Starting a new job: help saving!

[ghettoflow21]

Hi there,

I am new to this forum, 25 years old, and recently started a job with a salary of 68K/year with a target 10-15% bonus. I currently don't have any savings or debt, and was looking for some advice on getting started with savings. They have a 4% match and also contribute 6% of your total salary from the previous year. What kind of contributions do you recommend for this year? I was also looking into starting a Roth IRA and have a savings account with Ally. Do you have any suggestions on a specific Roth IRA I should go with? Or any other general strategies for saving? Thanks in advance

[TheKayla]

A good practice is to save early and often. Since you have no debt, you're can be off to a great start. Since you don't have an emergency fund yet or any savings, start with only 10% for retirement, and save at least 6 months of expenses for an emergency. You may want to build a bit up as a cash reserve too ($1-2k perhaps to start) for ingoing and outgoing bills, and a small buffer. Then I'd up your retirement contributions up to 15-20%. It's above the average for a 20-something, but the more you invest now, the more you have in the long run. As long as you can pay your bills just fine, this is what you should aim for.

While it may seem like a lot to contribute, one other nice thing about aiming high when you're young is if you ever ran into financial difficulties, you could always still lower it to get a bigger paycheck coming in again -- but you're already be a head of the game to you could return to investing more once the troubles were over. It will also help you to not be scrambling once you hit 40, 50, or 60 -- you don't want so much of your income going to retirement that you can't enjoy life for all of these years, just because youre worried you won't have enough at retirement. Save more now, save a little bit more later, but all around you'll be saving a manageable, stress-free amount!

[kork13]

I am new to this forum, 25 years old, and recently started a job with a salary of 68K/year with a target 10-15% bonus. I currently don't have any savings or debt, and was looking for some advice on getting started with savings. They have a 4% match and also contribute 6% of your total salary from the previous year. What kind of contributions do you recommend for this year? I was also looking into starting a Roth IRA and have a savings account with Ally. Do you have any suggestions on a specific Roth IRA I should go with? Or any other general strategies for saving? Thanks in advance

Welcome! It's excellent that you're starting to invest at a fairly young age -- 40+ years of growth will do alot of good for you come time for retirement. Even better, you don't have any debts! That sets you up very well for success in the future.

First recommendation: determine what you're goals are. Think through what you're aiming for, then write them down & use those things as your targets & measures of success. In the words of a wise, phantasmic cat... If you don't know where you want to go, it doesn't matter what road you take. I find it easiest to frame those goals in terms of time frame. Short term goals (from now through the next 5 years), mid-term goals (5-20 years from now), and long-term goals (20+ years). I'll warn you, my recommendations are a bit savings-heavy, but if you can save aggressively now while you're young, it'll be that much easier to do so as you age, and continue to be financially successful in the future. (additional warning, I'm a bit wordy... so please pardon my wall of text)

#2: How much do you have in savings right now? You want to hold at least 3-6 months worth of expenses in an emergency fund, which is held exclusively in cash or other risk-free accounts (like bank CDs or federal I-Bonds).

#3: Contribute 10%-15% of your gross income to your long-term, retirement goals (but don't count what the company matches, either the 4% match or 6% annual contribution). Max out a Roth IRA for yourself ($5500 per year, which is 8% of your gross salary). Based on that, I'd recommend contributing 7% to your 401k (which would also earn you the full company match). That will take you to 15% of salary going toward retirement.

#4: Save an additional 5% for short-term goals (like new car, annual vacation, gifts, infrequent annual expenses, or whatever else). This should probably be saved in your Ally savings account, or other similar accounts that are not subject to much risk.

#5: Save another 5% toward mid-term goals (like buying a house, saving for future education expenses, etc.). This can be invested in a taxable investment account (at this point, probably the best option), or tax-sheltered vehicles like a 529 plan for education expenses. In a taxable investment account, I recommend that you focus on just using low-cost indexed mutual funds, to minimize your investment expenses.

For starting a Roth IRA, you first need to understand that a Roth IRA is not, in and of itself, an investment. Roth IRAs are just a TYPE of investment account, similar to your 401k. Also, understand that with your 401k, you contribute pre-tax money, then are taxed on it upon withdrawal in retirement. Roth IRA's are the opposite: you pay tax on contributions upfront, but when you withdraw that money in retirement, it is tax-free.

