Mind my money.
November 2, 2012 12:18 PM Subscribe
I have a growing chunk of money in my checking account. I've paid off my student loans and don't have credit card debt. What's the most responsible way to manage this money? Does a potential major move affect the analysis?
I don't know ANYTHING about money or investing and don't have any older mentory/advisey people in my life so I turn to the green.
I'm a 27 year old attorney in Houston. I am a second-year associate at a small firm, a trial boutique. I finished paying off my student loans in April. My firm matches 401k contributions to a small extent. I'm contributing the max amount to my 401k, I think. I have no idea how the 401k money is invested because I was out of the office the day they had someone come in to talk to us about that. I don't have any credit card debt and pay off the full amount each month. I'm not married. I don't have a car or any car payments; I am debt-free. I make 160k. I have no idea what the bonus will be.
Complicating factor? I am seriously considering moving to San Francisco in 2014 if I can find a comparable job. I know I have a long time to look. I know how horribly high the cost of living in SF is. (I know a billion people there from college and I only know just a few co-workers and alums of my law school in Houston, and I work too much to meet more people. I don't see this changing, and I think once it gets to the point where I need to have clients, living somewhere where I know many people will be very useful to me). I also don't like Houston and yearn to move back to a dense metropolitan area. It's not a set decision yet and thus still uncertain because: I would be leaving a serious boyfriend who is unwilling to move behind, the legal market (all markets, really) is better in Houston than SF, and I fucking fucking love my firm and the people there, which are the reasons why the decision isn't fully made.
I might be trying to uncomfortably combine two dissimilar questions, but here it is. In light of the contemplated move, I'm not sure what I should be doing with money I'm making. Can y'all help?
I don't know ANYTHING about money or investing and don't have any older mentory/advisey people in my life so I turn to the green.
I'm a 27 year old attorney in Houston. I am a second-year associate at a small firm, a trial boutique. I finished paying off my student loans in April. My firm matches 401k contributions to a small extent. I'm contributing the max amount to my 401k, I think. I have no idea how the 401k money is invested because I was out of the office the day they had someone come in to talk to us about that. I don't have any credit card debt and pay off the full amount each month. I'm not married. I don't have a car or any car payments; I am debt-free. I make 160k. I have no idea what the bonus will be.
Complicating factor? I am seriously considering moving to San Francisco in 2014 if I can find a comparable job. I know I have a long time to look. I know how horribly high the cost of living in SF is. (I know a billion people there from college and I only know just a few co-workers and alums of my law school in Houston, and I work too much to meet more people. I don't see this changing, and I think once it gets to the point where I need to have clients, living somewhere where I know many people will be very useful to me). I also don't like Houston and yearn to move back to a dense metropolitan area. It's not a set decision yet and thus still uncertain because: I would be leaving a serious boyfriend who is unwilling to move behind, the legal market (all markets, really) is better in Houston than SF, and I fucking fucking love my firm and the people there, which are the reasons why the decision isn't fully made.
I might be trying to uncomfortably combine two dissimilar questions, but here it is. In light of the contemplated move, I'm not sure what I should be doing with money I'm making. Can y'all help?
401k: contribute at least the percent of your salary that your firm matches. target funds are the easiest to invest-and-forget, but their expenses are usually a lot higher than just an index fund, which is basically the same thing. i'm about your age, and i put all of my 401k into an index fund, which i'll start re-balancing to safer assets around age 35-40.
checking account cash: put it in a savings account until you have about 2-3 months of living expenses. once you have even more i would open a "roth IRA" you can read about them in other places.
posted by cupcake1337 at 12:25 PM on November 2, 2012
checking account cash: put it in a savings account until you have about 2-3 months of living expenses. once you have even more i would open a "roth IRA" you can read about them in other places.
posted by cupcake1337 at 12:25 PM on November 2, 2012
First, easiest step: move most of your checking account to a savings account. ING Direct and Ally are two of the easier-to-deal-with online banks and are pretty much built exactly for that purpose. It's not going to earn a lot of interest in today's environment, but it's still a step ahead of checking.
posted by psoas at 12:26 PM on November 2, 2012
posted by psoas at 12:26 PM on November 2, 2012
Emergency fund somewhere that offers better than pitiful interest rates, CD ladder, IRA to accompany your 401(k). What you want primarily is security with liquidity, and after that, something tax-advantaged to be locked away for the long term.
