22 year old trying to start smart

[vortgirl]

Hi there everyone!

I am new to this website and am very interested in getting all the oppinions and ideas I can about how to continue on the path of smart saving and living. I'll start by mentioning that I have been very blessed to have been taught well by my parents in ways of saving and being smart with money, however, now I need some more information to continue being smart with my money.

A little about me....My name is Brittany, I just turned 22 and I'm from NJ. I've had my BA since 2008. I worked and paid while going through college so the small loan I had was paid off in May 2010. I have no credit card or any other kind of debt. I work 3 jobs, spend a lot of time volunteering and still live at home with my parents. I have roughly $9000 put away in an Emergency Fund that will be fully funded in December 2010 at $14000 (which is 1 year of rounded up worst case expenses). After funding that emergency pile though I'm lost at where my money should be going.

More specific detail: My housing situation, as mentioned, is still with my parents. Their home is literally 1 mile from my office and I really dont spend enough time at home to make renting here in NJ a smart option. They dont charge me rent or utilities. I do pay for all my own insurance and car expenses. My monthly income in $2000 steadily with my full time job with an additional $300 to $1700 monthly with my subcontracting and part time position. My average basic expences are $500 per month.

I'm at a loss as to what I should be putting my money into....investing, IRAs, savings, I really have no idea! I'm not even sure what other "categories" I should be putting money aside for; so I'm really looking for some guidance or suggestions or possibly some ways for my hard work to continue paying off.

I'm very excited to be on this site, to learn more and hopefully get to know some of you a lot better. Thanks in advance!

[jimnjana]

I would suggest that you:

1) Find out if your employer has a 401K plan and if they match any of your contributions. If they do and they match your contribution with employer money, only put into the 401k what they will match.
2) I'd have a money market or savings account in addition to your "emergency fund" that I would be saving at a minimum what you would realistically pay to maintain your own apartment and utilities. Can't stay at home forever, and if you are taking and saving this money now, it is out of your hands for current spending. You probably want to add to this amount the amount you should be saving for purchasing next car, vacation, and other non retirement financial goals.
3) If you have any money left after doing 1 and 2, open a ROTH IRA.

Good luck...you are way ahead of your peers by even thinking about your future.

[aaronc879]

Quote:

Originally Posted by jimnjana I would suggest that you: 1) Find out if your employer has a 401K plan and if they match any of your contributions. If they do and they match your contribution with employer money, only put into the 401k what they will match. 2) I'd have a money market or savings account in addition to your "emergency fund" that I would be saving at a minimum what you would realistically pay to maintain your own apartment and utilities. Can't stay at home forever, and if you are taking and saving this money now, it is out of your hands for current spending. You probably want to add to this amount the amount you should be saving for purchasing next car, vacation, and other non retirement financial goals. 3) If you have any money left after doing 1 and 2, open a ROTH IRA. Good luck...you are way ahead of your peers by even thinking about your future.

I think the above is good advice, however, I would open a ROTH IRA(with Vanguard) as soon as possible even if it doesn't get fully funded the first year.

[vortgirl]

Quote:

Originally Posted by jimnjana I would suggest that you: 1) Find out if your employer has a 401K plan and if they match any of your contributions. If they do and they match your contribution with employer money, only put into the 401k what they will match. 2) I'd have a money market or savings account in addition to your "emergency fund" that I would be saving at a minimum what you would realistically pay to maintain your own apartment and utilities. Can't stay at home forever, and if you are taking and saving this money now, it is out of your hands for current spending. You probably want to add to this amount the amount you should be saving for purchasing next car, vacation, and other non retirement financial goals. 3) If you have any money left after doing 1 and 2, open a ROTH IRA. Good luck...you are way ahead of your peers by even thinking about your future.

My company does not offer a 401K match or plan.

I will be starting to save in areas such as "Housing", "Car", "Vacation", "Medical", ect starting in December when the Emergency Fund is complete.

I have been recently looking into a Roth IRA, but was a little confused with some of the technicalities. I will look into it deeper.

Thank you!

[lowflyer]

I think I opened my first IRA account when I was 17 and just continued from there. For you, the Roth might be good right now, since reducing/deferring taxes via a regular IRA or 401K, etc. probably isn't a big deal. As your income rises over the years, those choices will likely make more sense.

The key is to save and work on a lifestyle that has you living below your means. That's a common trait among people on this forum. Living with Mom and Dad now is a great way to keep your expenses low and save more, but at some point that will get old (as I know from both sides!)

Good luck!

[ATC Guy]

Vortgirl

The ROTH IRA lets you save and invest money that has already been taxed. This means it comes out of your paycheck after taxes. Because of this, the government will never tax that money or any earnings on that money from investing ever again.

Certain rules do apply. Technically you cannot take anymore than your original capital out of the account until you are 59.5 years old. There is an exception to this called the 72(t). Try to set financial goals for yourself along a timeline. For example, down payment on house by age 26, retire by age 45, etc.

Use these goals to base how you set aside and invest your money. If you want to retire at 45, you need to start thinking about how much money you would like to have each month without working and what the best way to get to this point is. It could be an index fund in your ROTH, investing in real estate, or any number of things.

