New Grad Finance

[leoric2012]

Hi all,

I'm a newcomer here, so thanks in advance for your insights and please forgive me for mistakes

My current situation:

- 24 years old, single, no debt of any kind (no student loan, car loan, mortgage, credit card debt), no dependents
- Graduated this past summer with Bachelor's degree in engineering
- Currently employed in tech sector (~130k/yr)
- Recently bought a car for about 30k, paid cash (I know, bad decision, should have taken a loan to build credit, wasn't thinking straight)
- Living in California: about $1250 rent per month, ~$250 car expenses (insurance, fuel, very little maintenance since car is brand new), ~$500 for all other expenses
- 60k cash currently earning 0.85% interest from a bank <-- this is the thing I'd like to fix.
- Net savings each month: ~$4500

Upcoming situation:

- I think I'd like to pursue a graduate (Masters) degree in about 2 years time. Thing is, the schools I am looking at are extremely expensive (25-40k / yr in tuition!). Of course, there are some caveats:
- I may not get in. The expensive schools are also very competitive
- I may get into a less prestigious school that will let me do a PhD program instead, which will take maybe 6 years and could potentially have funding for me
- I calculated that if I need to pay for the entire Master's degree myself, I would need up to maybe 120k for tuition and living costs. Of course, it's not 120k upfront, but over the course of the degree, I might not have any additional income. I do not want to have this delayed because of bad investment decisions forcing me to work longer before returning to school (brain will decay and be incompatible with academia if I stay away for too long).

Goal Summary:

- I'd like to have about 100k to 120k in roughly 2 year's time, while preferably earning some passive income without risking the pile.

Any advice / opinions would be greatly appreciated!

Happy Holidays!

[feh]

Buying CDs is probably your best option. Not gonna get a decent interest rate, but that is reality at the moment.

Do not invest it in equities or bonds, assuming you are not willing to risk losing money.

[Gailete]

First congrats on making such a great income at your age!

Recently bought a car for about 30k, paid cash (I know, bad decision, should have taken a loan to build credit, wasn't thinking straight)

No, the part that you weren't thinking straight was buying such an expensive car in the first place. The bright thing was paying cash for the car, so you aren't putting out in interest. I think I am a bit in the minority here, but I do not and never have made a single decision with my finances based on what it does to my credit rating.

- I'd like to have about 100k to 120k in roughly 2 year's time, while preferably earning some passive income without risking the pile.

If I am reading your numbers correctly, you have $60K in savings already and at a savings rate of $4500 a month x 24 months you will have $108,000 plus the 60K you will have $168,000 in 2 years time to get you through school easily.

If you can also become a TA or whatever to earn some of your tuition fees, etc. You could still come out of college with a good amount of money. Is there any way your company will help with tuition? Unless those prestigious schools will actually give you a better education that a state school, then stick to the lower cost schools. That is what I would really research - what is the best place for what I want to accomplish.

You seem to be well on your way!

[TheKayla]

- Recently bought a car for about 30k, paid cash (I know, bad decision, should have taken a loan to build credit, wasn't thinking straight)

I agree with the above poster, this was the best decision. A bit of a spendy car for such a young age (I made a similar mistake at a $21k car with student loan debt). However, paying for it in cash was a good option over taking out a loan. Car loans are unnecessary. Saving thousands on interest + not being in debt is much better than building credit. You'll have plenty of time to build credit -- you can do this with bigger purchases like a mortgage in the future. If you're at all worried about that beforehand, get a major credit card, put any discretionary spending on it each month, but be 100% responsible at pay if off every single month -- still living within a budget. (Do this only if you know you won't go into debt -- but looks like you have a pretty good grasp on finances so far )

Other than that, create separate savings goals for each of your future goals -- home, family, school, etc. Then save for long-term like retirement, or goals further off in the future. I personally love using SmartyPig to create several goals at once. You can probably find better interest rates and whatnot in CD's, but I generally use SmartyPig for ease of use. CD's however would be a great way to put away savings for specific longer term goals.

[scfr]

With only a 2-year window, you'll want to stick with "guaranteed" (FDIC insured) bank accounts. Here is the best site for researching which banks have the best interest rates: http://www.depositaccounts.com/ You can do slightly better than 0.85% but not by much. If you have the time, you can chase some bank bonuses (opening an account, meeting certain requirements, and then closing the account after keeping it open for the minimum number of days).

[leoric2012]

Thanks all for the great input!

Feh- I currently have it in AmericanExpress's savings account with 0.85% interest, and there's no fixed term. Do you think that I would be forgoing potential opportunity cost if I signed up for a one or two year CD and the federal reserve decides to raise interest rates? Alternatively, is a one or one and a half year duration in a market indexed fund a good idea right now?

Gailete - yes, that's approximately the current situation. However, I may not have an entire 24 months. It could be like 20 instead, which might make it a little tight. I don't think I can get the company to pay it, for some company specific reasons.... But definitely a less expensive school is something that can be considered.

TheKayla - thanks for that advice, I'll definitely look into it. Kinda feels really early to be earmarking funds for such long term purposes, but I guess one has got to start sometime.

Scfr - thanks for the info too. Do you know how lenders view a person with many accounts with all sorts of banks? Do banks do a soft check on your credit when you open an account?

Thanks again everyone!

[Gailete]

Do you know how lenders view a person with many accounts with all sorts of banks?

I think I can help with this. At one bank we have a checking acct, 3 savings, and 3 loan (mortgage) accounts, another bank has our business checking account and our online account (used to be ING now Capital 360) has a checking account and 4 different savings accounts, a Roth IRA and a stock account. Drives my hubby crazy but as long as I handle the money it is how I do things so I don't accidentally spend money earmarked for something else. One does what one must when heavily on narcotics for pain.