But honestly, you can afford a sit-down consultation with a fee-only financial advisor where you can go into a lot more detail about your needs over the short and mid-term.
posted by holgate at 12:27 PM on November 2, 2012 [1 favorite]
But honestly, you can afford a sit-down consultation with a fee-only financial advisor where you can go into a lot more detail about your needs over the short and mid-term.
posted by holgate at 12:27 PM on November 2, 2012 [1 favorite]
First of all, congrats on your financial situation, you're in a nice position. 2nd of all, you can probably get information on your 401k, and you might have options for changing it. That's worth looking into.
Given your high income, it might be worth consulting a (fee-based) financial planner to answer these questions for you, but the general advice is:
1. Save up an emergency fund of 6-12 months of living expenses in a relatively easy to access account (checking/high interest saving/short-term CD/other)
2. Start and max out an IRA. Vanguard is a good option for this, you can start a target date retirement fund as a Roth or traditional IRA and set up automatic monthly contributions.
3. Save for medium term goals (house/car/vacation) and/or see financial planner for further retirement saving advice.
posted by ghharr at 12:28 PM on November 2, 2012
Given your high income, it might be worth consulting a (fee-based) financial planner to answer these questions for you, but the general advice is:
1. Save up an emergency fund of 6-12 months of living expenses in a relatively easy to access account (checking/high interest saving/short-term CD/other)
2. Start and max out an IRA. Vanguard is a good option for this, you can start a target date retirement fund as a Roth or traditional IRA and set up automatic monthly contributions.
3. Save for medium term goals (house/car/vacation) and/or see financial planner for further retirement saving advice.
posted by ghharr at 12:28 PM on November 2, 2012
I have no idea how the 401k money is invested because I was out of the office the day they had someone come in to talk to us about that.
Don't take this a put-down, not everyone is that interested in $$ matters. However, $$ matters, and not knowing how your 401k money is invested is insanity. You are the poster child for someone that would benefit from a fee-based financial adviser.
Zug in the first response gave you the exact blueprint of what you need to do. Now go do it.
posted by mcstayinskool at 12:35 PM on November 2, 2012
Don't take this a put-down, not everyone is that interested in $$ matters. However, $$ matters, and not knowing how your 401k money is invested is insanity. You are the poster child for someone that would benefit from a fee-based financial adviser.
Zug in the first response gave you the exact blueprint of what you need to do. Now go do it.
posted by mcstayinskool at 12:35 PM on November 2, 2012
Best answer: All the standard savings/investment advice applies to you, except that you should be keeping a bigger-than-usual chunk of money in liquid savings (savings account or T-bill backed money market). Six months of expenses is a good rule of thumb, but since you are planning on moving, you should base it on six months of expenses in SF, not in Houston.
Perhaps by talking to your friends in SF you can get a good idea of what six months of expenses would be. Then you might want to add in the cost of the actual move, which is probably at least a few thousand bucks.
Beyond that, I'd make sure that you are getting the maximum return out of your 401(k), which basically involves ensuring that you're not leaving employer-match money on the table. Then I'd start socking money away in a Roth up to the maximum allowed each year ($5k). And then I'd put the rest in a low-expense mutual fund like the Vanguard 500 for long-term savings. There are lots of savings/investment questions on AskMe that flesh out these suggestions more fully, or you can read something like The Motley Fool Guide to Investing or Get Rich Slowly, both of which offer similar advice.
On a more general note, I'd offer one piece of unasked-for advice re your proposed move: be very careful that you're not admiring the green grass on the other side of the fence. You can live in a great city, but if your job sucks or you don't like the people you work with or you're in a crummy relationship or you gave up a great relationship to get there, you can still be deeply, bitterly unhappy. The location will not save you. Just something to bear in mind; it's easy to get fixated on the idea of moving, to the point of having unrealistic expectations of what we'll find there versus what we have already.
But having some additional liquid savings isn't a bad thing, so you're not sacrificing much in the short term to keep your options open.
posted by Kadin2048 at 12:36 PM on November 2, 2012 [5 favorites]
Perhaps by talking to your friends in SF you can get a good idea of what six months of expenses would be. Then you might want to add in the cost of the actual move, which is probably at least a few thousand bucks.
