Dividing up my paycheck, any advice?

[gf1723]

Just got a new job that I'm really excited about. Now I don't have to work at a crappy one and I finally get to move out of the parents house. I lived with them 2 years after graduating college. I'll admit, I didn't save as much as I should have but oh well, at least I didn't go buying a new car or anything. I'm 25 years old and have NO DEBT! No student loans, credit card, etc. My car also has low mileage and is all paid off, hopefully it doesn't break! Not sure what my net paycheck will be but I'm going to be making roughly $42K/year. I'm going to star budgeting my spending since I will be paying for rent, bills, and other things now.

My monthly bills (including rent) will come to about $950/month. I just started creating sub-accounts under my banking accounts. Here is the breakdown:

Checking: $400
Savings: $9,000
RothIRA: $100 (contributed max for 2010, starting already for 2011)
Emergency Fund: $50

I have about $3,000 from my 401k that I will roll-over into my Roth from my previous job. I am also getting paid all my vacation hours from my last job that will probably net me around $850. I will probably use that as my deposit and part of my first months rent. I know I should probably beef up my EF, to probably around $5,000? I just don't know the priorities right now of dividing up my paycheck. Obviously when I get my first paycheck this will be a lot easier, but I'm eager to start figuring it all out. I also thought about creating another sub-account for starting a house fund. Eventually I would like to start living in a home instead of renting. I figured I would rent for a couple of years and that will help me determine if I really want to stay in this area with this new job, and possibly buy a house? Any advice for someone new trying to figure this all out? Thanks so much!

[disneysteve]

Welcome. You've come to the right place. Congrats on the new job and on getting your own place.

Your bi-weekly take home pay will probably be somewhere in the neighborhood of $1,300 give or take a little. So monthly that is about $2,800. If your monthly expenses will only total $950, you will be in great shape.

I'd say the first priority is the EF. Six months of expenses would be $5,700. You already have over $9,000 between savings and checking so that is taken care of. Just designate $5,700 as your EF and set it aside not to be touched except for emergencies.

If you do have $1,800 free each month, you can certainly max a Roth. That takes $416.67/month. Will there be an employer-sponsored retirement plan (401k, 403b)? Putting $5,000 in a Roth will represent about 12% of your income. The general advice is to save at least 15% for retirement which would mean another $1,300 for you. If you can do that from the beginning, that would be fantastic but you may need to grow into that.

I'd say to wait a month or two after you move and see what your actual expenses are. Utilities, food, gas, etc. are things you won't know for certain until you are doing it. Then come back and post your true expenses and get more advice.

[jIM_Ohio]

Spend less than you earn
decide what % of each paycheck you want to save and save that EVERY WEEK (or every other week or 2X month... whenever you get paid, save that amount first).

I would suggest starting at 10% and trying to reach 20% within 2 years.

Meaning if you earn $42,000/year you should expect to see $4200 more in a bank account somewhere at end of 12 months.

10% is slightly below average (relative to this board, and 20% is above average relative to this board IMO)

[krantcents]

Spend less than you earn
decide what % of each paycheck you want to save and save that EVERY WEEK (or every other week or 2X month... whenever you get paid, save that amount first).

I would suggest starting at 10% and trying to reach 20% within 2 years.

Meaning if you earn $42,000/year you should expect to see $4200 more in a bank account somewhere at end of 12 months.

10% is slightly below average (relative to this board, and 20% is above average relative to this board IMO)

I totally agree. Before you look for that apartment, think about how much you should spend. The rule of thumb, I used one week's pay for rent. Consider a roommate if necessary. Good luck.

[maat55]

Your starting off great. I would fund a roth, establish a car fund around 300 per month, and determine how much for an house fund.

Whatever you do, make your plan livable and stick to it.

[gf1723]

Thanks for the advice. My new job does offer a 401k plan that I will probably put about 8-10 percent in. I already have about $30K in a RothIRA, thanks to my loving father who put money in for me when I was in college and couldn't afford it. I still plan to max my Roth every year, because I want to have a nice retirement.

I will definitely round off that EF to about $6000 first off. I don't plan on eating out a lot and I should be able to take a bus to work most days saving gas money. This will also keep me from eating out at lunch since I will have to bring it with me.

