What should I do with my money?

Parent Cafe
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<p>I’m a college student graduating this semester, so obviously there’s no urgency here, but I’m a planning type and figured I’d ask. Many of you have been dealing with this for a while, and can see what things you did that were good and what were bad, and since most of you are quite smart as well, I figured I can get good advice here. </p>

<p>Where I will be working they match half what you put into your 401K up to 6% of your income (by which they mean, if you put 6% of your income in 401K, they’ll put 3% of your income in as well, but if you put in more than 6% of your income, they’ll still only put 3% in - I confirmed this). </p>

<p>It seems obvious to me that I should put in, minimum, that 6%. Should I be putting in more? It’s my understanding that what you put in does not get taxed, however it’s illiquid. Cannot be drawn upon until age 59 1/2 without penalty, and cannot be used for many investments (housing, land, venture). However, once I get married and have kids, it may be harder to save, so perhaps straight out of college is the time to dump as much as possible into it. </p>

<p>I estimate that I will require about 23% of my pre-tax income to live off of. I excluded things like big purchases, health insurance (I don’t actually understand how it works - I’ll be looking more into it soon), vacations, etc, but included some for car maintenance. I am not sure about the realism of that estimate however, so let’s say 28%. </p>

<p>If I lose 6% to 401K and 32% to taxes after that (that seemed to be about what I lost when interning) and 28% for living expenses, that leaves about 36% of pre-tax income to save for other things. It’s my understanding that my employer has “really good” health insurance, but I don’t know how much that costs. I figure I’ll likely just take the cheapest option because I don’t go to the doctor or dentist or any of that, so it shouldn’t be too expensive. </p>

<p>What should I be doing with that 36%?</p>

<p>Straight out I should probably also be saving for a downpayment on a house as well. Not sure how much that should be. I am fully single right now (not married - no prospects - not happening any time soon) and have no responsibility for anyone other than myself, so the house would not need to be large. According to CNN the median home price in this area is just under 200K, so I figure an appropriate house for a single person should be about 120K. Would there be any sense in waiting until I have near that amount or should I just buy a house as soon as possible (giving it maybe a year to ensure I’m settled into the area and my job)? </p>

<p>Or let’s say I don’t buy a house and just rent a room. What are good investments for that money? </p>

<p>Basically, what I’m looking for from you all is general advice, logical flaws (I easily could have made some - there were a lot of assumptions and estimates), and suggestions.</p>

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<p>Yes, you absolutely should do that 6% so you get the max employer match on the 401 K.</p>

<p>What about putting some into a Roth? </p>

<p>You could also put a certain amount into a regular savings for your rainy day fund.</p>

<p>You will likely have other expenses at times…start up costs for your first apartment, a car, work clothing, a vacation here or there, holiday and birthday gifts, maybe money for eating out and other entertainment.</p>

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<p>Definitely agree with thumper.</p>

<p>I think the NUMBER ONE thing you should do (after employer match on 401K) is fully fund a Roth, if you are able. Understand, while this is after tax money, it will grow tax free and never be taxed upon withdrawal. There is no other retirement deal this good. You can only fully fund it if your income is less than 127K (for this year, single person), so if you will be high income in the future, you may not be able to do it for long. You can withdraw what you put into it at ANY time, no penalty, just not the gains. There is NO other deal out there like this, and it will probably not last forever.</p>

<p>This is so important to do while you’re young. The time value of money is immense. Run it through a financial calculator. I just figured $460 contributed monthly for only 20 years…in 40 years, at 10% rate of return, it will be worth 2.339 Million. TAX FREE. Understand, if it wasn’t tax free, you’d be paying 40-50% (or more) of it upon withdrawal. Perhaps a higher rate of return that possible, try only 5%, it would be 508K. Put it all in a financial calculator, and you see the difference of investing now, instead of later, and what a benefit it is. Vanguard is a really good investment company, very low cost and comprehensive.</p>

<p>I’ll wring my kids necks if they try to withdraw from their Roths!</p>

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<p>We just had a similar discussion with our kiddo who is a semester ahead of you and a few months into the “real world.” He also had a job lined up upon graduation in May.</p>

