I earned some money, help me keep it!
January 17, 2011 8:05 AM   Subscribe

special snowflake finance filter: Got my first real job. Now that I'm making money, what do I do with it?

I recently graduated and was lucky enough to land a full-time job right away. