To save or to spend and enjoy?

[StrangeClouds]

Hi all. I'll be living on my own income for the first time and would appreciate any suggestions on my situation.

I’ll be graduating college this year and will come out with ~15k in cash and no debt. I have signed a job offer and expect to make 110k+ next year working in a high cost-of-living area (NY, SF, Chicago, etc.)

I initially planned on saving as much as possible early i.e. opening and maxing out a Roth IRA with the little cash I have, especially since this might be one of my few chances to contribute to a Roth due to the 122k limit. I also planned on maxing out my 401k consistently during work for tax/retirement purposes.

However, there are some things that I really want (but don’t need) to spend the money on right now. These include a post-college trip with close friends, helping my parents and working sister pay off their debt, going out for drinks/nice dinners more often, etc. Things that I would enjoy a lot more now while still young and free of much responsibility.

Essentially, I’m trying to figure out if it’s possible that money today is worth more to me than whatever it would grow to by retirement age (i.e. $5k today vs. $45k at age 60 pre-inflation). If so, would it make sense to stash away less in the IRA/401k and put much more towards enjoyment today or in a more liquid fund for that family vacation, house downpayment, sports car, etc. several years down the line? What would be the "optimal" way to allocate any extra money?

On one hand, the tax benefits from retirement accounts make it seem like a no-brainer to max out if you have the means. On the other hand, I’d hate to look back as an old miserly retiree and regret not living it up more when I was young.

Sorry for the long post – any thoughts/comments are appreciated. Thanks!

[skydivingchic]

With that income, you can likely do both. I live in a HCOLA and make a salary a bit less than you. On that salary I manage to max out both my 401k and Roth. Contributing to a 401k on a pre-tax basis will make your adjusted gross income less, which is what the Roth contribution limit is based on. So, though you will likely still hit the limit, it make take longer than you think.

I also have plenty of indulgences. Some are recurring things like dinners out and a housekeeper and some are more one time things, like vacations. I feel like I've established a good balance between socking money away for retirement and living life now.

I would recommend that you immediately start maxing out your 401k. The limit is $17,000 though there may be additional restrictions through your employer. That is ~15% of your income, the minimum most here would recommend you save for retirement. After that, give yourself a few months to figure out what your expenses are going to look like. Then you can decide what to do with the surplus.

One more thing to consider. Did you earn at least $5000 in 2011? If so, you may consider using some of your savings to max out your Roth IRA for last year. You have until April 17th of this year to do that.

[snafu]

Good on you for being aware of the need to include savings/retirement planning right from the start. Setting up in a new community, new job, developing new friends and social/business network needs time and money. I suggest you start with a rough breakout of net income 20% savings retirement & emergency funding[this is also called pay yourself first], 50% needs & 30% wants. Take full advantage of any matching employer retirement contribution. The magic of compounding make early years contributions incredibly valuable. What you retain is so important I can hardly stress it's value strongly enough.

Since you want to help your folks and sister, you will need to rein-in your initial spending desires and seek less expensive ways to reach goals. Many of us have outfitted our 1st apartments with gently used furnishings and supplies from thrift shops, on-line sellers, Kijijji, Craig'sList and yard sales, choosing quality over quantity.

Wishing you every success and a bright future.

[kork13]

With that income, you can likely do both. I live in a HCOLA and make a salary a bit less than you. On that salary I manage to max out both my 401k and Roth. Contributing to a 401k on a pre-tax basis will make your adjusted gross income less, which is what the Roth contribution limit is based on. So, though you will likely still hit the limit, it make take longer than you think.

I also have plenty of indulgences. Some are recurring things like dinners out and a housekeeper and some are more one time things, like vacations. I feel like I've established a good balance between socking money away for retirement and living life now.

I would recommend that you immediately start maxing out your 401k. The limit is $17,000 though there may be additional restrictions through your employer. That is ~15% of your income, the minimum most here would recommend you save for retirement. After that, give yourself a few months to figure out what your expenses are going to look like. Then you can decide what to do with the surplus.

One more thing to consider. Did you earn at least $5000 in 2011? If so, you may consider using some of your savings to max out your Roth IRA for last year. You have until April 17th of this year to do that.

100% agree on everything she says here.

Bottom line, you should try to do both. Lay out a spending plan for yourself, estimating how much you'll pay each year in taxes, rent/mortgage, utilities, auto expenses, and so on. Include in there at least 20% of your income (preferably more if possible) to be allocated toward savings. Once you get a baseline figure of what you'll need to spend and save in order to live day to day while still preparing for the future... use the rest to enjoy life!

Definitely max out a Roth IRA every year (if you find yourself above the limit, contribute to a non-deductible IRA, then recharacterize it at year's end into a Roth). Save as much as practical in your 401k -- at the very minimum, enough to earn your full employer's match. Preferably, you want to save at least 10%-15% of your gross income for retirement every year.

