Financial Management: Spending and Saving
January 26, 2014 12:54 AM   Subscribe

For the first time in my life I'm actually making decent money! How do I balance spending and saving?

Hi Hivemind, I come to you for your wisdom. I find myself actually making money for the first time in my (young) life and it's awesome yet strange. However, it's difficult to be sure what I should be doing with it, with regards to spending and saving.

Details:
Checking - $22,000
Roth IRA - $11,000
Investment - $15,000 -- mostly mutual funds, with some individual stocks
Annual Income - $40,000

I'm confident in my investment knowledge, so I don't need help in that realm. I max out my annual Roth IRA contribution, and I throw money into my investment account here and there -- nothing scheduled.

If I'm able to contribute to my savings, should I treat myself to occasionally large expenditures, or should I aggressively save? Last fall, I spent about $7,000 on a trip to Asia. This spring, I was thinking about buying a motorcycle, which will cost around $7,000 when all said and done. Is this a fine idea, or should I continue to save? I am looking to go to business school in 2015, so perhaps I should start to save up for tuition? Or should I enjoy what I have, so long as I continue to contribute to my savings?
posted by masters2010 to Work & Money (13 answers total) 9 users marked this as a favorite
 
I can't speak to what your financial goals should be. However, the book "The debt free spending plan" by Joanneh Nagler (sorry no link) is great and you should check it out. Although it's primarily geared for an audience that is trying to live debt-free, it provides you with a concrete way to approach your savings and expenditures to live within your means while saving. The beauty of it is that you recognize the things that are most important to you to save for (retirement, travel, weddings, tuition, etc) and always have funds for emergencies and big ticket purchases. I think you're in a great place financially and the best thing you can do is actively plan to stay financially sound for the rest of your life. You've got a great start, just focus on long-term goals.
posted by lunastellasol at 1:13 AM on January 26, 2014


Do you have zero debt?
posted by jardinier at 1:31 AM on January 26, 2014


Try to save enough money so that you can live for six months without a job. You'll have to allow for rent, food costs, transportation costs, healthcare, etc. Keep this money in an account where you can get at it very easily, via cash. Then forget about it. This money does not exist to you. Don't be tempted to think that you have that much money available to you and you'll just dip into it and replace it with next month's paycheck. That paycheck might not arrive, and this money is for emergencies only. Knowing that you have this parachute will make making decisions easier.

Then, continue saving. This is fun money, for things like motorcycles. Walking into a motorcycle dealership with $7000 in cash puts you into quite a different situation than if you walk in there needing a loan to pay for it.

If you have any debt, it's imperative that you pay that off as quickly as possible. Even if it's just a few hundred dollars on a credit card, get rid of it ASAP. Credit is great when it's working in your favour, but interest rates often mean that it's not working in your favour.

Will going to business school increase your capacity to earn? If it will, I'd put the money that would be spent on the motorcycle towards paying for the tuition costs. Fun spending like that is nice, but being able to pay your bills with ease is nicer. You can always get a motorcycle later, and there's something to be said for deferred enjoyment. Anticipation can make getting something you want much sweeter. Consider whether the cost of the motorcycle is going to be worth the cost of the lower wage you'll be getting. Only you can answer whether or not it will be.

I read the book The Richest Man In Babylon several years ago, and it's transformed how I see money and saving and spending. These days, I pay myself first, then my bills, then what's left over is fun money. I maybe can't buy every single thing I want right away, but I found that when I did that, I didn't actually want the vast majority of the things I'd bought after I'd bought them.
posted by Solomon at 1:43 AM on January 26, 2014 [1 favorite]


I'd save aggressively for business school. 2015 is... next year.
posted by payoto at 4:10 AM on January 26, 2014


The money in your investment account -- what are you planning to do with it? If you anticipate using it for short-term goals (paying for grad school, buying a house in the next few years) it probably shouldn't be in a risky vehicle like stocks and mutuals, but rather in something like laddered CDs. If you anticipate being part of your general retirement savings, it should be in a tax advantaged account of some sort. I note that you currently own your own business, so a SEP-IRA would be a fairly simple option. Whatever broker you're using probably also has a SEP-IRA option; they're very easy to set up, and you can still keep it invested in mutuals and some individual stocks if you like to mess around with market. And you can contribute to your Roth on top of whatever you put into a SEP.

On the more philosophical question: how much to save vs. how much to enjoy now. Everyone's answer is going to be different, but the very rough rule of thumb nowadays from financial advisors is to try to save 20% of your income toward retirement. It sounds like you are (or would, if you put your investment portfolio in a proper tax advantaged account) meeting that goal. If you've got spending events on the horizon (school, house purchase, family events such as weddings or having babies), then it makes sense to save toward them. Save and pay cash for those spending events rather than going into debt if you can avoid it.
posted by drlith at 5:16 AM on January 26, 2014


You have WAY too much money in your checking account. You need to stash 20K of that in a high-yield savings account, where you'll get .85% or so interest--versus a checking account, which might be .15%. These look like some options.
posted by tooloudinhere at 5:51 AM on January 26, 2014 [1 favorite]


One thing I'll point out is that, outside of your investment accounts, you just have... money. In checking.

