<p>S1 got his first real job (finally!) a few months ago. Please give him advice on how to spend his money! :)</p>
<p>1) 401(k) through employer. He is participating and will receive the full company match. What percent of his salary should he ideally be contributing?
2) Roth IRA doesnt have one yet but I want him to open one.
3) Company stock purchase not participating but should he? His employer is a small, not well known, company. We have no idea if it is a wise investment or not.
4) Student loan repayment he is making monthly payment but wants to pay off the entire loan as soon as possible. The interest rate on the loan is 5%.
5) Liquid cash for emergency.</p>
<p>Since he doesnt have enough money to do everything, how should he divide his discretionary income among the five options above? Should he max out on the Roth and put less money in 401(k) or vice versa? Is paying off the loan more important than building a cash reserve? Is having an emergency fund necessary if he can just come home? Are any of the options particularly important for someone just starting out? We would love to hear your thoughts.</p>
<p>Live inexpensively until he gets a comfortable cash/near-cash buffer. I’d hold off on the 401k until be builds that cash cushion. IRA is OK since he can withdraw the funds upto next April. Hold off on paying down the student loan. </p>
<p>A new hire is extremely vernable to layoffs, termination in probationary period, management changes, or because he doesn’t like the job. </p>
<p>Do not enter into rental/lease agreements that last more than 6 months. Do not buy a new car.</p>
<p>Company stock is subject to similar risks as one’s job at the company (i.e. company does poorly => lose job and company stock that your savings is in goes down), and one’s ability to trade it on the public markets may be subject to laws and company policy to prevent illegal insider trading.</p>
<p>I never own my company stocks (didn’t matter where I worked). Every year I am given a chunk of it, and whenever it’s vested, I sell it right away. </p>
<p>D1 is going to start her job this July. My advice to her is to try to save up to 6 months living expense, save for 401k up to what the company matches, not to worry about anything else until she has enough liquid cash. </p>
<p>In your son’s situation, I would do 1, 5, 4.</p>
<p>Join the 401k and contribute the max allowed for company match. Then, when each year’s merit raise comes along, increase the 401k by 1%. He’ll still “feel” the raise, but won’t notice the additional contribution to retirement.</p>
<p>As others have said, for the 401k contribute the minimum that will produce the maximum company match. For example, if the company will match 50% of the employee’s contribution up to 6% (for a total of 9%), then contribute at least 6%, otherwise you are passing up “free” money.</p>
<p>Build up at least 3 months and preferably 6 months in liquid assets (CD, savings, checking, MM fund) in case of layoff or other emergency.</p>
<p>Pay off credit card bills immediately, without running a monthly balance. The interest rate is often 19% or higher.</p>
<p>I wouldn’t purchase much company stock - perhaps a little “play” money to have some skin in the game, but as ucbalumnus points out, owning any significant amount of company stock is doubling down on risk, something the Enron folks learned about. Like oldfort I usually sold my company stock when I was able.</p>
<p>Put as much as possible into the 401K. Reduces taxes, saves for the future.</p>
<p>Then save 15-20% of salary into liquid investments. I like index funds, like SPY and IWM. </p>
<p>Then put money into a Roth IRA.</p>
<p>All this assumes that money is left after paying for rent, food, and other essentials. Note that I no longer consider a car an essential. I think for most healthy people in cities with public transportation, a car is an expensive luxury.</p>
<p>Um, lots of ideas presented so far. The young man won’t go too wrong choosing among them. Each family is different of course … here’s what my family members would do.</p>
<p>1) Put in the 401(k) the minimum amount needed to get the maximum company match;
2) Open a brokerage account, and put the maximum amount in a Roth IRA there;
3) If a car is necessary, make it a cheap (but reliable) used one.
4) Set 10% of salary aside for fun … i.e., the “no guilt” money
5) Pay bills on time
6) If there’s any money left over, split it between a cash cushion and paying off student loans.</p>
<p>Thanks for sharing your thoughts. Prior to starting his job, S bought a used car because the work place is not accessible by public transportation. Two months later, his car needed a new transmission and the repair wiped out his savings from the new job. One important lesson learned: stuff happened - it is so much easier to deal with the stuff if you have money in the bank! So I agree that having a cash reserve is important.</p>
<p>I have gone one step further by printing out what is on-line about S’s employer match for the 401K as well as what is allowed for Roth IRA ($5000/year). We are encouraging him to max out both his 401K plan and his IRA, plus buy a good health & life insurance. We are hopeful that his current vehicle will be good for several more years w/o major repairs, which is what the mechanic promised us before we shipped it to S. DreamMom, so glad your S had savings to meet his unexpected repair bill.</p>
<p>We do encourage him to save as much as he can to build up savings reserve as well as money toward a down payment on a place of his own.</p>
<p>It depends on the situation RE life insurance. For S, he does have a pre-existing health condition that may affect his ability to get life insurance down the road. Also, he does not have any debt, so it seems like life insurance might be a useful thing to acquire if he can in the way of a group policy with employer while it’s available and affordable. For most new employees with no dependents and no obligations, it may not be a priority. Something to think about, for all those who are healthy–who knows what will happen down the road that may affect the ability to acquire term insurance at low premiums?</p>
<p>Pay off all loans ASAP. Use a “cash economy”…if he wants something he should save to buy it and pay cash. Put as MUCH money as possible into his retirement accounts.</p>
<p>I don’t know how much your son is making, but if he makes all these contributions mentioned above on a starting salary, he may not have enough after tax money to live on especially after loan repayment. I would first fund the 401K up to what his employer matches and more if he can afford to and the Roth IRA can wait. Any money leftover should be saved until he builds up enough emergency cash.</p>
<p>I’ll have to link this to DS - he’s in a similar situation and could use advice. Well, actually, he already has plenty of advice from me! But, it will be good for him to see other’s ideas.<br>
I agree with maxing out the 401K, but, in DS’s case, the company doesn’t let you know in advance how much they will contribute, since it depends on company profits. I actually think in this case, a ROTH is a better idea. With a ROTH you can always withdraw contributions with no tax liability; it is only the interest and earnings that can’t be withdrawn before retirement - so that money is available to you if needed!<br>
I’m stressing to DS the importance of living well below one’s means - as in, shared and fairly cheap housing, keeping the old, reliable and boring vehicle and SAVING lots of money so that any loans can be paid off and vehicles bought with cash reserves on hand. Sometimes, it makes sense to buy a vehicle with a loan, if interest rates are low and price is unaffected (Scions for example - no-haggle fixed price), but make sure you have cash in the bank to cover the loan if something happens to your job.</p>
<p>I agree with cbreeze. If my kid had low interest student loans, I would have her save up enough liquid cash so she could afford to pay her expenses if she should lose her job, before she pays off her loans. She needs to be able to eat first, student loan lenders could wait.</p>
But, it will be good for him to see other’s ideas.<br>