[disneysteve]

I agree with the others. Starting out at 110K, you should be able to do it all. There is no reason why you can't save 15% for retirement and still have plenty left to enjoy life. Absolutely do the Roth while you are able. You can't ever go back later and make up for missed contributions. You also can never, ever replace the value of compounding over time. Starting to invest now is the best possible thing you can do to ensure a secure future.

As someone who is about 25 years your senior, I also feel obligated to point out that getting older in no way diminishes your ability to go out and have fun, enjoy life, spend time with friends and travel the world. You don't have to cram that all in when you are 21. I'm in my 40s and do lots of things to enjoy life. Heck, I have an uncle in his 80s who just got back from a long European tour going to a bunch of countries I can't even pronounce. You've got your whole life ahead of you. You don't need to do all of your living tomorrow.

[BudgetSurgeon]

Yes, include me on this list. Congrats on a very nice starting salary out of college, and double-congrats on not having any college debt. You are well ahead of the curve for people your age. Offering to pay down the debt of family members is certainly a very noble gesture on your part.

That said, make sure you don't blow it all on enjoyment. It is important to have fun at your age, and you certainly deserve it, but make sure you still budget well, and have a savings strategy. I would max out on your 401K to lower your tax burden (and potentially take advantage of any company matches), and you should certainly contribute some to your Roth IRA as well.

You didn't specify what your budget was, so I'm not sure what your potential is for savings, so it's hard to comment any further. Just always aim to reduce your budget as much as possible, make sure you have a savings strategy in place, and yes, have some young fun!

[Slug]

As others have noted, you can do it all with regards to saving and fun despite being in a HCOLA. Their recommendations are spot on. To add to this I would just caution you to be careful about your peer set who will also likely be young and successful, however, they may not be as savvy from a personal finance perspective. Thus, you may feel like you aren't having as much fun as they are, but that's because they either aren't saving at the same rate you are and/or they may already come from wealth and so are still subsidized in many ways. Don't get sucked into trying to keep up. Your goals are solid and virtuous and will help you and your family in the long-term, and you'll still have plenty of fun along the way.

[disneysteve]

I would just caution you to be careful about your peer set who will also likely be young and successful, however, they may not be as savvy from a personal finance perspective. Thus, you may feel like you aren't having as much fun as they are, but that's because they either aren't saving at the same rate you are and/or they may already come from wealth and so are still subsidized in many ways. Don't get sucked into trying to keep up.

I just want to emphasize this. If your coworkers who are also earning 110K or so seem to be driving nicer cars, wearing nicer clothes, eating out more and talking about their latest purchases, don't let that alter your plan or your budget. Odds are good (probably 70% if stats are to be trusted) that they aren't saving anything. You don't want to go down that path.

[MonkeyMama]

As someone who is about 25 years your senior, I also feel obligated to point out that getting older in no way diminishes your ability to go out and have fun, enjoy life, spend time with friends and travel the world. You don't have to cram that all in when you are 21. I'm in my 40s and do lots of things to enjoy life. Heck, I have an uncle in his 80s who just got back from a long European tour going to a bunch of countries I can't even pronounce. You've got your whole life ahead of you. You don't need to do all of your living tomorrow.

Agreed.

On the flip side, I remember in my 20s everyone else being very broke and more open to being very frugal (hanging out at each other's apartments, playing games, doing potlucks). I know these days people tend to spend more than they have, on credit. But it just seemed like it was easier to save money back then with no real difference to lifestyle. I mean I had a friend I traveled with a lot but we'd crash with friends and that kind of thing. Likewise, I didn't have any of the financial obligations I have now (mortgage, insurance, kids, etc.). So it was far easier to enjoy and save a lot, even with much smaller incomes back then.

& I did really appreciate the money I saved when younger, a few years down the road when we bought a house and had kids. These are all very expensive endeavors made easier with savings and good money habits. When money is tighter, priorities become important (prioritize what you want to spend money on, and what can wait for later). You may have to prioritize a bit. But, you are in a good income position to both save and enjoy. We have always done well on a lower income - just being very efficient with our spending (buy a lot of used things to save money, for example) and being very in-tune with our priorities. MEaning, we have never lacked that which was the most important to us.

I would absolutely max out the 401k and just make that a habit going forward. Skydiving's comments were spot on. I also think it is wise to keep the spending low key the first year or two until you are sure you are happy with career/job. Problem is when you get used to a high income that is not sustainable.

[disneysteve]

On the flip side, I remember in my 20s everyone else being very broke and more open to being very frugal

That's true, too. Sleeping on a friend's floor in my sleeping bag for the weekend was a get-away compared to a nicer hotel with a hot breakfast now. I miss those days actually. I'd still be perfectly happy on the floor but DW and DD not so much.

[ecoadapt]

Right. You are lucky enough graduating without any debt but you are luckier having a job after college that gives a good pay. Thus, you can do both spending and saving. It's a good start knowing your priorities!