Is the budget red or black?
March 28, 2015 9:30 AM Subscribe
I've got the job. Now I have to navigate the paycheck/loans/benefits/retirement... Where do I start?
I'm graduating in May, and have a job. (yay!!!!!) I'll be making enough that I estimate half of my take home will pay my expenses and debts. What do I do with the rest of it to maximize that money for the rest of my life? How much should I save each month? How much do I actually get to spend? My only debt will be student loans. I want to buy a house within a few years. (Bf & I plan to stay in this area, get married, have kids... we are mid 20s, he graduates next year and will also have loans.)
Second part, the prelim benefits package shows options between medical plans, expense account, etc. How do I choose which plan, how much $ to put towards 401K (max I can, I guess), etc. Are there online resources/blogs/etc that deal with this post-college first-job transition?
I'm graduating in May, and have a job. (yay!!!!!) I'll be making enough that I estimate half of my take home will pay my expenses and debts. What do I do with the rest of it to maximize that money for the rest of my life? How much should I save each month? How much do I actually get to spend? My only debt will be student loans. I want to buy a house within a few years. (Bf & I plan to stay in this area, get married, have kids... we are mid 20s, he graduates next year and will also have loans.)
Second part, the prelim benefits package shows options between medical plans, expense account, etc. How do I choose which plan, how much $ to put towards 401K (max I can, I guess), etc. Are there online resources/blogs/etc that deal with this post-college first-job transition?
Best answer: Congrats on the job!
One thing I've learned over the years is that if I increase my savings rate (be it 401k or otherwise) just as I get a raise or a new job, I never miss that money. It's psychologically a lot easier to send a high amount to savings right off the bat before you've had a chance to get used to having the cash available to spend. So I encourage you to save absolutely as much as you can. One strategy I used when I was just starting out was to have a large (what felt painfully large at the time) direct deposit into an interest-bearing savings account. The interest rates are low, and it's not tax advantaged like a 401k, but it moves the money to somewhere that it's out of sight (so you will be less likely to spend it), yet it's easily available if you need it. That made it a lot easier for me to put away more than I thought might be wise -- I knew that if I over-did it, I could always go over there and get some money from that account to cover things. But it does take discipline to only do that when absolutely necessary. If you view it as just another spending money account, it defeats the purpose. By doing that for a few years, I was able to put a reasonable (for a first time buyer, at least) down payment on a house and do other major things without taking on any debt. As I got raises, I kept increasing my 401k until it's now completely maxed out, which is another nice thing. If I look at the amount being taken out, it can feel like a lot, but since it's "invisible" I never know what I'm missing.
For me, having things be automatic and out of sight was really key to getting into the habit of saving.
posted by primethyme at 9:54 AM on March 28, 2015 [4 favorites]
One thing I've learned over the years is that if I increase my savings rate (be it 401k or otherwise) just as I get a raise or a new job, I never miss that money. It's psychologically a lot easier to send a high amount to savings right off the bat before you've had a chance to get used to having the cash available to spend. So I encourage you to save absolutely as much as you can. One strategy I used when I was just starting out was to have a large (what felt painfully large at the time) direct deposit into an interest-bearing savings account. The interest rates are low, and it's not tax advantaged like a 401k, but it moves the money to somewhere that it's out of sight (so you will be less likely to spend it), yet it's easily available if you need it. That made it a lot easier for me to put away more than I thought might be wise -- I knew that if I over-did it, I could always go over there and get some money from that account to cover things. But it does take discipline to only do that when absolutely necessary. If you view it as just another spending money account, it defeats the purpose. By doing that for a few years, I was able to put a reasonable (for a first time buyer, at least) down payment on a house and do other major things without taking on any debt. As I got raises, I kept increasing my 401k until it's now completely maxed out, which is another nice thing. If I look at the amount being taken out, it can feel like a lot, but since it's "invisible" I never know what I'm missing.
For me, having things be automatic and out of sight was really key to getting into the habit of saving.
posted by primethyme at 9:54 AM on March 28, 2015 [4 favorites]
Best answer: There are lots of online site, blogs, etc. about personal finance, and many of them deal, at least at times, with people who are new at their career, though not always with as much of the nuts and bolts as you're thinking of. I've read at various points Getrichslowly, The Billfold, The Simple Dollar, and Lifehacker's finance section TwoCents, among others.
