Recent College Grad Finances

[keelerjr12]

I'm a recent college graduate that started a new job and looking for some financial help. Here are few stats so far:

Gross salary: $64k
Net salary: $3,800/month

Checking: $600
Savings: $7,750

Student loan: $32k @ 4.2-6.8% (w/additional $7k to parents at 0%)
No car payment (driving a '94 with 185k miles).
No CC debt (don't even have a CC).

Kept a budget over the last month and this is about what I spent:
Food: $250/month
Gas: $300/month (30-40 min commute).
Entertainment: $250/month
Utilities: $100/month
Rent: $400/month
Other expenses: $300/month (insurance, birthdays, holidays, etc.)

I was hoping to pay back student loans in 18 months. I think I have a good EF set up so far and now looking where to put my money right now. I was thinking paying my unsubsidized loans first and then the rest all at about $1,500/month.

I'm just wondering if I should being putting money towards my employer's 401k because they match 5% at 80 cents on the dollar. However, to keep that employer contribution I have to stay here for at least 3 years. However, I am in the process of applying for Air Force OTS and hope to be selected and leave in the next year.

Am I better of to just save money for a new car, put as much money towards my loan, and if I have any left over than open up a Roth IRA that I will put towards once I'm in the military (so not even bother with employer 401k).

My dad thinks I should pay as fast as possible and save $500-600 a month for a new car when my current car dies. With the way the market is, the target date fund (2050) through my employer is only averaging 6% YTD, -.6% for the last year. Therefore, I actually make out better by putting towards my loans at 6.8% I think.

[bjl584]

You're EF should be about double what it is. Then, I would start saving for a replacement car. And, I would open up a Credit Card so that you can establish some credit history. Just be responsible with it and pay the bill in full each billing cycle.

[keelerjr12]

I thought my EF was in good shape for being 22 and having relatively low expenses (about 4-5 months of expenses saved up). Also, I don't really want to get a credit card; I'm more of the 'pay for everything in cash' type of person.

As for saving for a car, I will never buy a new car. I work in the automotive industry currently and have grown up in it and I know how fast a new car will depreciate. I usually do most of my own car repair as it is, so I'm looking for a 3-5 year old car with 40k-50k miles on it. Figured I'd save about $6k-7k before I look at buying a used car.

[bjl584]

I thought my EF was in good shape for being 22 and having relatively low expenses (about 4-5 months of expenses saved up). Also, I don't really want to get a credit card; I'm more of the 'pay for everything in cash' type of person.

As for saving for a car, I will never buy a new car. I work in the automotive industry currently and have grown up in it and I know how fast a new car will depreciate. I usually do most of my own car repair as it is, so I'm looking for a 3-5 year old car with 40k-50k miles on it. Figured I'd save about $6k-7k before I look at buying a used car.

Your expenses that you listed are $1600 a month. That doesn't incluse your SL payments. They are probably around $250 to $300 a month or so. That gives you $1850 to $1900 a month in expenses. That times 6 month equals around $11K. That's where your EF should be.

I didn't say buy a new car. I said save for a replacement car. You seem to share that mondset. A 94 with 185K won't last forever. You may get a few more good years out of it before it starts causing trouble for you. I'd strive to save 10K for a replacement car.

Does your employer offer a match on their 401K? If so, then definitely contribute at least to the match. Don't pass up free money.

[keelerjr12]

Your expenses that you listed are $1600 a month. That doesn't incluse your SL payments. They are probably around $250 to $300 a month or so. That gives you $1850 to $1900 a month in expenses. That times 6 month equals around $11K. That's where your EF should be.

I didn't say buy a new car. I said save for a replacement car. You seem to share that mondset. A 94 with 185K won't last forever. You may get a few more good years out of it before it starts causing trouble for you. I'd strive to save 10K for a replacement car.

Does your employer offer a match on their 401K? If so, then definitely contribute at least to the match. Don't pass up free money.

Okay, I firmly agree with your recommendations. My employer matches up to 5% at 80% match. However, it won't become vested until you've been at the company for at least 3 years. I do not plan on being here for the next 3 years (whether I leave for military or another job).