<p>No question, max out any matching funds. He is also contributing to a Roth IRA with the goal of 15% annually (the suggestion of our financial planner for adequate requirement savings). Roth because your better off paying the taxes now as opposed to after 40+ years of gains.</p>

<p>Can’t really address what to do with your “leftover” money. So much depends on if you will be staying where you are now and how the real estate climate is there to determine if taking the homeowner dive is a goal.</p>

<p>Edit to add that I see I’m not alone in the Roth suggestion!</p>

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<p>Did you file a tax return last year? I don’t think you can pay 32% in taxes while interning. More likely your employer withheld taxes as if you made the same salary the whole year. You should get back a chunk.</p>

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<p>You need to save up an emergency fund that is enough to cover your living expenses for an extended period of time - work to save one month worth, then keep adding until you have enough for at least six months. Layoffs can be sudden, and can last much longer than you hope they will.</p>

<p>You also should have a separate savings fund for “life happens” things - car will suddenly needs new tires, you crack a tooth and the repair is not fully covered by insurance, family funeral on the other side of the country, etc. Things that are not exactly predictable, but aren’t dire emergencies. If you keep about $1000 in this fund and re-fill it as soon as you can after spending it down, you will be ready for the next random life event.</p>

<p>Lastly, don’t forget to set up your everyday savings fund for collecting money for that new sofa, the car insurance that is due every six months, and other regular expenses. </p>

<p>Truly the closer you can stick to living like a poor college student, the better. Don’t ramp up your spending just because there is money in your pocket.</p>

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<p>You should probably go to a dentist to check for cavities and gum disease issues before they get too severe. Dental visits and cleanings are not that expensive, but root canals, crowns, and implants are expensive.</p>

<p>You may want to visit a physician for any recommended screenings: [Recommendations</a> for Adults (USPSTF)](<a href=“http://www.uspreventiveservicestaskforce.org/adultrec.htm]Recommendations”>http://www.uspreventiveservicestaskforce.org/adultrec.htm)</p>

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<p>Thanks for the responses everyone. </p>

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<p>Thanks for that explanation on the Roth IRA busdriver. So, should I pretty much dump the entire 36% into that? I guess I’m confused about the downside. If I can dump all of my money into one, have total control of it, and not have it retaxed, why would I not? </p>

<p>Also, what does fully fund mean? </p>

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<p>I’ve currently got some money saved up that I figure can be used as a rainy day fund.</p>

<p>The figure I gave for food assumed I was eating out most days, as I do generally eat out most days. Considered mostly casual restaurants though, not really an appropriate amount for expensive restaurants. My dad said he’d sign the title of his old car (he has another) over to me when I move, and it runs pretty well. I’m pretty much set for clothes, though where I’m moving is very cold so I might have to buy some heavier stuff, but I just shop at Meijer which isn’t too expensive. </p>

<p>I’m not really sure how much I should be saving for vacations. I know the company will send me out for a couple of weeks out of the year to various locations for work, but these may be unappealing locations. What is a typical vacation budget for one person with substantial disposable income? They give 3 weeks vacation time but I don’t intend to travel for 3 weeks. Like, what might a nice 3-4 day vacation cost typically? </p>

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<p>It’s a different state but where I am now and where I’ll be going are both in the Midwest. Where I’m moving would probably be considered a “more remote” area. The employer is dominant in the city where I’ll be moving, so I don’t want to be more specific than that. The company has been increasing in size, so I guess I do have some worry that housing prices will increase rapidly, but I don’t really know. </p>

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<p>Oh yeah, I’ll get a lot back. But I figure if I was working year round I wouldn’t be getting it back. </p>

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<p>I’ve got a sizable amount saved up right now (certainly more than 6 months worth of living expenses), but can I (and should I) move that to a Roth IRA?</p>

<p>I don’t intend to ramp up spending too much, though I don’t really live the typical “poor college student life” either. Only place I’m really skimping over others I know right now is rent, which I’ll probably continue as it’s not really a priority for me to live in an upscale place. </p>

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<p>I tend to be a skeptic when it comes to medicine, but I’ll check out how much it costs with the insurance.</p>