My checking account took a minor beating today because I bought a new futon, TV stand and some end tables for the living room. My apartment isn't furnished but I don't mind buying furniture. I feel that it's now mine and I won't need to pay for new furniture for quite some time unless I move into a bigger place. I will also need to buy a small fire-proof vault to keep in a closet, I got important papers that I will need with me now that I'm out of my parent's home.

I actually will think about renting for a decent amount of time still. I don't really want to look forward to home ownership expenses right now. All my friends went and bought houses, but they have all settled down and got married right after college. They tell me renting is just wasting money, but I really don't see it as that. At least I don't have to pay for lawn mowers and other upkeep on a home.

Thanks again! I love reading the other advice on the forums and hope to gain a lot of personal finance/budgeting knowledge!

[snshijuptr]

My advice (as a fellow young adult) is to set really high savings goals. We save between 30-50% every month for one thing or another. If you set high savings goals then you won't get trapped in increasing your standard of living too quickly. Right now you are single with little to no financial responsibility. Just think how quickly your expenses will inflate once you have partner, kids, house, etc. Don't falsely inflate them now through huge increases in your standard of living.

[skydivingchic]

One minor note. You said you planned to roll your old 401k over to your Roth IRA. If your old 401k was contributed to on a pre-tax basis, you would have to pay taxes to get it into a Roth. I also don't believe you could roll directly into a Roth. I think you have to roll into a traditional IRA and then convert to Roth - someone correct me if I'm wrong. You can roll it over to a traditional IRA with no taxes. If it was a Roth 401k, I think you can roll it into your Roth. I've never done a roll over, so I don't know the exact mechanics, but wanted to mention the taxes.

[disneysteve]

One minor note. You said you planned to roll your old 401k over to your Roth IRA. If your old 401k was contributed to on a pre-tax basis, you would have to pay taxes to get it into a Roth. I also don't believe you could roll directly into a Roth. I think you have to roll into a traditional IRA and then convert to Roth - someone correct me if I'm wrong. You can roll it over to a traditional IRA with no taxes. If it was a Roth 401k, I think you can roll it into your Roth. I've never done a roll over, so I don't know the exact mechanics, but wanted to mention the taxes.

This is correct. A regular 401k can be rolled over into a traditional IRA, not a Roth.

[jpg7n16]

This is correct. A regular 401k can be rolled over into a traditional IRA, not a Roth.

I don't think that's correct. You can go straight from 401k to Roth according to IRS.gov

From: Publication 590 (2009), Individual Retirement Arrangements (IRAs)

You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):

• Employer's qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
  
• Annuity plan,
  
• Tax-sheltered annuity plan (section 403(b) plan), or
  
• Governmental deferred compensation plan (section 457 plan).

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

Income. You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid.

Example.

In July of 2009, you decide to roll over $50,000 from your 401(k) plan to your Roth IRA. You have no after-tax contributions. For 2009, you must include in income $50,000.



If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Rollover methods. You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways.

• Rollover. You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Since the distribution is paid directly to you, the payer generally must withhold 20% of it.
  
• Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA.

For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1.

[disneysteve]

Very interesting, JPG. I believe that is a change from the previous rules. I rolled over money a number of years ago and I could not put it directly into a Roth. Same thing happened to my wife.

[gf1723]

Great advice guys, I appreciate all of it! Just got done packing up TONS of my stuff and getting ready to have a stress-free New Years with some friends in Chicago. Then I'll be working for a week and will move into my new apartment next weekend.

One last question for you all. Should I consider buying a used washer/dryer within the first two months? My apartment has hookups and they do pay for all my water, so I figure in the long run, it will save me in quarters. The only downside is if I decide to move somewhere else, I will need to find an apartment with hookups.

[disneysteve]

The only downside is if I decide to move somewhere else, I will need to find an apartment with hookups.

Not necessarily. You could just sell yours on craigslist before you move. Or perhaps the landlord would buy them from you to keep in the apartment for the next tenant. Depending on how long you are there, you might save enough from having them that it won't matter if you just leave them behind because they will have paid for themselves.

[CalisFinancialGuru]

To throw my two cents in, I agree with your idea of creating an additional sub-account to start savings towards real-estate. I personally use an online goal savings bank I found called smarty pig. It is a great savings account that allows you to divide up your funds into separate goals and track them. You can then cash them out separately when the goals are met. Thought this might help and sounds like you are on a great path to wealth!