Anyhow, we bought a used car a year and a half ago. As the financing process seemed to be taking so long, I finally asked the guy if there was a problem with our credit. He laughed and said we had one of the highest credit scores that they ever see -- rarely! So I don't think too many accounts work against you

I've known a few people that didn't own checking accounts and couldn't get them simply because they bounced so many checks. So you can answer that one pretty easily if you think a bank will hold anything against you. Banks WANT customers, they don't really like turning them away and so have to have a good excuse to do it.

[feh]

Thanks all for the great input!

Feh- I currently have it in AmericanExpress's savings account with 0.85% interest, and there's no fixed term. Do you think that I would be forgoing potential opportunity cost if I signed up for a one or two year CD and the federal reserve decides to raise interest rates? Alternatively, is a one or one and a half year duration in a market indexed fund a good idea right now?

I'd avoid all bond funds for such a short time horizon. Nobody can predict what interest rates will do over the next couple years, but there is a real chance your investment would be less when you need it than it is today. Obviously, equities should be avoided.

You'll have to compare the interest rate you could get in an 18 or 24 month CD vs your .85% and decide if it's worth the hassle or not. I do not think interest rates on savings accounts will be increasing any time soon.

[Gailete]

Also look for deals on savings accounts either on line or at a B&M bank at the beginning of the year here. Things like open an account and get a $50-75 bonus. It counts as interest and will help a bit to boost the compounding within each account. may not seem like much or worth it, but in my financial world, every 'free' $50+ is a great thing as it is money I don't have to try earning. If the interest is decent, deposit only what you have to to make that bonus money, even if it means several different accounts. Don't forget with a CD you want to layer them, not have them come due all at once. If school will take 2-3 years then have one come due a month before each semester would start and you have to pay the piper.

I think that is where I find some people's savings goals for retirement a bit odd. It is like they want all the funds in their account on their 65th birthday, but in reality, lots of the money won't be needed until they are 70-80. Although in this instance I may be misinterpreting what they are talking aobut.

[scfr]

Do banks do a soft check on your credit when you open an account?

They may do a hard inquiry, so yes there is the potential that there could be a very small negative impact on your credit score.

[Gailete]

so yes there is the potential that there could be a very small negative impact on your credit score.

Curious as to why you feel that opening a bank account would have a negative effect on a credit score? seems they would be much more enthusiastic over someone with money in the bank than those with a pile of bills. Sort of like the deal that banks only want to lend money to people that already have it.

[scfr]

Curious as to why you feel that opening a bank account would have a negative effect on a credit score? seems they would be much more enthusiastic over someone with money in the bank than those with a pile of bills. Sort of like the deal that banks only want to lend money to people that already have it.

Oh, it has nothing at all to do with how I "feel," it's simply that a hard inquiry may lower your credit score by a few points and I'm just letting OP know what the effect of opening a new bank account could be since he/she asked. (And good for him/her for thinking it through and asking the question!)

For what it's worth, I agree with what I think you are saying ... that it is ridiculous. It is also ridiculous that I have a lower credit score due to having a paid-for house and paid-for cars than I would if I had a mortgage and car loans. However, I do understand that a credit score is exactly that, a CREDIT score and not a "financial responsibility score" or a "net worth score" so I don't let it bother me any more (it used to bother me a lot).

I don't let a small ding to my credit score prevent me from opening a new account ... I am an interest rate chaser and a bank bonus chaser ... Since I have no plans to take out a loan of any type ever again I am long past the days of worrying about whether my credit score is in the top 1% or merely "very good." However, OP sounds like a young person who may some day be trying to get a mortgage, etc. so a hard inquiry is something they may want to think about more seriously than I would.

Cheers.

[Gailete]

I am long past the days of worrying about whether my credit score is in the top 1% or merely "very good

As well as we are, but then I never did worry about it except for the 4 years I had a spendthrift, credit card using, 'we can afford anything we want as long as we have a credit card' husband. Sort of like the old Cathy cartoon as she asked how she could be out of money if she still had checks left!

We have no plans to move and other than needing a 'new' car every 10 years or so (and hopefully we will pay cash next time) we don't do any borrowing either. No boats, no vacation home, none of kind of stuff in our future.

[asdf]

Something that I'm curious about is the reason why the OP wants to pursue a graduate degree. Making $130k at age 24 is pretty dang impressive. Will a graduate degree make that income even more impressive? Or, are the reasons unrelated to money?

[leoric2012]

I see, thanks for all the info everyone! I'll look into the bank accounts with bonuses for account opening - seems like the consensus is that it does not impact the credit ratings then.

asdf - I'm thinking of pursuing an additional degree due to multiple reasons, wanting a better job (even at the same company) that requires more technical background, wanting to build a more solid set of skills, I guess some part of it is also a bit of prestige. The current job is lucrative, but isn't building enough for me in terms of professional development. Unfortunately, in the tech world nothing lasts forever, and I guess one has to keep on paddling or risk sinking. There are also some other personal reasons as well.

feh - I think you have a good point with the CDs, I haven't found any significantly higher than the 0.85% I've been getting. Maybe the best choice is indeed to leave it where it is.

scfr - Will do! I think Chase still has their regular promotions of several hundred for opening an account and moving the direct deposit to them... going to keep an eye out for their coupons

Gailete - Looks like you've got everything nicely sorted out now thanks for the first hand experience about the bank accounts. I think that in the past I was told by someone that opening too many accounts makes one's profile look bad, and as a result I stuck with a single savings / checkings account for years. Geez.

Happy New Year everyone!