Advice for a beginner saver

[poordoctor]

Having just got out of school and started work this Jan, I am trying to get a grip on what to do with my money and am looking for some advice. I have $25K cash saved up so far this year and am wondering whether I should apply it towards my student loan 34K at 4.75% (111 payments remaining) or invest it somewhere.

Also are there some general guidelines I can follow with my savings starting out. I will turn 30 later this yr, am single and my living expenses including all debt+rent are 2,500 pmonth. I calculated that I can save ~35K per year apart from 401K.

Other details
Earning 115K + ~10-15K options, bonus, espp
Debt Student Loan payment $373 pm + car lease payment of $215 pm, No CC
Aiming to max out 401K with emp match will be $20,750 per year

[jIM_Ohio]

Keep 6 months expenses in cash for emergencies.
At 4.75% I would not be in a hurry to pay off loans.
Do you have retirement savings started (IRA, 401k)?

My generic advice-

save 20% of income and live on 80% (or less) of what you earn.
keep 6 months cash for emergencies.

The 20% you save- mark 15% of this for retirement. 401ks, IRAs and even taxable accounts (which are marked for retirement and not touched). 15% of gross income.

5% of gross income should go into savings for short and mid term expenses. new car, new house, paying off student loans or similar.

If the 5% would be sitting in cash, you are better off using that portion to pay down debt (even if debt is at 4.75%). You would have to tie money up in cash for 7-8 years for it to return even close to 4% after taxes.

[maat55]

The best thing you could do is always live on 80% as stated above. I personally would concentrate on getting debtfree as quickly as you can and not lease cars. Save and pay cash for your stuff.

With your extra 35k I would fund your EF then apply the rest to the SL. After SL is gone, can start a car-stuff-down payment for home etc.

[responduser]

Get out of your debt first.

[MonkeyMama]

The best thing you could do is always live on 80% as stated above. I personally would concentrate on getting debtfree as quickly as you can and not lease cars. Save and pay cash for your stuff.

With your extra 35k I would fund your EF then apply the rest to the SL. After SL is gone, can start a car-stuff-down payment for home etc.

Agreed.

We saved at that pace first out of school and had a down payment on a home rather quick.

I'd pay off the debt, save an emergency fund, and save some significant money for a home. As well as invest some of it.

(Of course, assuming you want to buy a home).

Maxing the 401k is a great start as far as tax concerns. I would also max out a ROTH, if you are eligible, and consider maxing out a HSA. Though you need to be in a HDHP to contribute to a HSA (HEalth Savings Account) there is currently no income limit on making tax deductible contributions. (Though if you have good benefits those may be worth more than a HSA).

The more you invest, the more taxes you pay, so you just want to keep in mind to max out your tax shelters, if possible.

[zetta]

Read the book "All Your Worth" -- it will lay out a step-by-step plan for setting up your financial life that largely concurs with JimOhio's recommendations above.

[bigalross]

You are on the right track!!

It sounds like you are on the right track and I have seen some excellent ideas on some earlier responses. The one thing that I have to add is that i would not stop at saving 20% of what you make. One of the keys to being able to retire comfortably is to learn to live on less than you are making. Obviously, living on 80% fits that criteria, but once you have the short and mid=term savings objectives covered, you should be maxing out all other long term objectives such as 401k's, IRA's with particular emphasis on any Roth opportunities that you might have. Once that is done, I would have set aside an amount for investing in diverse opportunities and would look to increase that amount (while still making sure that I am maxing out any retirement funds) every time I get a raise. If I get a 3% raise, I would add another 1% to my savings. By doing this, you will continually increase your savings while decreasing the amount the percentage of what you make that you are living on. This will work for people that are making much less than $115k as well.

[poordoctor]

Thanks!

Thanks all for the advice!

I have decided to just get rid of the $35k student loan as soon as possible. I paid off $15k this week. I have another $10K in savings and waiting for a relocation bonus of $10K and so I hope to be debt free (with $0 savings though) by EOY. Feels good to see the balance come down.

I think leasing a civic lx instead of buying is something I overspent on although it was a good deal with $2K down and $199pm for 36 months and my gas costs are low (400 miles on a full tank) and no maintenance costs. I just had a jalopy car for so long during school and grad school that I couldn't resist and I would like to upgrade to a better car later not right away, hence the lease.

Another question I had was whether people think its enough to do the IRS max contribution to 401K every yr starting at age 30 and also $5K to traditional IRA. I may not be eligible for Roth atleast this year due to sign-on bonus. Will just this be enough for retirement. I also get $5K company match.