How to make the most of doubling my salary?
May 7, 2010 8:39 PM   Subscribe

My salary just doubled. How can I make the most of it?

I am 25 years old and I am going from making ~$45k to ~$90k. I am not a big spender or serial shopper so I'm not worried about that. I am just trying to figure out how to make the best of the extra money coming in.

At my age, I have the expected debts. About $15k in student loans, $9k in a car loan, and about $4k in credit cards. Just to note, I don't use the credit cards anymore and haven't for awhile. I do plan on selling my car and buying something cheaper since I'll be traveling every week. It's worth about $10k.

I've never messed with stocks or anything like that. I do currently have an ING savings account with an APY of 1.10%. That has about $2500 in it.

How have you grown your money? Stocks? Savings accounts? CD's? Etc?
posted by anonymous to Work & Money (26 answers total) 14 users marked this as a favorite
One of the first things you should buy is someone who you can explicitly trust to help with these decisions.
posted by hermitosis at 8:43 PM on May 7, 2010 [6 favorites]

Eliminate your debts ASAP. Then, if you're renting and you're ready to settle down, buy something well within your means.
posted by Simon Barclay at 8:50 PM on May 7, 2010 [1 favorite]

In addition to eliminating debt, definitely start saving for retirement-- it's much more effective the earlier you start. Plus, if your company matches contributions, you'd be throwing away money if you didn't contribute. I plan on investing in conservative-growth mutual funds when I start my first real job later this year. No need to play the stock market game.
posted by parkerjackson at 8:55 PM on May 7, 2010 [2 favorites]

I'm with hermitosis: find someone you trust to help set up your long-term savings/investment plans. But if you need something to do with your newfound income in the short-term here are a couple of guidelines:

- Annualize your NET increase in take home pay and divide by 12. That's how much your monthly income is going to go up. $45k sounds like a lot but it's easy to blow through $2k each month.
- Given the above, if you want to grow your money you'll need manage your standard of living. Don't move into a bigger place, buy a new car, etc just yet. Make your plan, THEN move on up within your means.
- Build a cash reserve (some say 3 months, some say 6 months) Keep it liquid, your ING is a good place to start.
- Pay off high interest CC debt. The best savings rate in the world won't trump 19.9% APR unsecured debt.

From your question you are looking at this like a responsible person. Good on you. BUT you just got a major raise so be sure to do something nice for yourself - you deserve it! Congrats!
posted by m@f at 9:05 PM on May 7, 2010

1. pay off debts
2. contribute to your savings account until you've established a 6 month cushion of expenses
3. contribute to your 401(k) to take full advantage of any company match
4. establish a Roth IRA, you are young and your tax bracket will only increase. Max your contribution
5. After you've taken care of ALL of the above, then think about investing. The correct answer is Vanguard. Keep it dead simple. I'd suggest Vanguard Target Retirement 2045 Fund (VTIVX). It will automatically shift its allocation from aggressive to conservative as you age, and it's got a really low expense ratio
posted by leotrotsky at 9:07 PM on May 7, 2010 [2 favorites]

Oh, obviously you'll need to invest the IRA as well. Stick that in Vanguard also.
posted by leotrotsky at 9:08 PM on May 7, 2010

Do yourself a huge favor and read The Bogleheads' Guide to Investing. Learning how to manage your own money when you're young, will save you a ton of expenses and fees.
posted by Durin's Bane at 9:09 PM on May 7, 2010

continue living on your previous, 45k/year budget. this shouldn't be hard, you're already used to it. keep 10-20% and use it to splurge - either monthly (fine dining, new clothes, bigger car payment on a luxury automobile, whatever floats your boat and fits your budget), or save it up for a few months at a time and buy something that takes your fancy. then, take the rest, and invest it.

hire a financial advisor right off the bat to help you decide the specifics. sooner or later life will catch up with you, and you'll find you HAVE to start using more of your income (say if you have kids, decide to buy a house, etc) so salt as much of this away as possible while you can. 5 years of investing half of 90k, even after taxes, should set you up nicely!

the specifics of how you invest are really going to be down to what you decide with your financial advisor, who will probably recommend a range of suggestions - some to minimize taxes, some to grow your portfolio aggressively, some to hedge against hard times, etc etc
posted by messiahwannabe at 9:12 PM on May 7, 2010

I think you need to build up 6 months to one year of emergency expenses, then wipe out your debt, then invest. Congrats on the extra income!
posted by Happydaz at 9:20 PM on May 7, 2010 [1 favorite]

First keep in mind that 90k a year is taxed more heavily than 45k a year, so you should really think about things like starting an IRA to get some money that's tax-sheltered first. After that, if you can commit 20k a year to investment, I'd be very conservative for a couple years, and if you make it to around 100k, you can start thinking about using a good investment advisor.

