Prioritizing extra money

[wouql]

Hello all...I'll be graduating from college in May, and I've accepted a nice job offer in town.

I'm drawing up a budget, and I'm specifically deciding what I should be doing with money beyond my monthly expenses.

I've been reading up online, and for now this is my general priority list.

1. Monthly payments(rent, car loan, school loan......duh)
2. Any credit card/high interest debt (I have none right now)
3. Fund 401k to company match
4. Establish emergency fund (more immediate/important than retirement, but I want as much free 401k money as they'll give me)
5. Roth IRA to maximum
6. Saving for a down payment for a house (at least 5-6 years away, but I want one someday)
7. Other debt (extra money towards car/school loan etc.)
8. Taxable investment accounts

Obviously I'm making nowhere near enough to reach most of these, or even get past saving for an emergency fund. But eventually that will be gone, and I'm really just trying to establish a general list of what to do with extra money.

Anyone have any advice/critcisms?

[locolorenzo24]

Your list looks good, but you should at least fund your emergency acct to 3-6 months of expenses before worrying about a 401k match...or if not that than 1000 bucks in the emergency fund. Other than that, it looks good.

[robex]

Awesome list! I think it's great that you're thinking it through now and planning your goals.
I would make an emergency fund of $1000 a priority, as well. It's important to have something to fall back on if something unexpected comes up.

[sweeps]

Hopefully you can fund both the 401k up to the match *and* the emergency fund. I tend to disagree that you should build up your entire emergency fund before earning your 401k match. That's money that you lose forever if you don't take advantage of it.

You may be able to forego paying down #7 other debts before #8 taxable investment accounts, if the interest rates are relatively low. School loans in particular are usually cheap and tax-deductible, and not worth paying down the principal.

[BAGAGT1]

I agree with Sweepsplayer wholeheartedly, you should start your 401k as soon as possible AND fund an emergency fund.

[wouql]

Originally Posted by Sweepsplayer

I tend to disagree that you should build up your entire emergency fund before earning your 401k match. That's money that you lose forever if you don't take advantage of it.

That's pretty much my thinking as well (and in this case, it's not a "one or the other"; I can afford to put some towards both.) Given a choice - hypothetically - between allocating 100% of some amount to an emergency fund and, say, 25% to a 401k (enough to fully match) and only 75% to an emergency fund, 25/75 seems like the right move to me.
It'll take a little longer (well, 33% longer I suppose) to finish setting up 3-6 months of expenses, but when it's a choice between 6 months and 8 months, I feel it's worth it to get the 401k money.

Thanks for the words, all. Any advice is welcome.

[jmjj215]

I second (third?) sweeps comment on the match.

[Fern]

Excellent list! Very focused. I wish i were so on the ball when i was your age.

Ditto what sweepstakes said about the 401k. You should be ready to contribute enough so that you get the maximum benefit from your employer's match. It's FREE $$$ and would be a shame to lose it. You can always split contributions between the 401k and your emergency fund.

As for the Roth IRA, if you can, make your contribution earlier in the year rather than later, so you can get maximum benefit from the tax-deferred advantages.

What savings vehicle will you be using for your house money? I'd pick something on the conservative side, to protect your nest egg, but not a savings or money market account since they pay a pittance. If you like mutual funds, T. Rowe Price Equity Income Fund has excellent returns and low ris. This fund family as a whole has lower than industry average annual expenses, which bite into your returns.

On the taxable investment accounts, there are a lot of choices to minimize taxes. Some fund families, like TRP, offer funds specifically designed to do this. Or, if you invest in a Fortune 500 INdex Fund, expenses are also typically very low compared to other funds.

[Ima saver]

According to the author of "Deal with your debt", retirement planning should be the highest priority for almost everyone. If you are starting this young, I can almost guarantee that you will have millions when you retire. Smart planning!!

[FrugalTexan75]

One thing I would suggest. You need to have money put aside for the non-monthly expenses such as car insurance, renter's insurance, clothing, medical, car repairs, etc. If you have the money put away for those things ahead of time, they won't have the ability to "surprise" you when they come along.

[Tree0164]

Pay cash instead of using credit cards. If you don't have any debt now, why plan on having in the future.

[PRICEPLUS]

Keep it simple and live beneath your means. Good Luck!

[Ima saver]

Don't acquire too much "stuff" You don't need it.

[debtfreeme]

great that you have no credit card debt! We are all very proud of you for not having any! i agree with the 401k idea. fund till they no longer match, get as much as you can early.

If you have student loans that can go into deferment if you are back in school take a look at your local community college and see if there are 6 units worth of classes you can take to put your loans in deferment. Make them fun classes you want to enjoy or wanted to study but didn't have the time. You can still make payments (indeed i would recommend it) but you will not be paying interest on those loans. If you have more than one lender look into conslidating them (read all the fine print) to lock in an interest rate that is relativley low. I know that school rates have been rising lately. Lock it in early.

I have used this stragety to study foreign language, literature and other classes while not paying a dime in interest and still making payments to my loans. Having fun and keeping busy too. and Foreign language classes usually use the books for several semesters at a time. Oh i wish i was starting out again with out the mistakes i have made in the past! Good for you!

[Ima saver]

Oh debtfree, don't we all wish that!

[wouql]

Originally Posted by Ima saver

Oh debtfree, don't we all wish that!

Well, I wouldn't say that. I've got a car loan and about $30k of student loans to pay back. I don't have any credit card debt, but that's because I just finished paying it off.

[Ima saver]

No, we meant to be young and starting out knowing what we know now. I never even heard of mutual funds until I was in my early forties.

[wouql]

Oh, ha ha; I misinterpreted what you said. I thought

Originally Posted by Ima Saver

Oh debtfree, don't we all wish that!

meant you thought I was debt free (which is why I said I wasn't) and wished to be too.

In fact, you were replying to a poster named 'debtfree'.
Now I understand.

[Ima saver]

Oh no. The person before me was named "debtfreeme" I wish I was debt free too, but I don't have any credit card debt, just one car and some land payments.

[contrary1]

I wish I had known all this when I was young too. Gads, how much further along I would be!!
The one thing I would add to the list is that an Emergency Fund isn't always just for emergencies in my opinion. I have used my extra fund for good things too, things that were obviously such a good deal I couldn't pass them up. For example, a family member that is having to sell a vehicle & offers it to me. I wasn't planning on buying one, but wow.........such an opportunity. Bought it & then sold it for a profit after just cleaning it up a tad. If I didn't have the money put aside, I couldn't do those kinds of things.
Another example............I buy things in bulk, often with friends & if something comes up, I can usually take advantage of it. Saving tons in the long run, but you do need the cash at the time.
So, an emergency fund isn't always for bad, unexpected things...........but for good ones too.