I'm about a decade older than you, with friends who are in varying parts of their financial journey so my advice would be:
1. Fight lifestyle inflation. Even if you're not making much money, you're probably making significantly more than you were at college, but your expenses will go up too, and if you let them go too far up, it is hard to come back down. If you have a real high paying job, this is particularly true.
2. If you get a 401k match, contribute at least enough to get the full match (free money) but know if there are vesting restrictions (i.e., how long you have to stay at your employer in order to get the matching funds) and take that into account.
2a. See what the fees are on your 401k. A lot of plans have relatively high fees. If yours does, consider whether it makes sense to (i) only invest enough in your 401k to get the max match, and invest more into an IRA (Roth if you are eligible based on your income or regular IRA if you are not) or into a general investment account with lower fees. For either an IRA or investment account, I like Vanguard due to their low fees. For a 401k and/or IRA or investment account, you can compare different funds, or just stick with the account that is pegged towards your retirement age (i.e., Vanguard Target Fund 2060 probably, assuming you're 22 now and will retire in your late 60s).
2b. If your job doesn't match at all, again look at the 401k fees and decide if they are high. If so, do some soul searching and decide whether you are disciplined enough to put money aside post-paycheck (again, into an IRA or general investment account somewhere like Vanguard or its competitors). You can set up automatic withdrawals to do this, but the money will still be in your paycheck so psychologically the 401k may be better. I find that I never miss my 401k money (even when I've maxed it out), since it never appears in my paycheck at all.
2c. If you are making a lot of money (i.e., you have a job in i-banking or the like or a well-paying job in a very low COL area), consider both maxing out your 401k/IRA (depending on your analysis re: fees) and also putting regular amounts away in an investment account. The benefit of an investment account that isn't a retirement vehicle is that you can withdraw that money (subject to taxes on gains of course) usually whenever you want. That's also the danger for long term savings.
3. Watch your credit. Check your credit reports (for free at Annualcreditreport.com) at least once a year (or check one every four months). Some credit cards now include a credit score on your statements (my Discover and Capital One cards both do that, and I know some others do), and its worth keeping an eye on to catch any problems.
3b. Use credit responsibly - especially if you want to buy a house in the near future. Pay your credit cards on time, and in full every single month. (It is an urban legend that your credit score will suffer if you pay your bill in full. I have and I know several people with exceptionally high credit scores - 810+ - that have never paid less than their full bill every month.) Even if you pay in full every month, your credit will suffer if you come close to maxing out your cards, so try to avoid that (or, get an additional card/a higher line of credit but ONLY if you won't run up higher bills).
3c. Set your student loans to auto-debit, particularly if this results in a decrease in the interest rate after a set amount of time. Look at your student loan interest rates and consider if they are high enough to warrant cutting down on some savings to pay them down. (Do not do this by eliminating retirement savings entirely, however. Compound interest for retirement savings is your friend and will help so much if you start right away.) Find out if your student loan interest rates are fixed (so the rate won't change) or adjustable (rate can change). Most adjustable rate loans are fairly low right now, but look at the paperwork and see how high they can go. You have to determine yourself how much of a risk you're willing to take if you have adjustable rate loans. Consider if it makes sense to consolidate some or all of your loans. Keep notes/evidence of all interactions you have with your lenders or servicers and keep track of who your loans are sold to (and they probably will be sold). Tons of people have had problems with inconsistent servicing or messaging from servicers and lenders.
4. Figure out how much your emergency fund needs to be, and put that somewhere accessible, but not too accessible (i.e., not your checking account), and preferably somewhere where it makes a little bit of interest. Think now about what constitutes an emergency so that you don't tap it for items that aren't really an emergency and possibly screw yourself in the future. The "experts" seem to recommend anywhere from 1 month to 8 months of living expenses, so you have to decide what you're comfortable with. I'd consider what parental assistance could be available, what the job market is in your area, and whether your job/employer gives severance in layoffs. But also would consider transportation - do you rely on public transit, biking, walking or car and, if a car, how reliable is your car and how likely are you to have to make major repairs at an inconvenient time.