Pay off your debt first though, because it really doesn't make sense to throw money at stocks & bonds until you don't have debt biting you, and a little bit of emergency expenses isn't a bad idea either.

The good news is, it sounds like you're pretty young, so this is a pretty good time to make mistakes with investing, so if you're tempted by the stock market, figure out a good amount to risk now and go for it. Pick up a copy of A Random Walk Down Wall Street, read it, and then decide what level of risk you want to get yourself into.
posted by devilsbrigade at 9:41 PM on May 7, 2010

I disagree with the advice on hiring a financial advisor. A $90,000 income, even after taxes, is not a daunting amount to self-manage. A financial advisor will be expensive and unnecessary unless he's attempting something very ambitious financially. Many banks and offer free financial advising that will suffice.

My advice: pay debts obviously, open a retirement account either through a Roth IRA or an employer-sponsored plan like a 401k. You should be able call your bank and ask about a Roth if they offer it, or just google it for the basics. Build up an emergency savings account with 3-6 months of expenses. I don't think a 6-month amount is absolutely necessary if you're young (with living parents whom you can fall back on) and only supporting yourself (it'd be irresponsible to lack ample savings if you're supporting a child or a spouse), and I do think money should be spent to live a little while you're in your 20s. Why live like a pauper so that you can spend your golden years in luxury? Keep the savings in CD's, and google for the best CD rates.

After your savings you have discretionary money that you can grow. Stocks are an option. There are a million guides on beginning to invest that you can use. Summed up, stocks are risky, but an index fund reduces the risk greatly. Overall I'd recommend just spending a lot of time on, and to learn more, and googling for guides.
posted by mnemonic at 10:17 PM on May 7, 2010 [4 favorites]

What leotrotsky said.
posted by PueExMachina at 11:15 PM on May 7, 2010

Just as another idea:

Take $4500 out and spend it within the next month. You might find it will help you be more responsible with the other 90% of your raise.

You could do something philanthropic with $4500. You could do something career-changing, like attend an awesome professional workshop or two.

Thought it was worth mentioning, since sometimes getting a big raise can feel like more money management pain without much more of a tangible kick to it. $4500 could get you a pretty nice tangible kick.
posted by circular at 11:20 PM on May 7, 2010 [3 favorites]

First thing is to get rid of your credit card debt. Don't bother with anything else until that's done. After that, I'd probably split my money into 4 buckets, not necessarily all the same size:

1) Emergency fund. The rule of thumb is that you should try to have 6 months' salary saved up in cash in case you lose your job, get injured, etc. You're young, so you might only save up 1-2 months' salary for now.

2) Retirement. The rule of thumb here is to try to save 10% of your pre-tax salary toward retirement. This should go in an IRA through an online broker. Scottrade is a good choice, but there are others. Roth IRAs tend to be better than traditional IRAs for young people, but you're pretty close to making too much money to qualify for a Roth. Check out the IRA info on The Motley Fool...they have good information. I would not recommend most of the rest of The Motley Fool at this point, because they had to sell out their values to please the venture capitalists who funded the site.

3) Debt service. I would probably pay close to the minimum on student loans, because the interest rate is likely pretty low (assuming these are government loans). However, the car loan needs to go relatively quickly, because the car is a depreciating asset, and the it's never fun to pay interest on a depreciating asset.

4) A little something nice for yourself. While you should emphatically NOT get used to living on 90k a year, you should give yourself an extra hundred bucks a week or so to spend on whatever you want. You've earned it.

After you get the debt paid off, take the money that you were sending to the credit card people each month and send 1/3 of it to your ING account, 1/3 of it to a non-IRA brokerage account, and keep 1/3 to spend on whatever you'd like.

A couple of notes on the stock market:
1) Don't put any money that you need in the next 5 years or so in the stock market.