What you should have is "cash" - ie, money you're allowed to spend - and savings, which you're not (except for specified purposes.) You could get more complicated and mark things off into lots of accounts, if you'd prefer:

* Emergency Fund (3 months' expenses, minimum)
* B-school savings
* New Car

etc. But at a bare minimum, you should separate out long-term emergency savings from other money. It can also be extremely helpful to have a "Fun savings" account for things like that $7K asia trip - that is, having an account that isn't your checking account, so you don't casually spend it, but also isn't your other savings, so you're not tempted to take money earmarked for Important Purposes and blow it on vacations.
posted by Tomorrowful at 6:30 AM on January 26, 2014


Spend, save, and donate.
posted by aniola at 9:55 AM on January 26, 2014


Response by poster: Thanks for all the good advice! To clarify, I have zero debt. Very fortunate to have my grandparents pay for my college education.

I definitely think business school will increase my capacity to earn. I plan to use it as a pivot point in my life and hopefully create a startup with the possibility for large return. I will only go if I can get into one of the top 5 schools.

It's correct in that I have all retirement investment put into a Roth IRA. Why should I create a 401(k)? I'm self-employed, so I would get no employee matching benefit. My thinking was that I'll only be making more money in the future (theoretically), so I should pay my taxes now while I'm in a lower bracket.

With regards to my investment account (note my total is actually a bit higher than stated):
- I dedicated $6,000 to stocks, which is money I'm not worried about. It's already up 26% in less than a year, but I realize these things go up and down.
- I put $15,000 in mutual and index funds. This money is for general savings, though with no dedicated purpose. I'll probably end up pulling it out to pay for business school, but I'm willing to accept the risk of the investments for the next year or two.
- $13,000 in my Roth IRA

Starting a SEP-IRA sounds like a good idea, though I'm not certain that now is the right time, especially considering that I'm going to need to pay for business school in a little under 2 years. Yay? Nay?

Based on your advice, I'll transfer $13,000 of my checking account to a savings account for an 8-month emergency fund. Or should I accept some risk and invest it? I'm more inclined to accept some risk, especially considering it's an 8 month emergency and I also have other savings that I could use if it really came down to it. Or is that a bad idea?

I'll create an investment account for business school with a mutual fund index. Then I'll maintain my checking account around $2,000 for spending. Where should I pull rent from? My checking account, and then just replenish it with my paycheck? How does this plan of action sound?
posted by masters2010 at 12:33 PM on January 26, 2014


If you plan to use cash to pay tuition, you might gain a tax advantage in some states (e.g. New York) by routing that money through a 529 college savings plan. Something to investigate.
posted by Jahaza at 10:04 AM on January 27, 2014


Based on your advice, I'll transfer $13,000 of my checking account to a savings account for an 8-month emergency fund. Or should I accept some risk and invest it? I'm more inclined to accept some risk, especially considering it's an 8 month emergency and I also have other savings that I could use if it really came down to it. Or is that a bad idea?


An emergency fund is an emergency fund and should be highly liquid so you can easily pay things like major unexpected medical bills, car-repair bills, etc. A high-interest savings account or, at most, a high-yield CD is about as illiquid and risky as you should be looking at. Risk is for long-term investments, not emergency funds.
posted by Tomorrowful at 11:51 AM on January 27, 2014


You skipped a few relevant numbers in this question. You make $40,000 per year, let's assume that's before tax. From your previous questions, you have made that much money for 14 months now by drawing it as a salary from your own business, and you're about 25.

So pulling some numbers out of my ass, you have about $30,000 per year after taxes and Roth IRA contributions. In your last post you say that $13,000 is an 8-month fund, so you presumably spend about $20,000 per year on living expenses (are you sure of that number, or just guessing?) - after $7,000 for travel/motorbikes that leaves $3,000 for all other savings, is that how much you thought you were saving? As to whether it's enough, here are some of the questions you need to be asking:

When you go to business school will you continue drawing a full salary from your business and working there, or will you stop paying yourself and be living off savings (or stop working and keep paying yourself)? How much will it cost in tuition? Is it online, so your living expenses don't change, or will you have to move (and how much would that cost?)? Do you have health insurance and disability insurance? If you break all your limbs tomorrow will your business survive, and will you have any money to live on? How much will business school increase your income?
posted by the agents of KAOS at 8:56 PM on January 27, 2014


Also, you clearly have more money saved than you've drawn in income since you graduated. If this comes from gifts/etc, you need to be careful you aren't misleading yourself as to how well you're saving - shuffling money that you already had into 'this goal' category can make you feel like you're meeting goals when you're not actually saving any of your income.

Also also, how do you have $13,000 in a Roth IRA when a year ago you had $1250? Hopefully you mean that you've already contributed for 2014 *and* you rounded up from $12,250?
posted by the agents of KAOS at 9:02 PM on January 27, 2014


« Older The researcher is the subject.   |   The Ladies and Women of Olympic Sport. Newer »
This thread is closed to new comments.