A little help for someone just starting out?

[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.

[LuxLiving]

Anya, you're a woman, correct?

I'd ask what kind of financial education you've gotten for yourself? Have you read any financial books?

Some for women that I particularly like are Mary Hunt's "Debt Free Living", David Bach's "Smart Women Finish Rich", Suze Orman's new book on women's money, sorry can't think of the title and I don't own it just borrowed from the library last year and David Chilton's "The Wealthy Barber".

There will be some folks along with good advice but I still suggest you do some reading on your own if you haven't already. It sounds as if you are doing fabulously for a young person!

In the meantime, rRead the archives here for lots of good info!

[Aleta]

Anya7: For a first time poster, you have given us alot of information. I assume that you are newly out of college. The great thing is that you only have 2 debts which are your student loans.

I have to concur with Lux Living about reading as many financial books as you can. The great thing is that you don't have to make any fast decisions yet. I agree with the books that she reccommended. I also like ALL YOUR WORTH . You can get any of these books from your library. There's no reason to buy books at this time.

As far as your company not having a 401K, you can start your own IRA and for your age, I would suggest a Roth IRA. What you can contribute depends on how much you make and your company doesn't have a 401K. You could start with a Target Retirement Fund for now. TRowePrice offers a great way of about $50 a month to start one of these funds. Vanguard requires $3,000. to open a fund (which I have).

I gather from what you say that you bring home $2,000 a month. For an emergency fund you don't need the $2,000 a month. There are expenses that you wouldn't have if you had an emergency of any kind. For instance, you wouldn't be saving money. This is only for basic living expenses. Some start with 1 month expenses and add to it. You need between 3 and 6 months of emergency funds.

You also have until April of 2009 to get your entire retirement amount in for 2006. You say that you have $400 left over and part of that is to go to your retirement, so you clearly wouldn't need your savings for your retirement savings. If you pay off 1 or both of your loans, you'll be way away because you will have $128 more to yourself every month without paying 7.22% interest.

As for your savings, CD's and savings accounts are fine for now. You need preservation of your capital at this time until you decide what you want to do.

Any money you have in your account earning interest will be taxed at the end of the year at your tax rate. It's important for you to think about having money earning interest that is taxable or paying off interest that you can't deduct on your taxes. Most importantly is your support base and who is there to help you should you have a problem.

I think that you are doing great. Keep reading here.

[maat55]

Hello Anya,

Reading books will help you to setup a financial plan. Some books will help you with the mechanical side of finances, like The Total Money Makeover by Dave Ramsey and some will help you with the philosophical side of money, like Rich Dad Poor Dad and The Millionaire Next Door. Reading books will give a better overall financial plan.

Basics are: Live debtfree other than your mortgage, make a budget, have an emergency fund of 3 to 6 months expenses and invest about 15 of your take home in Growth stock mutual funds. Read also a book on investing to help you understand how it works.

We can answer many questions on this forum, but to get a good overall view, reading books will help you alot. I'ts good to see you are looking for advise at this stage in your life. Good luck.

[disneysteve]

Welcome, Anya!

It sounds like you are doing great for your age and just starting out. You've got no debt except modest student loans. You already have money in savings. You recognize the importance of beginning to save for retirement. And you have some basic financial goals sketched out. Good for you.

Here are some thoughts.

You say 10% of take-home would be $200/month. That means your gross annual pay is somewhere in the neighborhood of $30,000, right? Correct me if I figured that wrong.

1. If possible (and it sounds like it is), I'd aim for 10% of GROSS pay to retirement, not 10% of take-home.
2. If there is no 401k, I agree with opening a Roth IRA for that money.
3. If your take-home is about $2,000/month and you have about $400 left over, that means your monthly expenses total about $1,600. A 3-month emergency fund would be $4,800. 6-months would be $9,600. Your plan includes $1,000 cushion in checking and $1,800 for emergencies, or $2,800. That isn't enough, so I'd suggest keeping a total of at least $4,800 on hand.
4. I think you could go either way with the student loans. The rates aren't terrible but given current market conditions, paying them off earns you a guaranteed 6.8% and 7.22% return on your money which looks pretty darned good right now. As you noted, paying off the 7.22% loan also lowers your monthly expenses by $65. So I think I'd vote for getting rid of that $5,400 debt.

So of that $11,800, $1,000 will stay in checking. $3,800 will go into a high yield money market account as the rest of your EF. $5,400 will go to repay the one loan. That leaves you $1,600. I'd probably use some of that to start the Roth and some in the "new" car account. By the way, I put new in quotes because I would not advise buying a brand new car. I (and many others here) much prefer buying good quality used cars. Personally, I'm a fan of something 2-3 years old, but others go even older. Depends on your budget and preferences.

[Fizgig]

A little tip on saving successfully - Instead of taking what is left over every month and manually transferring it to savings/IRA, set the transfers up automatically with each paycheck. Make it a budget item like a bill.

[noppenbd]

Anya, welcome to the board. You are receiving wonderful advice. I particularly like disneysteve's specific guidance. One other note on the student loans. Look into consolidating the loans in July 2008, when the new rates are announced. They are going to be some of the lowest ever. I believe you can consolidate even if you just have one loan. This may free up some more cash for savings.

[jIM_Ohio]

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.

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.