2) Don't fall into the managing your own investments trap. Don't worry about picking individual stocks. Instead, stick your money in index funds. See the Bogle book mentioned earlier. You'll likely get a higher return than if you tried to pick individual stocks, and you'll certainly save a bunch of time. You'll have to find something else to talk about at cocktail parties, though.

Again, when you go to sites like The Motley Fool, they'll try to persuade you to manage your own money by picking individual stocks, especially by reading one of their pricey newsletters. Don't bother, it's not worth the time and effort for 99.99% of people.

Good luck, and congrats.
posted by griseus at 3:55 AM on May 8, 2010 [1 favorite]

Aside from investments you should also think about spending money on things that currently take time you would rather spend on something else. Cleaning and cooking are good examples of this. You will be more stressed at the new job - there's a reason you got a raise. Personal trainer, therapist, life coach are other examples. Your time and happiness are as valuable as the cash.
posted by By The Grace of God at 4:02 AM on May 8, 2010 [1 favorite]

About $15k in student loans, $9k in a car loan, and about $4k in credit cards.

Pay these off in reverse order. Once you do that, act as if you make $70,000. Spend and save within that budget. Put the rest into a longterm savings/investment vehicle.
posted by spaltavian at 6:33 AM on May 8, 2010

Pay off ALL debt first in this order- Credit Card, Car, Student loan.
Build up an emergency cash fund of 3 to 6 months and keep it liquid (my credit union carries a money market account that returns 1.5 annually, I think ING has about the same).
Max out your 401k (if I had your salary, I'd put in 15% of my gross pay, even if my company doesn't match that much) and open a roth and max it out.

Once you have all of this done, start looking at purchasing a house/condo, if that is what you want (go with a 15 year mortgage). If not, invest the money in a personal investment account.

Once you have all of this, well then sit back and pat yourself on the back for doing what hardly anyone else in the US can/has done and enjoy the money.
posted by TheBones at 6:37 AM on May 8, 2010

Spaltavian and TheBones are right about the order to pay off your debts. Get rid of credit card debts. Then start using credit cards again. Use your new income to make sure you pay off the balance in full each month. Get one that gives you rewards you'll use. Cash is a good one. Depending on your interest rate for your student and car loans, you might not want to bother paying them off early.

Most of the IRA advice so far has been bad. You definitely should not open a traditional IRA. You make too much money if you're single and you'll just be locking up your savings until you're old with no tax advantage. The Roth IRA has an income limit a little above what you will be making now. Do you think you'll be getting any more raises that aren't of the 3% variety? Because if you do think you'll be making more, you're going to go through your life with a Roth IRA that has $10-15k in it (you can only contribute $5k a year) that wasn't even tax advantaged when you contributed it.

On the other hand, max out your 401k. That's treated far more favorably. Unlike an IRA, it's tax-advantaged at your income. By max out, I mean contribute enough to receive a full match from your employer or however much more you want to save for your retirement. 10% was mentioned above and doesn't seem bad.

Beyond that, don't change your lifestyle too much and let your money pile up. Ease into feeling richer. I was in your shoes a few years ago. It's nice to have a cushion.

As for specific investment ideas, keep a few month's living expenses in something very liquid that won't suddenly drop in value too much, like a savings account. This isn't going to grow your money very much, but will help for emergencies. Stick everything else in an index fund. When you're looking for an index fund, going for one that uses the S&P500 is a pretty reasonable one. Look for one with a low expense ratio. Set up your account to contribute to it every paycheck. You won't even miss that money because you weren't earning it last month and now it's growing.

Don't get CDs. They don't pay any interest these days and they're not liquid enough for your emergencies. Don't buy individual stocks unless you were thinking of going to Vegas but wanted something with better odds. But you won't do better than the pros, and it doesn't sound like stocks are your hobby. Don't get regular mutual funds. The pros are inconsistent about beating the S&P500, and even if they can, you are paying them for it.
posted by oreofuchi at 7:49 AM on May 8, 2010

Make a budget using the old salary. I read a great book that suggests dividing your take-home pay thusly: 60% to living expenses, 10% savings, 10% investments, 5% emergency fund, 15% fun/free money.