You and I are the same age, so I understand where you are coming from. My largest goal is to save between $80-$100K between my wife and I over the next 4 years to start investing in rental real estate and for a downpayment on our first house.

Again, once you create the goals you want to achieve and start becoming more financially literate with what investment options are available to you, what you should do with your money will become much more apparent.

[easysurfer]

Quote:

Originally Posted by vortgirl My company does not offer a 401K match or plan. I will be starting to save in areas such as "Housing", "Car", "Vacation", "Medical", ect starting in December when the Emergency Fund is complete. I have been recently looking into a Roth IRA, but was a little confused with some of the technicalities. I will look into it deeper. Thank you!

Hi Vortgirl,

Welcome aboard.

It looks like you've done a great job having an emergency fund.

If you don't already have one, what I'd do is create a budget. That is where you'd see all your "categories" accounted for. You can have a category such as "investments" along with your other categories ("housing", "car", "vacation", "medical"). That way you treat "investments' as another expense category that you "Pay" each month, and eventually it will grow. At an early age, you will experience the magic of compounding which many who only live paycheck to paycheck without investing will not get, then when 10 or 15 years pass by, they find themselves behind the 8-ball.

Easysurfer

[caninelover]

Hi Vortgirl,

Welcome. You are off to a great start. I would agree with others, at your age start that Roth IRA. You don't have to fully fund it immediately, start with maybe $1k per year and make a goal to increase your contributions by $500 per year. In a few years you'll be maxing it out and it won't feel so painful. In 20 years you'll be grateful you did this.

The remainder of the money, I would put into a savings account for your other goals - house, vacations, etc. Its a good idea to get in the habit of making a budget so you can prioritize all these bigger goals. Very few people can simply fund everything they want all the time, most people have to choose / prioritize their spending goals. I use Mint.com and spreadsheets to accomplish this, everyone has their own methods.

Otherwise, keep doing what your doing and you'll be fine. You may want to pick up a book or two on personal finance to start educating yourself on the basics. There are some stickies on this forum with some suggestions. At your age I started with "Personal Finance for Dummies" and it worked just fine for me in laying out the basics. Once you're armed with that, and a LYBM mentality, you will be unstoppable

[LOL!]

A Roth IRA is a good place to hold your emergency fund when just starting out. If you cannot save enough money to invest in an emergency fund AND a Roth IRA, then you should use the Roth IRA to hold the money market fund or CD that is your emergency fund. If you ignore your Roth IRA contribution each year, then it is gone. You cannot go back and invest that money in a Roth since there are annual contribution limits.

Since you have $9000 in an emergency fund AND have earnings of $5000 this year already, you can put $5000 of your emergency fund in a Roth IRA now. I would look at a couple of financial institutions to hold your Roth investments: either Vanguard or Fidelity.

There was lots of talk about the goal of retirement. What are some of your other goals for your money?

[caninelover]

LOL, I would respectfully disagree with that. Her tax bracket is low enough that using a Roth for her emergency fund isn't that beneficial. Plus if its an emergency fund than she would need to keep those Roth investments in short term money funds, not yielding much now anyway.

Plus there is a danger in getting into the mentality of raiding retirement accounts for day-to-day unexpected expenses (car breakdowns, etc.). These accounts really work best if you dollar cost average into them over a long period of time without withdrawing from them. Would rather see her, at her age, get into the habit of investing into the Roth each year, increasing the contribution until she maxes it, and leaving that money alone in long-term investments to grow for the future. I think that mindset at her age of emergency funds as a buffer for today's emergencies, a retirement fund that's actually for retirement, and then an intermediate savings account for her other goals is best.

[LOL!]

We agree that she should fund the Roth IRA to the maximum each year. If she doesn't have the money to do that, what should she do?

[caninelover]

She should have enough based on her current expenses / income ($500 per month expenses, $2-$4K income, that's over $15k per yr extra money) to start funding her Roth and ramp up the contributions, and save for her intermediate goals. We agree that the earlier she starts the Roth the better, and the more the better but I think balance at 22 is important, and she'll have other big expenses over the next 10-20 yrs than only retirement savings (house, car, maybe wedding, kids). Like I said, I think its important that she does put retirement money away at her age to take advantage of all the time/compounding she'll get, but compounding is useless unless you LEAVE the money there to compound. I don't think that its immediately necessary to fund an IRA to the max at 22 (although certainly great if she can), as long as she gets in the habit of putting something in, and increasing the contributions each year, she'll get there soon enough.

I really do think its a slippery slope to tell a 22 yr old, go ahead and put money into this retirement account but feel free to take it out the first time things get rough. Everyone faces some money trouble at some time and if you want to retire eventually, you need to fight to protect against raiding long-term money for short-term needs.

Careful planning & execution is the key to long-term success, not shortcuts here or there just to hit an IRS limit.

[walkinwood]

Wow! What a great story. Congratulations on such a wonderful start to your financial life.