From there, I would say a good place to start would be Vanguard or Fidelity. Both of them (among others) have very good, low-cost index mutual funds that you can use to get started with your Roth IRA. How familiar with investments are you? If they're new to you, you might consider just using one of their target retirement mutual funds, targeted around 2050 or 2055. Alternately, an easy way to go is to use a couple Total Market index funds to broadly diversify your investments (and in so doing, reduce your overall risks). You will need to determine your desired asset allocation -- basically, how do you split your funds between stocks, bonds, international investments, and so on. Beyond that, just continue to consistently add money with every paycheck, and let your savings grow over time.

[feh]

Kork gives good advice above.

To the OP - if you want specific advice, you'll need to tell us more. Current savings, plans for large expenditures in the next few years, budget, etc.

[asdf]

Very good advice given above, and I also second what feh said about telling us more. The more detailed information you give us, the more detailed advice we can give you.

Start with providing a list of your typical monthly expenses. Then figure out what your take-home pay (after contributions, if there are any, and taxes) is each month. This will help with precision on short term goals like an EF, which can then move on to addressing your medium and long term goals.

[ghettoflow21]

Thanks for the great advice. Currently, I do not have an EF or any type of savings, so that is going to be the first thing that I want to do. Currently the only expenses that I have are rent at $1,200/mo including utilities, and food, which I spend close to $500 on and am trying to cut down on. With a 7% 401K deduction my take home bi-weekly would be $1,600. Currently I do not have any short term goals and I have no need for a car or vacation, although I would like to save some money to be able to buy stocks that I can hold onto, that will grow enough to be able to put a down payment on a house in the next 5-10 years. I am not sure how realistic this is, but with annual bonuses of 10-15%, I am hoping that this is realistic.

[feh]

Thanks for the great advice. Currently, I do not have an EF or any type of savings, so that is going to be the first thing that I want to do. Currently the only expenses that I have are rent at $1,200/mo including utilities, and food, which I spend close to $500 on and am trying to cut down on. With a 7% 401K deduction my take home bi-weekly would be $1,600. Currently I do not have any short term goals and I have no need for a car or vacation, although I would like to save some money to be able to buy stocks that I can hold onto, that will grow enough to be able to put a down payment on a house in the next 5-10 years. I am not sure how realistic this is, but with annual bonuses of 10-15%, I am hoping that this is realistic.

Ok. I think building an EF is first order of business. Then, determine how much money you want saved for a house in 5 years, and start saving that in a separate mental bucket. I would not invest that money in equities, given you may need it in 5 years. For that time horizon, I suggest CDs.

After the EF is funded and you've chosen a monthly amount to save for a house, the rest should go toward retirement. Come back when you're ready to discuss that topic.

[asdf]

Thanks for the great advice. Currently, I do not have an EF or any type of savings, so that is going to be the first thing that I want to do. Currently the only expenses that I have are rent at $1,200/mo including utilities, and food, which I spend close to $500 on and am trying to cut down on. With a 7% 401K deduction my take home bi-weekly would be $1,600. Currently I do not have any short term goals and I have no need for a car or vacation, although I would like to save some money to be able to buy stocks that I can hold onto, that will grow enough to be able to put a down payment on a house in the next 5-10 years. I am not sure how realistic this is, but with annual bonuses of 10-15%, I am hoping that this is realistic.

Are there any other typical expenses out there, like transportation, clothing, communications or even entertainment?

However, if you are really putting your monthly expenses at around $1700/month, that would indicate that an EF to cover 3-6 months would be $5k to $10k. If your job is your only source of income, I'd personally aim for 6 months, but there's room for interpretation there. The good news is that if you're netting a positive $1500/month this should take you little time to accomplish--3-6 months, in fact. Even if your monthly expenses are closer to, say, $2000/month, you should easily be able to meet that before a year has passes.

As far as saving for a house goes, do you live in a high COLA? $1200/month for rent seems very high to me, but you did say that utilities were included in that--I'd be curious to know what that includes. If you are in a high COLA, that could also mean that buying a house could be higher than normal, as well. Also, the type of house that you should pursue should also attempt to coincide with your longer-term life goals. Do you see yourself living in your location for the long term? What kind of house do you want to buy? Do you plan to start and have a family in this house? And so on.