Then take ALL the surplus since your salary has doubled, and put it on your debts. And once those are paid off, put it into a house fund. And once that is done, put it back into your take-home pay so the above percentages will be recalculated.
posted by JoannaC at 8:43 AM on May 8, 2010

In regard to stocks, etc... Look into Exchange Traded Funds (ETFs). They are like a mutual fund, in that they are a collection of different investments. But they trade like a stock (which is advantageous because the price is more market driven, rather than being "set" once per day). And the fees are generally lower than mutual funds, too.

iShares has some good ones, as do most of the big mutual fund names (Vanguard, etc.). We're still relatively young and so carry a bit more volatile funds, with a mix of more conservative stuff thrown in. Check out the iShares Latin American Fund. It's done well for us.

We did some calculations a couple of years ago. We figured out that if we socked away $50K in a single year, we almost wouldn't have to contribute to our retirement fund ever again (given conservative estimates on returns). And that was at age 37! Imagine what you could do at your age!!
posted by wwartorff at 8:48 AM on May 8, 2010

Pay off all you debts as quickly as possible. Then put 3-6 months of baseline living expenses into a savings account for emergencies.

Next, start contributing the max to your 401(k) account. Did you know that if you start investing for retirement now and stop at age 35, you will end up with about the same or more at retirement than someone who started at age 35 and saved for the rest of their lives? Amazing but true. Also, your employer probably matches some or all of your contribution; this is free money you should definitely not miss out on.

Also contribute the max to a Roth IRA. That's after-tax dollars, so you can withdraw your contribution in emergencies without paying penalties.

Put the retirement money into an index-based target retirement mutual fund (where they adjust the allocation based on your age) or failing that, split it between a broad market index (e.g. S&P 500) and a good bond index. Keep contributing, especially when your investments are down, rebalance annually, and don't touch it until you retire if at all possible.

You will still end up with more money each month than you had before. You can decide what you want to do with that: new car, home upgrade, travel. You can do this with the luxury of knowing that your future is secure.
posted by kindall at 9:20 AM on May 8, 2010

Against hiring a financial adviser. Educate yourself! Everyone posted great ideas here.

The best advice is to continue living the way you've been living. Work to live. Many of my colleagues end up living to work and barely enjoy the fruits of their labors.

Use the extra cash to save for retirement and for other things you NEED. Occasionally splurge on yourself but take several days to review whether the item you want is what you REALLY want or just a temporary craving that you'll grow bored of.

One tip I always recommend. Track everything using Microsoft Money, Quicken, or

My income is well above 40K but my wife and I have yearly expenses of about 37K (not counting vacations which is our splurge area (still minimal since we don't care about hotels seeing as we are never inside the hotel except to sleep).
posted by InvestorMD at 9:30 AM on May 8, 2010 [1 favorite]

I'm not a huge fan of financial advisors. There are about a billion sites out there that can give you good financial advice and it all pretty much boils down to the same thing: Pay off high interest debt, have a 3-6 month financial cushion, and invest in some broad based index funds (I happen to like Vanguard because they are low, low cost) and resist the temptation to mess with it. There you go.

If your company has a 401K then you should use it. If your company matches 401K contributions then you should definitely contribute as much as you can to get the maximum match. Not doing that is literally turning down free money and that's not something you should ever do.

If you don't know what to invest in, Vanguard (and others) have great funds that are retirement date targeted. Let's say you plan to retire in 2045. You invest in the 2045 fund and they gradually change the mix over time, moving out of stock and into cash and bonds. They are actually a little conservative for my taste, but if you really want a "set it and forget it" retirement plan then you could do a lot worse.

As wwartorff pointed out, saving now is much more powerful than saving later.

Make a pledge never to carry a balance on a credit card again. You won't succeed, because something always comes up, but that should be your goal.

Final bit of advice: I'm a total hardass about pulling money out of a 401k. Don't, unless you are going to lose a limb or lose your house. I've seen advice about using it to pay off loands by comparing the interest rate on the loan with what you make in the 401k and blah blah, deducting the penalties and yadda yadda and I don't buy it. It's too tempting and I would never recommend doing it unless you really had no other option.
posted by It's Never Lurgi at 9:32 AM on May 8, 2010

First, congratulations.