5. If you're still in school and covered by your parents' or school's health insurance, consider getting some things done before you switch plans, such as dental exams (if you have dental), eye exams and new contacts/glasses (if you have that coverage), physical, ob/gyn, etc. Compare the plans you're offered by considering how you really use your healthcare (i.e, do you have a condition that requires lots of visits or prescriptions? then you probably want to pay a higher premium for better coverage. If you rarely go to the doctor, maybe consider a high deductible plan with a lower premium). But also think about worse case scenario: if you have a high deductible plan and need to be hospitalized, you'll likely be on the hook for the entire deductible, so you'll need to save for this. (For most US high deductible plans, you're eligible to save tax-free money up to $3k or so a year in an HSA. That money can only be used for approved healthcare purposes (with limited exceptions) but, unlike an FSA, you don't have to use the money in the year (or just after) you saved it, so you can build up a fund for possible deductible expenses (or use it as another savings vehicle of sorts).
6. I've never kept a specific and detailed budget, but I like the balanced money formula as an idea and as the framework for a budget. You can google for details (and it has definitely been discussed here before) but the gist is that you should take your take home pay (i.e., after 401k, health care premiums, taxes) and balance it as follows: 50% needs, which includes housing, minimum debt obligations (i.e., minimum monthly payment for student loans, credit cards, car loans), food (within reason - so not including fancy dinners every night), clothing (again, within reason), transportation, and anything you are contractually obligated to pay (cell phone, gym membership if you're in a contract, etc) at least through the termination of the contract; 20% savings, which includes savings accounts, investment accounts, etc., as well as additional payments on debt (i.e., extra payments on top of the minimum payments); and 30% wants, which is anything you want but don't need, and can include upgrades to things you need such as a nicer car or taxi instead of subway or meals out, etc. Of course, if you can keep needs even lower, you are in even better shape (in case you lose your job or have another emergency).
posted by Caz721 at 12:04 PM on March 28, 2015 [4 favorites]
I'm about a decade older than you, with friends who are in varying parts of their financial journey so my advice would be:
1. Fight lifestyle inflation. Even if you're not making much money, you're probably making significantly more than you were at college, but your expenses will go up too, and if you let them go too far up, it is hard to come back down. If you have a real high paying job, this is particularly true.
2. If you get a 401k match, contribute at least enough to get the full match (free money) but know if there are vesting restrictions (i.e., how long you have to stay at your employer in order to get the matching funds) and take that into account.
2a. See what the fees are on your 401k. A lot of plans have relatively high fees. If yours does, consider whether it makes sense to (i) only invest enough in your 401k to get the max match, and invest more into an IRA (Roth if you are eligible based on your income or regular IRA if you are not) or into a general investment account with lower fees. For either an IRA or investment account, I like Vanguard due to their low fees. For a 401k and/or IRA or investment account, you can compare different funds, or just stick with the account that is pegged towards your retirement age (i.e., Vanguard Target Fund 2060 probably, assuming you're 22 now and will retire in your late 60s).
2b. If your job doesn't match at all, again look at the 401k fees and decide if they are high. If so, do some soul searching and decide whether you are disciplined enough to put money aside post-paycheck (again, into an IRA or general investment account somewhere like Vanguard or its competitors). You can set up automatic withdrawals to do this, but the money will still be in your paycheck so psychologically the 401k may be better. I find that I never miss my 401k money (even when I've maxed it out), since it never appears in my paycheck at all.
2c. If you are making a lot of money (i.e., you have a job in i-banking or the like or a well-paying job in a very low COL area), consider both maxing out your 401k/IRA (depending on your analysis re: fees) and also putting regular amounts away in an investment account. The benefit of an investment account that isn't a retirement vehicle is that you can withdraw that money (subject to taxes on gains of course) usually whenever you want. That's also the danger for long term savings.
3. Watch your credit. Check your credit reports (for free at Annualcreditreport.com) at least once a year (or check one every four months). Some credit cards now include a credit score on your statements (my Discover and Capital One cards both do that, and I know some others do), and its worth keeping an eye on to catch any problems.
3b. Use credit responsibly - especially if you want to buy a house in the near future. Pay your credit cards on time, and in full every single month. (It is an urban legend that your credit score will suffer if you pay your bill in full. I have and I know several people with exceptionally high credit scores - 810+ - that have never paid less than their full bill every month.) Even if you pay in full every month, your credit will suffer if you come close to maxing out your cards, so try to avoid that (or, get an additional card/a higher line of credit but ONLY if you won't run up higher bills).