[snafu]

Since you're just starting, I suggest beginning by managing your basic monthly cash flow. That means diving up income into 3 'buckets.' Pay yourself first with 20% for savings. Bucket #2 holds 50% of net income to cover all your basic expenses month-to-month starting with living categories like rent, utilities, cell, food, transportation, rental insurance. The third bucket fulfills 'wants.' The discretionary spending for clothes, entertainment, eating out, dating, friends, vacations and fun.

It's critical to establish an Emergency Fund to cover at least 3 months of your basic expenses [rent, utilities, cell, food, transportation, renter insurance] if anything horrible happens.

It's important to learn the details of your employer's 401K. Do you already qualify for match? How/Who manages the fund, what are the fees, what are your choices? It's smart to take advantage of the free money match by employer. The sooner you start the better it gets since it depends on 35 years of compounding. Any other savings is awesome.

Pay attention to the small stuff. Use a bank with the lowest possible fees for the services you need and use. I suggest one of the well know electronic banks [Ally, USAA etc] or Credit Union. I believe a Credit Card is useful if you pay the balance in full at least two business days in advance of due date. CCs are dangerous because the interest rates are ridiculously high when savings rates are under 2%.

Hope this helps clarify a starting strategy

[ghettoflow21]

Are there any other typical expenses out there, like transportation, clothing, communications or even entertainment?

However, if you are really putting your monthly expenses at around $1700/month, that would indicate that an EF to cover 3-6 months would be $5k to $10k. If your job is your only source of income, I'd personally aim for 6 months, but there's room for interpretation there. The good news is that if you're netting a positive $1500/month this should take you little time to accomplish--3-6 months, in fact. Even if your monthly expenses are closer to, say, $2000/month, you should easily be able to meet that before a year has passes.

As far as saving for a house goes, do you live in a high COLA? $1200/month for rent seems very high to me, but you did say that utilities were included in that--I'd be curious to know what that includes. If you are in a high COLA, that could also mean that buying a house could be higher than normal, as well. Also, the type of house that you should pursue should also attempt to coincide with your longer-term life goals. Do you see yourself living in your location for the long term? What kind of house do you want to buy? Do you plan to start and have a family in this house? And so on.

I live in San Francisco, so a very high COLA. This includes water, electricity, garbage, cable, and internet. In terms of saving for a home, I will most likely want to move to a surrounding area when I wish to settle down, the details are not of too much importance to me.

I rarely make large purchases, but do spend about $100 a month on entertainment, mainly sporting events.

The 401K through work is with Fidelity, and I currently qualify for this 4% match. I will not be able to set up the account for another week or two until my first paycheck comes in. Do you have any recommendations on what I should invest in for the 401K?

Working through the Holidays I will be receiving a check of around $8,000 gross for triple time, which I plan on using for my EF. Should this go into a savings account or keep this in my checking account? Ideally, I would like to set this up through direct deposit so that I am only able to see my checking account balance and adjust my lifestyle to that, with a set amount going into my retirement, savings, and possibly investments (any suggestions for these?) so that I will not be tempted to spend that money on anything else.

Thanks for the solid advice so far, I am just trying to get my footing while still learning everything that there is to being financially responsible.

[feh]

The 401K through work is with Fidelity, and I currently qualify for this 4% match. I will not be able to set up the account for another week or two until my first paycheck comes in. Do you have any recommendations on what I should invest in for the 401K?

Since you're just starting your 401K, I suggest 100% to total US equities (FSTVX) or choose a target date fund with at least 80% equities.

Working through the Holidays I will be receiving a check of around $8,000 gross for triple time, which I plan on using for my EF. Should this go into a savings account or keep this in my checking account? Ideally, I would like to set this up through direct deposit so that I am only able to see my checking account balance and adjust my lifestyle to that, with a set amount going into my retirement, savings, and possibly investments (any suggestions for these?) so that I will not be tempted to spend that money on anything else.

The contributions to your 401K should be taken out automatically. I suggest you keep your EF at an online savings account so you earn a little interest on it.