Beyond that, I'd make sure that you are getting the maximum return out of your 401(k), which basically involves ensuring that you're not leaving employer-match money on the table. Then I'd start socking money away in a Roth up to the maximum allowed each year ($5k). And then I'd put the rest in a low-expense mutual fund like the Vanguard 500 for long-term savings. There are lots of savings/investment questions on AskMe that flesh out these suggestions more fully, or you can read something like The Motley Fool Guide to Investing or Get Rich Slowly, both of which offer similar advice.
On a more general note, I'd offer one piece of unasked-for advice re your proposed move: be very careful that you're not admiring the green grass on the other side of the fence. You can live in a great city, but if your job sucks or you don't like the people you work with or you're in a crummy relationship or you gave up a great relationship to get there, you can still be deeply, bitterly unhappy. The location will not save you. Just something to bear in mind; it's easy to get fixated on the idea of moving, to the point of having unrealistic expectations of what we'll find there versus what we have already.
But having some additional liquid savings isn't a bad thing, so you're not sacrificing much in the short term to keep your options open.
posted by Kadin2048 at 12:36 PM on November 2, 2012 [5 favorites]
I posted a boilerplate list of my general personal finance advice a while back which I will link to instead of rehashing.
I have no idea how the 401k money is invested because I was out of the office the day they had someone come in to talk to us about that
Unless your company has a very unusual 401k setup, you should be able to go to some sort of website to be able to do things like see your balances, change your contribution amounts, and change what you're investing in. Since you won't be retiring for a few decades you probably should just put most of it in a broad stock market index fund, which most 401k plans have available.
I might be trying to uncomfortably combine two dissimilar questions, but here it is. In light of the contemplated move, I'm not sure what I should be doing with money I'm making.
If you expect more risk than usual in terms of unplanned expenses, then you should probably go with a higher than usual amount of emergency fund money, and since it sounds like you have a lot sitting in cash at the bank you already have that covered pretty well. Otherwise the main priority for investing is long term over decades rather than years, so where you're living at any given time doesn't impact that a whole lot. Overall you sound like you are in good shape so nothing is really super important to get in order right away, just start taking more control of your finances and start doing more planning in terms of your overall financial plan with short and long terms goals, budgeting and whatnot.
posted by burnmp3s at 12:46 PM on November 2, 2012
I have no idea how the 401k money is invested because I was out of the office the day they had someone come in to talk to us about that
Unless your company has a very unusual 401k setup, you should be able to go to some sort of website to be able to do things like see your balances, change your contribution amounts, and change what you're investing in. Since you won't be retiring for a few decades you probably should just put most of it in a broad stock market index fund, which most 401k plans have available.
I might be trying to uncomfortably combine two dissimilar questions, but here it is. In light of the contemplated move, I'm not sure what I should be doing with money I'm making.
If you expect more risk than usual in terms of unplanned expenses, then you should probably go with a higher than usual amount of emergency fund money, and since it sounds like you have a lot sitting in cash at the bank you already have that covered pretty well. Otherwise the main priority for investing is long term over decades rather than years, so where you're living at any given time doesn't impact that a whole lot. Overall you sound like you are in good shape so nothing is really super important to get in order right away, just start taking more control of your finances and start doing more planning in terms of your overall financial plan with short and long terms goals, budgeting and whatnot.
posted by burnmp3s at 12:46 PM on November 2, 2012
I'm going to tackle the potential move/relationship part of this question.
You have a job you love, you have a serious boyfriend. You don't have many friends. The two reasons prompting a lot of people moving are the ones you already have where you are. Why would you give that up?
posted by DoubleLune at 12:52 PM on November 2, 2012
You have a job you love, you have a serious boyfriend. You don't have many friends. The two reasons prompting a lot of people moving are the ones you already have where you are. Why would you give that up?
posted by DoubleLune at 12:52 PM on November 2, 2012
If you are single and making more than $125K per year, you likely are not eligible for a direct Roth IRA contribution. However, you are eligible for a non-deductible traditional IRA. You can then convert that traditional IRA to a Roth IRA for no additional tax. In fact you can do the Roth conversion the next day after contributing to the traditional IRA. This assumes you have no other deductible IRAs, in which case the taxes for conversion are a little more complicated and must be pro-rated between deductible and non-deductible contributions. Any gains in your Roth IRA are tax free forever.
posted by JackFlash at 12:54 PM on November 2, 2012 [3 favorites]
posted by JackFlash at 12:54 PM on November 2, 2012 [3 favorites]
You've received good advice so far: put at least six months' worth of your net pay into a savings account so you will have it easily accessible as cash if the need should arise. Good job maxing out your 401k contributions, now start maxing out an IRA. You make too much for a Roth.