3c. Set your student loans to auto-debit, particularly if this results in a decrease in the interest rate after a set amount of time. Look at your student loan interest rates and consider if they are high enough to warrant cutting down on some savings to pay them down. (Do not do this by eliminating retirement savings entirely, however. Compound interest for retirement savings is your friend and will help so much if you start right away.) Find out if your student loan interest rates are fixed (so the rate won't change) or adjustable (rate can change). Most adjustable rate loans are fairly low right now, but look at the paperwork and see how high they can go. You have to determine yourself how much of a risk you're willing to take if you have adjustable rate loans. Consider if it makes sense to consolidate some or all of your loans. Keep notes/evidence of all interactions you have with your lenders or servicers and keep track of who your loans are sold to (and they probably will be sold). Tons of people have had problems with inconsistent servicing or messaging from servicers and lenders.
4. Figure out how much your emergency fund needs to be, and put that somewhere accessible, but not too accessible (i.e., not your checking account), and preferably somewhere where it makes a little bit of interest. Think now about what constitutes an emergency so that you don't tap it for items that aren't really an emergency and possibly screw yourself in the future. The "experts" seem to recommend anywhere from 1 month to 8 months of living expenses, so you have to decide what you're comfortable with. I'd consider what parental assistance could be available, what the job market is in your area, and whether your job/employer gives severance in layoffs. But also would consider transportation - do you rely on public transit, biking, walking or car and, if a car, how reliable is your car and how likely are you to have to make major repairs at an inconvenient time.
5. If you're still in school and covered by your parents' or school's health insurance, consider getting some things done before you switch plans, such as dental exams (if you have dental), eye exams and new contacts/glasses (if you have that coverage), physical, ob/gyn, etc. Compare the plans you're offered by considering how you really use your healthcare (i.e, do you have a condition that requires lots of visits or prescriptions? then you probably want to pay a higher premium for better coverage. If you rarely go to the doctor, maybe consider a high deductible plan with a lower premium). But also think about worse case scenario: if you have a high deductible plan and need to be hospitalized, you'll likely be on the hook for the entire deductible, so you'll need to save for this. (For most US high deductible plans, you're eligible to save tax-free money up to $3k or so a year in an HSA. That money can only be used for approved healthcare purposes (with limited exceptions) but, unlike an FSA, you don't have to use the money in the year (or just after) you saved it, so you can build up a fund for possible deductible expenses (or use it as another savings vehicle of sorts).
6. I've never kept a specific and detailed budget, but I like the balanced money formula as an idea and as the framework for a budget. You can google for details (and it has definitely been discussed here before) but the gist is that you should take your take home pay (i.e., after 401k, health care premiums, taxes) and balance it as follows: 50% needs, which includes housing, minimum debt obligations (i.e., minimum monthly payment for student loans, credit cards, car loans), food (within reason - so not including fancy dinners every night), clothing (again, within reason), transportation, and anything you are contractually obligated to pay (cell phone, gym membership if you're in a contract, etc) at least through the termination of the contract; 20% savings, which includes savings accounts, investment accounts, etc., as well as additional payments on debt (i.e., extra payments on top of the minimum payments); and 30% wants, which is anything you want but don't need, and can include upgrades to things you need such as a nicer car or taxi instead of subway or meals out, etc. Of course, if you can keep needs even lower, you are in even better shape (in case you lose your job or have another emergency).
posted by Caz721 at 12:04 PM on March 28, 2015 [4 favorites]
Best answer: I've recommended this book before and I will again. The best thing to read for someone in your position is a book with a stupid title but great advice: I Will Teach You to Be Rich by Ramit Sethi. It has exactly what you are looking for.
I'm having some trouble linking--new tablet-- but just google it.
posted by islandeady at 12:07 PM on March 28, 2015 [2 favorites]
I'm having some trouble linking--new tablet-- but just google it.
posted by islandeady at 12:07 PM on March 28, 2015 [2 favorites]
Save as much as you can, now, for retirement.