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<p>"So, should I pretty much dump the entire 36% into that? I guess I’m confused about the downside. If I can dump all of my money into one, have total control of it, and not have it retaxed, why would I not? "Also, what does fully fund mean? "</p>

<p>Fully fund means put the max allowable into it…which, at this point, is 5.5K/yr. The max will probably go up in subsequent years. So I doubt you could dump the entire 36% into that, unless you’re only earning 15-16K/yr, then there is no way you’d be paying as high taxes as you’re expecting. And you’d need to hang onto your dollars more than investing!</p>

<p>Certainly you need to make sure you have ready access to some cash in case of emergencies. While you can access your Roth contributions at any time, it’s not instantaneous, like your checking account is. So I would definitely make sure you have a nice pad of cash saved up , that you have access to, first. Then put into the 401K/employer match, then put as much (up to the limit of 5.5K/yr) into the Roth that you can. I suggest that you invest in long term mutual funds that have done well over a number of years, and don’t play the market (unless you learn what to do).</p>

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<p>One thing about the medical/dental insurance…if you’re still on your parents insurance right now, make sure you get everything possible done while you’re covered on their insurance before you have to pay for your own!! For example…it costs me nothing extra if my kiddos get stuff done, since we have family insurance. But my 23 year old just aged out of his dental insurance, his company doesn’t provide it, and if he needs some dental work done, he’ll have to pay for it full price. My dear niece just had a nasty surprise and her root canal will cost over 1K. Good to get as much done as possible before you have to pay the big bucks!</p>

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<p>Yeah, the 36% is far more than 5.5K, but I can put that 5.5K in there no problem. So, they won’t allow you to put the full 5.5K/year if you make over 127K? Why? </p>

<p>As for getting medical stuff done, from what I understand, my dad’s insurance only covers stuff that costs more than 10K, which should hopefully be nothing I’d need done. Chances are my insurance would be better than his.</p>

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<p>'So, they won’t allow you to put the full 5.5K/year if you make over 127K? Why?"</p>

<p>As you go into the working world, and start making higher income, you’ll see how many things that will be income limited. So many benefits, so many tax breaks that are disallowed. I suppose it is from the mindset that you are advantaged by having a higher income than most, so you will get less tax breaks, less deductions, taxes going up. It’s just the progressive tax system that we have, the more you make, the less advantages you get. So while you’re making the income that allows you the breaks…take em while you can!</p>

<p>My oldest son started his first real job at a high income, in a well paid career field. I told him that he must put money into the Roth for as long as he can, because he might only be able to do it for a few years, and then be ineligible for it forever more. Man, I sure wish I had learned this a long time ago!!</p>

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<p>That is assuming that you make ordinary wage, salary, and interest income. The super-high-income people are often able to have their income be something else that is taxed at lower rates or deferred or something like that (particularly in the finance industry).</p>

<p>However, note that Social Security payroll taxes are assessed only on income up to $113,700 for 2013: [Social</a> Security and Medicare tax rates; maximum taxable earnings](<a href=“http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240/~/social-security-and-medicare-tax-rates%3B-maximum-taxable-earnings]Social”>http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240/~/social-security-and-medicare-tax-rates%3B-maximum-taxable-earnings) . So this is one advantage that high (wage, salary) income people get as income from these sources increases.</p>

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<p>Lots of good advice here. Definitely fully fund your 401K up to your employer’s match and maybe a bit beyond, but you don’t want all your income as a young person going into retirement savings. What if you drop dead at 55 and all your pleasure has been deferred to a retirement you never get to enjoy? Next, fully fund your Roth. The amounts you can put in are quite low, but it’s a good investment. </p>

<p>I think your actual living expenses may be higher than you’re anticipating. You’ll want to splurge on an occasional meal that costs more than you would have spent in college. The clothes from Meijers may start to seem a little downscale relative your work colleagues. The second-hand car handed down by your father might run its course and need replacement. A friend might suggest an alluring vacation that’s going to take a bigger bite out of your budget than you anticipated. A romantic interest might necessitate more money on nights out and eventually on romantic get-aways than you had budgeted for. And so on. I think your instinct to live frugally is sound, but you also need to build in some flexibility to account for the unexpected opportunity. A healthy cash reserve in a savings account to respond to such contingencies is advisable.</p>