That's why I'm wondering if I should just pay down my loan as fast as possible ($1500/month) or if I should contribute to a 401k or Roth IRA.

[keelerjr12]

Good job on no car debt or no CC debt!

Since you are planning on leaving your job prior to being vested, I would start contributing 5% to a Roth IRA.

I would save $300-$400 per month for a newer car, paying cash for an upgrade when necessary or when you have enough money to upgrade.

I would NOT get a credit card. You are establishing a credit record with your student loans. I would pay off the student loans as quickly as possible.

Once the student loans are paid, I would then build the EF to 3-6 months expenses.

The next step after being debt free and having 3-6 months in an EF would be to bump up the 5% in your Roth IRA to 10-15%.

You explained word for word what I was trying to achieve. I just wanted to make sure that my plan was a smart financial move.

[bjl584]

I would NOT get a credit card. You are establishing a credit record with your student loans. I would pay off the student loans as quickly as possible.

Once the student loans are paid, I would then build the EF to 3-6 months expenses.

Getting a CC or not can be debated both ways. I take the side of the argument that credit can be a good financial tool if used responsibly. I receive fuel points on mine. There is also added fraud protection with a CC. If something fishy appears you can simply dipute the payment. With a debit card it can take the bank several weeks to replace your money leaving you broke in the meantime. This decision is ultimately up to OP.

As far as paying student loans, then saving for an EF, you have to look at a few things. It may be more beneficial to do both simultaneously. If OP dedicates all extra cash to debt repayment and has a financial emergency of some kind, then he will be forced into debt to pay for it. Also, student loans may be tax deductible. If he can earn a better return elsewhere, then paying the minimum may make more sense. OP will need to crunch the numbers.

[keelerjr12]

Thank guys for your help.

I think this comes down to how much risk am I willing to take. Being 22 years old, I can afford to take a good amount of risk (no house, no car payment, no family). I plan on putting at least 5% of my gross salary into some form of retirement. Now the question becomes:

Should I put that 5% into my employer's 401k and get the match or open up a Roth IRA and put in 5% to that? My fear is if I do stay [get stuck] here for 3 years than I've missed out on the match. Having said that, I'm almost 90% sure I will not be here after 3 years.

Also, what do you guys recommend for investing individual mutual funds/stocks? I was hoping to invest in some mutual funds on my own so I can hopefully make some money prior to 59.5 (around 40-50). Or am I better to maximize all my retirement options first?

[bjl584]

Also, what do you guys recommend for investing individual mutual funds/stocks? I was hoping to invest in some mutual funds on my own so I can hopefully make some money prior to 59.5 (around 40-50). Or am I better to maximize all my retirement options first?

Standard advise is to Max 401k, then Roth, then indivual taxable accounts.

That's standard advise. I invest in all three. My 401K is not maxed. I contribute 10%. My Roth is maxed, and I contribute a sizeable amount to my taxable account.

For individual funds, find one with low expenses and a good track record. (10 years of solid history.) You can look into target funds and take some of the guess work out of things.

But, you are getting a little ahead of yourself. It start by putting in 5% to the 401K, saving up more of an EF, and paying down your loans. That is an excellent start at 22.

[keelerjr12]

Standard advise is to Max 401k, then Roth, then indivual taxable accounts.

That's standard advise. I invest in all three. My 401K is not maxed. I contribute 10%. My Roth is maxed, and I contribute a sizeable amount to my taxable account.

For individual funds, find one with low expenses and a good track record. (10 years of solid history.) You can look into target funds and take some of the guess work out of things.

But, you are getting a little ahead of yourself. It start by putting in 5% to the 401K, saving up more of an EF, and paying down your loans. That is an excellent start at 22.

Sounds like a great investing strategy. Thanks again! And I didn't plan on starting individual funds until I was financially sound. Just something I wanted to keep in mind.

[kork13]

I have to disagree on the 401k... I normally hear & pass on as "standard": contribute to 401k up to the match, the max Roth IRA, then max 401k, then taxable. But since you aren't planning to stay long enough to actually get the 401k match, I'd treat it as if you don't have a match at all. Thus, Roth IRA becomes the priority, then 401k only after the Roth is maxed out.