"Lifestyle inflation", as Caz721 points out, hurts. When you get a better job, a raise, etc., do everything you can to maximize the money you're throwing at savings, especially retirement savings. The earlier you start on retirement savings, the better you'll have it in retirement. Don't *just* throw 15% at the 401K, see if you can *also* throw the $5500 you're allowed every year at a Roth IRA.
Once you get used to spending more money, it is harder to downsize. Better to arrange for it to vanish off the top and then you probably won't even notice it is missing. Kinda like taxes, except this is paying for your own future.
posted by jgreco at 12:13 PM on March 28, 2015 [1 favorite]
"Lifestyle inflation", as Caz721 points out, hurts. When you get a better job, a raise, etc., do everything you can to maximize the money you're throwing at savings, especially retirement savings. The earlier you start on retirement savings, the better you'll have it in retirement. Don't *just* throw 15% at the 401K, see if you can *also* throw the $5500 you're allowed every year at a Roth IRA.
Once you get used to spending more money, it is harder to downsize. Better to arrange for it to vanish off the top and then you probably won't even notice it is missing. Kinda like taxes, except this is paying for your own future.
posted by jgreco at 12:13 PM on March 28, 2015 [1 favorite]
How much do I actually get to spend?
Wrong question. The real question is how much do I spend right now and how much to I get to invest in having a great future.
Saving more and keeping your current spending lower not only gives you more savings but also means that your burn rate is lower so it won't take as much savings to keep you in current lifestyle if you have a hit to your income. It is not just about retirement or buying a house, it also gives you the option to quit a job you hate even if the next one isn't lined up or switch to a lower paying, more fulfilling career or take a year off to follow your dream or allow you or your partner to cut hours/stop working when you have children. If you can get excited about these possibilities then managing your expenses isn't about depriving yourself, it is about giving your future self a wonderful gift.
A great resource for this perspective (which is often recommended here on the green) is Mr. Money Mustache
posted by metahawk at 12:59 PM on March 28, 2015 [1 favorite]
Wrong question. The real question is how much do I spend right now and how much to I get to invest in having a great future.
Saving more and keeping your current spending lower not only gives you more savings but also means that your burn rate is lower so it won't take as much savings to keep you in current lifestyle if you have a hit to your income. It is not just about retirement or buying a house, it also gives you the option to quit a job you hate even if the next one isn't lined up or switch to a lower paying, more fulfilling career or take a year off to follow your dream or allow you or your partner to cut hours/stop working when you have children. If you can get excited about these possibilities then managing your expenses isn't about depriving yourself, it is about giving your future self a wonderful gift.
A great resource for this perspective (which is often recommended here on the green) is Mr. Money Mustache
posted by metahawk at 12:59 PM on March 28, 2015 [1 favorite]
+++ the advice above on increasing your 401K contributions or other automatics savings to coincide with your raises. It makes saving so incredibly painless when you literally can't feel it coming out of your paycheck. I've been doing this over the past several years and wish I'd started this strategy years ago. (And . . . congrats on the job!)
posted by bookmammal at 2:02 PM on March 28, 2015
posted by bookmammal at 2:02 PM on March 28, 2015
I second the Ramit Sethi recommendation. It's meant specifically for folks in your financial situation. (young, able to save a decent % of their income)
posted by yaymukund at 3:22 PM on March 28, 2015
posted by yaymukund at 3:22 PM on March 28, 2015
I found the book Get a Financial Life really helpful with all of this stuff when I was in your situation - I read the first edition, it looks like it was last updated in 2009 so may be a little bit outdated, but that sort of advice doesn't really change much, so I highly recommend it. I have a friend who swore by the Suze Orman book around the same time. I never read it, but it sounds like it contained a lot of the same information.
posted by echo0720 at 6:36 PM on March 28, 2015
posted by echo0720 at 6:36 PM on March 28, 2015
Best answer: Chaussette Fantoche: " What do I do with the rest of it to maximize that money for the rest of my life?
Invest it, while reducing the mount you give up to taxes and investor fees. Long story short, contribute as much as you can your 401k, and allocate 70 percent to a low fee fund attempting to replicate the returns of the S&P 500, and the rest to a low fee bond fund tracking the iShares AGG index.
How much should I save each month?
Ten percent is a good starting number. I'm somewhere at 40-60 percent depending on how you count.
How much do I actually get to spend?