<p>Beyond that, I’d probably dump some money into the stock market in the form of after-tax mutual fund investments. We’ve done quite well with low-fee stock market index funds. They go up when the market is up and down when the market is down, but earnings don’t get gobbled up by big management fees, and the long-term performance of index funds tends to be better than that for “managed” funds that try to “beat the market” but in most cases fall short of the long-term secular appreciation in stock prices. It’s basically a bet on the stock market as a whole, as opposed to betting on a particular firm or sector. These types of funds tend to be highly liquid, consequently easily accessed for a down payment on a house, purchase of a new car, paying for a wedding, absorbing the loss of income resulting from an unexpected layoff, etc.</p>

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<p>“That is assuming that you make ordinary wage, salary, and interest income. The super-high-income people are often able to have their income be something else that is taxed at lower rates or deferred or something like that (particularly in the finance industry).”</p>

<p>That’s for sure. That is the problem with being a wage slave, seeing so much of your income disappear to taxes. The hope is to move your income from the high tax paying side to the low/no/deferred tax paying side…but probably tough to do when you’re first starting out! I’m still trying to figure out how to do that.</p>

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<p>Nice to see someone taking control over his finances in a logical way.</p>

<p>You might find the tax calculator at this site worthwhile in helping you estimate what your after-tax income will be.</p>

<p>[1040</a> Tax Calculator](<a href=“http://www.dinkytown.net/java/Tax1040.html]1040”>1040 Tax Calculator)</p>

<p>Its the only one I found that has the new 2013 rates, and it seems to be reasonably thorough.</p>

<p>Good luck. You’re on the right track from a savings perspective. From an investment perspective, I would read Warren Buffett’s letter to shareholders from 2011…in particular the pages in the section The Basic Choices for Investors… on page 17. His discussion on those pages is masterful in presenting a birds eye view of what you can do with your savings. You can find this on the Berkshire Hathaway website.</p>

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<p>My order of priority would be:

  1. 401K 6% so you get maximum match - that’s a no brainer
  2. make sure you have six month living expenses in a form that’s easy to get at. One thing you can do is ladder CD’s - ie stagger the due dates so that you are getting a bit of interest from the longer term ones. Even if you have to withdraw early, the penalties are not that bad. Probably a better bet than sticking it in savings.
  3. Take care of health insurance issues. And do what you can on you parent’s plan first.
  4. Roth IRA</p>
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<p>Mathmom has exactly the same list I would make. :slight_smile: If you haven’t drawn up a formal budget (sounds like you are working on it), do that. That will help you understand how much you can spend on rent & utilities, for example. She took out her estimated taxes (state & federal), Medicare, Social Security, and benefit deductions as a starting point. Then her 401K contribution and planned donation to her emergency fund. THEN she used the rest as a starting point for her budget. Once she had that, she had an idea how much she could spent on an apartment & utilities per month, for example. Once she had been working for a couple of months she revisited the budget to see if it needed to be adapted. She had some leftover money the first year and opened a Roth with it.</p>

<p>She was lucky and came out of college with some savings (diligent about working during school and summers, and lived pretty frugally in college). So she had money for her apartment security deposit and moving expenses, too (got reimbursed for the moving expenses by her company, but could have handled it if they hadn’t).</p>

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<p>Just to throw a wrinkle into the suggestions. I believe Roth IRA early withdrawal of the principle is tax and penalty free. Starting out, one might be able to think of Roth as emergency fund or a supplemental emergency fund. Of course it is not as liquid as money in the bank, but it is not that far away from it because there is a little more logistics or paperwork involved. The benefit is of course, Roth gains will be shielded from tax and you won’t loose that 5.5k a year allowance.</p>

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<p>Also, find yourself a very good reputable financial planner. Someone who is willing to explain everything to you so you can understand their recommendations. Don’t invest in anything you don’t understand. (Except the 401K and ROTH, whether you understand them or not…they ARE the best first place to put your money).</p>