share meals so you get to try different things without having to pay for all of them. And drink tap water. If you get soft drinks or alcohol, that really inflates your bill.QUOTE]
yum, dim sum night with friends, and everyone picks 1....

also, if you frequent an establishment often enough & build a rapport, you may find you are able to ask for 'downsizing' in your meals, or maybe less expensive substitutions... usually only works in non-chain local places.

i'm sure there's lots more eating-out tips. where's julie? she eats out pretty regularly.

[lgslgs]

One of the more interesting dining out tips that I've read was to not mix food and alcohol. If you go out for a meal, buy food and drink water. If you go out for a beer, buy beer and don't buy food. The person who posted that idea said it was a reeal cost saver for them.

Lynda

[disneysteve]

Originally Posted by tinapbeana

i'm sure there's lots more eating-out tips.

Never order the daily special unless you know how much it is. When the servers come over and rattle off the specials, they don't generally tell you the cost. We made that mistake once at a local place we frequent. Both of us ordered specials. BIG mistake. They were more expensive than anything on the menu.