It seems you have enough cash available each month ($1900/mo -ish) that you can work on multiple things all at once. First, open up a Roth IRA and contribute $416.66/mo to max it out... And do this as the FIRST priority, not the last "if there's money left" option. I'd definitely hammer on the student loans (maybe $1000/mo), but also save & earmark $300/mo for a replacement car, and another $200/mo to beef up your EF. It's not a race -- since you have the ability, take the time to meet all of your needs/goals concurrently.

I understand your hesitation to start investing, but I would strongly recommend you start into it with your Roth IRA ASAP. Start out with a target-date fund like you mentioned, or even just a simple S&P 500 index fund. After you're started and going in those basic investments to at least get yourself moving, you can take the time to really learn about investing more and make the smart decisions about what you actually want to do. But start sooner than later....with long-term investing (like for retirement), the earlier you start the more money you'll make.

Oh, and good luck with OTS! I'm in the AF myself, and although sometimes you'll have to wait a year or two before OTS will accept you, it's not a bad way to go.

[keelerjr12]

I have to disagree on the 401k... I normally hear & pass on as "standard": contribute to 401k up to the match, the max Roth IRA, then max 401k, then taxable. But since you aren't planning to stay long enough to actually get the 401k match, I'd treat it as if you don't have a match at all. Thus, Roth IRA becomes the priority, then 401k only after the Roth is maxed out.

It seems you have enough cash available each month ($1900/mo -ish) that you can work on multiple things all at once. First, open up a Roth IRA and contribute $416.66/mo to max it out... And do this as the FIRST priority, not the last "if there's money left" option. I'd definitely hammer on the student loans (maybe $1000/mo), but also save & earmark $300/mo for a replacement car, and another $200/mo to beef up your EF. It's not a race -- since you have the ability, take the time to meet all of your needs/goals concurrently.

I understand your hesitation to start investing, but I would strongly recommend you start into it with your Roth IRA ASAP. Start out with a target-date fund like you mentioned, or even just a simple S&P 500 index fund. After you're started and going in those basic investments to at least get yourself moving, you can take the time to really learn about investing more and make the smart decisions about what you actually want to do. But start sooner than later....with long-term investing (like for retirement), the earlier you start the more money you'll make.

Oh, and good luck with OTS! I'm in the AF myself, and although sometimes you'll have to wait a year or two before OTS will accept you, it's not a bad way to go.

Thanks, this is the way I'm going to go. I'm looking at Vanguard right now for a Roth IRA. And are you on the officer or enlisted side? Don't mean to delve into your personal life, but what is your job?

[sblatner]

I personally would get a basic credit card. I believe you cannot rent a car without one. You may not be old enough to rent a car now (you might have to be 25) but you will be old enough some day. If you get a basic free card, put it away and just know it is there if you need it.

[kork13]

I personally would get a basic credit card. I believe you cannot rent a car without one. You may not be old enough to rent a car now (you might have to be 25) but you will be old enough some day. If you get a basic free card, put it away and just know it is there if you need it.

Agreed. Having a credit card, so long as it's used responsibly, can only benefit you. You will slowly build your credit over time and with responsible use (e.g., pay in full every month), you have the potential to earn rewards (cash, redeemable points, airline miles, or otherwise), and it will offer you much better consumer protections than using a debit card. Just because you use a credit card doesn't mean you start paying exorbitant interest. Pay the full balance every month (to the same net effect as using a debit card), and you'll never pay a dime in interest.

You should check into your local credit unions, they probably offer a no-fee credit card that you can use as required for online purchases, renting cars, making hotel/airline reservations, or just day-to-day spending. Use it smartly and it'll serve you well.

[kork13]

Thanks, this is the way I'm going to go. I'm looking at Vanguard right now for a Roth IRA.

Vanguard is a great option, I've got my investments there, along with probably a good 40%+ of the regular posters around here.

And are you on the officer or enlisted side? Don't mean to delve into your personal life, but what is your job?

No problem -- I'm an officer (captain), and fly as a mission crew member on the E-3 AWACS (love it! ) . If you want to talk specifics or have particular questions, just send me a PM.