Your first year, probably as little as possible. Don't rush out to buy yourself a BMW just because your budget and the car sales guy says you can. The reason for this will be made clear below.
I want to buy a house within a few years. (Bf & I plan to stay in this area, get married, have kids... we are mid 20s, he graduates next year and will also have loans.)
Having kids is by no means cheap. Do yourself a favor and pretend for a minute you're pregnant already. Do you keep your job? If so, what infant care do you use, and how much do they cost? Relatedly, does your employer offer an FSA for childcare? If you're not working, can you afford the mortgage you want on one person's salary?
Until you answer those questions, it seems straightforward enough to just keep saving. For young folks wanting to buy a home, diverting that extra savings to a Roth IRA makes a lot of sense: it's a retirement account, but you can pull out your contributions any time, and up to 10k in 'earnings' for special events like buying your first home after five years. So open one up as soon as you can legally fund it!
Second part, the prelim benefits package shows options between medical plans, expense account, etc. How do I choose which plan, how much $ to put towards 401K (max I can, I guess), etc. Are there online resources/blogs/etc that deal with this post-college first-job transition?
To figure out the benefits stuff, you probably want to do a lot of reading now. Go to the library, find some of the books mentioned in this thread, and maybe ask the reference librarian for some suggestions.
Once you know what the benefits are and how they work, I recommend an annual spreadsheet budget. Every year you copy the old budget to a new tab/sheet, and adjust where required. Personally, I have the spreadsheet calculate taxes, but it took me a few years to get it to that point. Once you have the spreadsheet you can make versions of it for every option you're considering, and see if that helps you any. FWIW, I never know how to choose between the health plan options, so as a reasonably healthy dude, I just choose the cheapest. You may need a different strategy.
posted by pwnguin at 8:17 PM on March 28, 2015
Invest it, while reducing the mount you give up to taxes and investor fees. Long story short, contribute as much as you can your 401k, and allocate 70 percent to a low fee fund attempting to replicate the returns of the S&P 500, and the rest to a low fee bond fund tracking the iShares AGG index.
How much should I save each month?
Ten percent is a good starting number. I'm somewhere at 40-60 percent depending on how you count.
How much do I actually get to spend?
Your first year, probably as little as possible. Don't rush out to buy yourself a BMW just because your budget and the car sales guy says you can. The reason for this will be made clear below.
I want to buy a house within a few years. (Bf & I plan to stay in this area, get married, have kids... we are mid 20s, he graduates next year and will also have loans.)
Having kids is by no means cheap. Do yourself a favor and pretend for a minute you're pregnant already. Do you keep your job? If so, what infant care do you use, and how much do they cost? Relatedly, does your employer offer an FSA for childcare? If you're not working, can you afford the mortgage you want on one person's salary?
Until you answer those questions, it seems straightforward enough to just keep saving. For young folks wanting to buy a home, diverting that extra savings to a Roth IRA makes a lot of sense: it's a retirement account, but you can pull out your contributions any time, and up to 10k in 'earnings' for special events like buying your first home after five years. So open one up as soon as you can legally fund it!
Second part, the prelim benefits package shows options between medical plans, expense account, etc. How do I choose which plan, how much $ to put towards 401K (max I can, I guess), etc. Are there online resources/blogs/etc that deal with this post-college first-job transition?
To figure out the benefits stuff, you probably want to do a lot of reading now. Go to the library, find some of the books mentioned in this thread, and maybe ask the reference librarian for some suggestions.
Once you know what the benefits are and how they work, I recommend an annual spreadsheet budget. Every year you copy the old budget to a new tab/sheet, and adjust where required. Personally, I have the spreadsheet calculate taxes, but it took me a few years to get it to that point. Once you have the spreadsheet you can make versions of it for every option you're considering, and see if that helps you any. FWIW, I never know how to choose between the health plan options, so as a reasonably healthy dude, I just choose the cheapest. You may need a different strategy.
posted by pwnguin at 8:17 PM on March 28, 2015
This thread is closed to new comments.
That said, do be aware of your company's vesting policy -- some places don't let you keep the matched contributions unless you work there for a minimum period of time, which can be up to three years in my experience. Just something to keep in mind.
posted by andrewesque at 9:37 AM on March 28, 2015 [1 favorite]