Please consider reading a few good investment books like the ones recommended in the FAQ. My personal favorite is The Four Pillars of Investment by William Berstein. It is a great background & education on investments. Other books will help you formulate your long term investment policy. It isn't rocket science, so don't shy away from taking it on.

Live at home as long as you can. When you move out, don't fall for the "american dream" of buying/renting the biggest house you can afford. Not only are big houses expensive, they take a lot of valuable time & energy to maintain.

Focus on your career too. Document what you like and don't like doing, what you're good at and what you aren't good at. Use this to guide your career. Focus first on your strengths and then work to limit your weaknesses. Plan on a lifetime of learning. Loving your work makes life so much more fulfilling - but you have to make it happen.

Congratulations once again! (and don't let it go to your head

[LOL!]

Which is better: $5000 sitting in bank CD earning 1.5% or $5000 sitting in a Roth IRA CD earning 1.5%?

Since she has money in her emergency fund, there is absolutely no reason to not fund the Roth IRA to the maximum allowed each year. This is common financial advice: roth ira for emergency fund - Google Search

Of course, if she has more than enough money to have an emergency fund outside of the Roth IRA and will not miss out on making those Roth IRA contributions, then she is doing great.

The idea is NOT that the Roth IRA is a long-term emergency fund. The idea is that the Roth IRA is a great place to have your emergency fund when you are just starting out and cannot afford to otherwise invest much.

[caninelover]

LOL, I guess we'll just agree to disagree. I understand what you're saying, I'm not saying you're wrong, I'm just saying I have a different philosophy. That $5k @ 1.5% would generate a puny amount of tax savings in a Roth, given she's in a pretty low/moderate tax bracket. I would rather her see her start to invest regularly in equity index funds in that Roth and leave the money there to grow.

Plus she does have the money to invest from her income/expense profile. Not sure why you keep insisting she doesn't. She just needs to sit down and prioritize how much to invest for retirement vs. her other goals. Those are her own personal choices to make, and if she wants to invest a little less for retirement at age 22, and a little more for other goals, well frankly, I don't see anything wrong with that. She has enough cash flow to have her cake and eat it too, as long as she plans it out.

[vortgirl]

Thank you so much for the encouragement and suggestions. I have been working on a budget for the last week or so. I'm trying to pin down all my expenses and amounts from the last few months. I'm sure it will be something that just takes time and practice. I already live way below my income and actually enjoy putting money away, weird for a young woman I know....

I will be picking up Four Pillars this weekend, I have been suggested that book by quite a few folks.

I will also be looking at Roth IRA. I think I will try to put $1000 in this year and increase my input by $500 every year until I max.

I do plan on hopefully getting married and having kids someday, so planning for a home, college educations and expenses are definately things I am taking into consideration when looking at my options of putting "too much" money away into an IRA. I hope to never touch the habit of taking out of my IRA when things get tough so I will stay conservative on that for right now.

Thank you again for all your suggestions and support!

[Texas Proud]

Quote:

Originally Posted by caninelover LOL, I guess we'll just agree to disagree. I understand what you're saying, I'm not saying you're wrong, I'm just saying I have a different philosophy. That $5k @ 1.5% would generate a puny amount of tax savings in a Roth, given she's in a pretty low/moderate tax bracket. I would rather her see her start to invest regularly in equity index funds in that Roth and leave the money there to grow. Plus she does have the money to invest from her income/expense profile. Not sure why you keep insisting she doesn't. She just needs to sit down and prioritize how much to invest for retirement vs. her other goals. Those are her own personal choices to make, and if she wants to invest a little less for retirement at age 22, and a little more for other goals, well frankly, I don't see anything wrong with that. She has enough cash flow to have her cake and eat it too, as long as she plans it out.

I am more in line with LOL... she has a big emergency fund right now, but I can not see anything she might need the money for 'right now'... so she can fund the ROTH now and replenish the emergency fund... next year she will also fully fund the ROTH and start to invest all in stocks etc.

When I was young... I was putting all my money into an IRA (now I know it was not the bet thing to do at the time) and did not have an emergency fund... but I have NEVER needed to use any part of my emergency fund... most people I know have not spent money from theirs..

[Gumby]

I would like to commend both LOL and caninelover for a thoughtful, respectful and informative exchange. That is one of the things that makes this forum great.

And welcome aboard vortgirl. You're off to a fantastic start!

[DangerMouse]

Just want to add my welcomes and say I wish I had of been as smart with my money at 22 as you have been. You are giving yourself a great headstart on your peers.

[kyounge1956]

Hi Brittany,
you might want to investigate whether it would be advantageous for you to take the Retirement Savings Contributions Credit. If you meet all the requirements, I believe you can reduce your total income tax due by some portion of the amount you contribute to your retirement account. This is in addition to deducting contributions to a Traditional IRA from your taxable income.

I would not be overly concerned about putting the money in exactly the right place. Whether you put it into a Traditional IRA, a Roth, or a regular savings account for future purchases like a house or car, you are putting yourself on a much better financial footing than most people your age. I venture to guess it may be a better footing than a lot of people twice your age. IMO you really can't go wrong as long as you continue not to spend every cent you earn. A great big "thumbs up!" to you.