IAAL, and to the extent you raised it, a possible move does relate to your future finances. The practice of law largely depends on personal relationships with your clients, so it will get harder to move as time passes and you develop a book of clients, many of whom are likely to be local and may not be able to move with you from Houston to SF. Also, being in Houston, I imagine that you probably went to a regional law school. If so, that makes it a bit more difficult to find work in SF. Your salary indicates to me that you are in BIGLAW, and it would be difficult to make it to SF BIGLAW if you don't have a California or national law school pedigree. By no means impossible, but the challenge is there.
There are no happy places, only happy people. You have a BF and job you love in Houston. That sounds like a happy person to me.
posted by Tanizaki at 12:55 PM on November 2, 2012
IAAL, and to the extent you raised it, a possible move does relate to your future finances. The practice of law largely depends on personal relationships with your clients, so it will get harder to move as time passes and you develop a book of clients, many of whom are likely to be local and may not be able to move with you from Houston to SF. Also, being in Houston, I imagine that you probably went to a regional law school. If so, that makes it a bit more difficult to find work in SF. Your salary indicates to me that you are in BIGLAW, and it would be difficult to make it to SF BIGLAW if you don't have a California or national law school pedigree. By no means impossible, but the challenge is there.
There are no happy places, only happy people. You have a BF and job you love in Houston. That sounds like a happy person to me.
posted by Tanizaki at 12:55 PM on November 2, 2012
These answers are fine, but if you don't know anything about money, it would really be worth your while to take a few hours and read a book. It will answer the questions you have and the ones you don't know enough to ask. This is one of many fine books.
If after an investment of say, 30 minutes of reading for a week, you're still confused, you could hire an advisor, but as a young single guy, the standard advice should be fine.
If you can understand law, you can understand investing.
posted by Mr.Know-it-some at 1:02 PM on November 2, 2012
If after an investment of say, 30 minutes of reading for a week, you're still confused, you could hire an advisor, but as a young single guy, the standard advice should be fine.
If you can understand law, you can understand investing.
posted by Mr.Know-it-some at 1:02 PM on November 2, 2012
@Tanizaki: I am from Texas, which is how I wound up here. I went to Stanford for undergrad and a T6 law school. Almost everyone I know from college is working in SF and at some type of start up (I majored in a computer science-related interdisciplinary major). I am already starting to get legal questions from them. I anticipate this will continue in the future, and is a promising starting point for the book of business I suppose I'll have to have one day. One of the major reasons I'm considering moving is that I have such a broad base of connections there. Meanwhile, I don't know much (and am not very interested in) the energy sector, which is where almost all the work in Houston comes from. I left Texas when I went to college and didn't really keep up with people from high school. Particularly in Texas, I find this is a big detriment. I wasn't in a sorority, I didn't go to UT or A&M, etc., and I don't work at a huge law firm, so networking events and stuff is difficult. I went to a Federal Bar Association dinner yesterday and knew no one other than people from my firm and a two old partners who've been opposing counsel. I think the move may make sense from a career (and thus financial) perspective, but I do welcome a different perspective. I'm very conflicted.
Thanks for everyone's advice so far. I've bought Get Rich Slowly and will email someone at my office to set up a meeting with the financial firm that handles our 401K.
posted by anthropomorphic at 1:09 PM on November 2, 2012
Thanks for everyone's advice so far. I've bought Get Rich Slowly and will email someone at my office to set up a meeting with the financial firm that handles our 401K.
posted by anthropomorphic at 1:09 PM on November 2, 2012
Good job maxing out your 401k contributions, now start maxing out an IRA. You make too much for a Roth.
I know this was well meant advice but it is incorrect--or at least incomplete. Jackflash had it right. To reiterate:
You can and should contribute to a Roth IRA. You earn too much to contribute directly but that doesn't mean a hoot because you can just contribute to a regular IRA and then immediately convert it to a Roth IRA. This is an even better investment than the 401k because it is never taxed. This is called a Backdoor Roth IRA.