1) Don't start spending more.
2) Pay off your debts as everyone said, as fast as possible.
3) Dont' get back into debt.
4) Establish a cushion - just let the cash pile up in the bank. Let it pile up until you have at least 6 months or a year's worth of expenses at your current burn rate (figure out what that is).
5) Then.... let it keep piling up as cash. Do not be swayed easily by ANY investment.... you are not in a rush to invest... you really aren't. That's the LAST thing you want to do. Socking away cash IS investing..... that cash represents your time, and every dollar you save is a dollar you don't have to earn again. You have your lifetime to plan investments... you can start in a year or so.
6) Let it keep piling up.
7) Watch the money grow.
8) It's still piling up.... and your'e comfortable with that now, because a lot of time has passed, and you've been reading up and talking with people about financial strategy, especially older, successful retired people. You'll have long forgotten what day payday was, and you'll secretly smile inside when people are "waiting for payday" to go do something..... or when people lost money on bad investments.

I guess my point is - figure out how to live a cash positive life - you are in a position now where you can do that - and the more cash positive you are, the more opportunities there are in life for you - the more surplus you have the less concerned you are with things like changing jobs, debt becomes something you simply don't have, and you control your financial future. You become less concerned about money in general, and start viewing it in a different, more positive way.
posted by TravellingDen at 1:12 PM on May 8, 2010

Asking advice on investments is very risky. I doubt if any advice you get comes from anyone who has more than 10 years successful experience. I will, however, tell you what I did to prepare for retirement. I am now retired.

First, I only invested in things that paid dividends or interest. The reason was if the value of the investment went south, I'd never show a total loss. Second, I always reinvested the dividends and interest. This with regular additions to the investment portfolio from what I could spare, created a sinking fund that, in time, built into a very respectable sum. Third, I made certain that I had the discipline to invest in this fund monthly. My employment history was such that I couldn't take advantage of retirement plans. I didn't use tax shelters like 401K or Keough. I would have probably done still better if I had, but, as I said, I had a very erratic work history.

Sometimes it is impossible to follow these rules for all sorts of reasons. The most significant is loss of employment. But what is important is to return to this hard-ass savings plan as soon as it is feasible.

My portfolio is over 80% in fixed income investments, like GNMAs. The GNMA mortgage is very safe and will preserve your principle(research it yourself). Government mortgages today are paying around 4%. The remainder is in low-risk securities that pay reasonably high dividends (this will take a bit of research to find suitable candidates). Avoid buying funds. There is a significant risk of loss with any fund (check to the history of any fund and compare it to a sinking fund of your own selection).

You are young and all investment advisors will try to get you to invest in growth stocks. Don't listen. There are very few stocks you can predict to be worth significantly more in 30 years than they are now. This speculation requires all your time to follow what's happening, and the broker has a big incentive to keep your account actively buying and selling. Besides, if you buy popular growth stocks, you are likely entering the market too late and will be lucky to see a significant profit, if any profit at all.

I have to be brief because of the space, but if you are patient and find a broker who will treat your interests as if you are now living off a fixed income and you don't get greedy, you should retire quite comfortably.
posted by Hilbert at 3:56 PM on May 8, 2010

While the strategy Hilbert recommends may have worked fine for him, in general it would have done worse than what others are recommending over almost any time period since market data began being reliably tracked.

In particular his recommendations for dividend paying stocks and fixed income investments may be worthwhile for someone concerned with capital preservation (i.e. someone who is retired and just wants to make sure that their investment income keeps coming in), but the returns are much much lower than what you'd get investing in stocks.

Stocks don't just go up because of speculative reasons. Stock prices tend to go up over time because companies in general tend to make profits. Those profits either are reinvested in the company (increasing its value) or repaid to investors in the form of dividends (because of the tax disadvantages of dividends, it is often better for a company to reinvest the profits rather than return them). The only reason it would make sense to believe that in the long run stocks will not go up, is if you believe that companies on average will not be able to be profitable.

I don't have time to go quite into the depth I want, other than to reiterate what others have said about investing your money into equity based index funds with low management fees.

(Also definitely take advantage of all tax-sheltered accounts that you have access to. If your employer matches your 401K by 50%, that is like you just got a 50% return instantly with 0 risk. Similarly, I know longer have the journal article in front of me, but I have seen estimates showing that the lifetime savings in taxes for each dollar invested in IRAs can be well in excess of $2. i.e. if you one extra dollar in the account, not only do you get to keep all the money you saved, but you also have saved yourself $2 in taxes).
posted by vegetableagony at 8:00 AM on May 13, 2010

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