That link doesn't seem to be working at the moment so try the Google cache. MSN Money article.
Also, for all things financial, I heartily recommend the Bogleheads, once their site is back up.
posted by NailsTheCat at 1:43 PM on November 2, 2012 [1 favorite]
I know this was well meant advice but it is incorrect--or at least incomplete. Jackflash had it right. To reiterate:
You can and should contribute to a Roth IRA. You earn too much to contribute directly but that doesn't mean a hoot because you can just contribute to a regular IRA and then immediately convert it to a Roth IRA. This is an even better investment than the 401k because it is never taxed. This is called a Backdoor Roth IRA.
That link doesn't seem to be working at the moment so try the Google cache. MSN Money article.
Also, for all things financial, I heartily recommend the Bogleheads, once their site is back up.
posted by NailsTheCat at 1:43 PM on November 2, 2012 [1 favorite]
Have you looked extensively at the legal job market in SF? I think you might be weighing your odds of getting a job with more nostalgia than practicality.
Just a thought. Look before you leap.
posted by hobo gitano de queretaro at 2:58 PM on November 2, 2012
Just a thought. Look before you leap.
posted by hobo gitano de queretaro at 2:58 PM on November 2, 2012
Agreed with NailstheCat and JackFlash, I make an income like yours and this is what I do to contribute to a Roth.
Obviously you need to find out what your 401(k) is invested in - some 401(k) investments come with fees that SERIOUSLY eat into your earnings.
It isn't clear from your follow up posting, but are you making an appointment with the adviser for the financial firm just to find out what your 401(k) is invested in? Because that person is probably NOT the fee-based financial planner that several others above have recommended, and I would also add my recommendation for. It is really important to get a fee-based financial planner and not just ask the advice from any "advisor" at a financial firm, because one of those guys works on commission and has an interest in selling you on whatever investment vehicle his company puts out or whatever's going to make them the most commission/profit. You need someone who has no motive other than your best interest to advise you.
posted by treehorn+bunny at 6:30 PM on November 2, 2012
Obviously you need to find out what your 401(k) is invested in - some 401(k) investments come with fees that SERIOUSLY eat into your earnings.
It isn't clear from your follow up posting, but are you making an appointment with the adviser for the financial firm just to find out what your 401(k) is invested in? Because that person is probably NOT the fee-based financial planner that several others above have recommended, and I would also add my recommendation for. It is really important to get a fee-based financial planner and not just ask the advice from any "advisor" at a financial firm, because one of those guys works on commission and has an interest in selling you on whatever investment vehicle his company puts out or whatever's going to make them the most commission/profit. You need someone who has no motive other than your best interest to advise you.
posted by treehorn+bunny at 6:30 PM on November 2, 2012
Inspired by nodding vigorously to treehorn+bunny's response to write more to underline those points.
1. Your 401k and IRA will invest in funds. Most people believe you should buy index linked funds with low Expense Ratios (ERs) rather than an actively managed fund with a higher ER. Often, that's what a salesman "advisor" will push you toward because of commission.
2. Another commonly pushed investment vehicle is life insurance: whole life, universal life, there are lots of variations. If an advisor recommends that I would run a mile.
3. Do, do take a little time to read some of the investment philosophy at Bogleheads (now it's back up). Even if you hand over management of your funds to someone else, it's good to understand everything and it's really not that hard. They have some good books too.
posted by NailsTheCat at 9:23 PM on November 2, 2012
1. Your 401k and IRA will invest in funds. Most people believe you should buy index linked funds with low Expense Ratios (ERs) rather than an actively managed fund with a higher ER. Often, that's what a salesman "advisor" will push you toward because of commission.
2. Another commonly pushed investment vehicle is life insurance: whole life, universal life, there are lots of variations. If an advisor recommends that I would run a mile.
3. Do, do take a little time to read some of the investment philosophy at Bogleheads (now it's back up). Even if you hand over management of your funds to someone else, it's good to understand everything and it's really not that hard. They have some good books too.
posted by NailsTheCat at 9:23 PM on November 2, 2012
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Next, put away 6 months worth of living expenses (in SF, in light of the move) in some sort of liquid form. 3 should hang in your checking account, the other 3 can go into a CD or other guaranteed short-term investment.
Then start a Roth IRA.
posted by zug at 12:23 PM on November 2, 2012 [8 favorites]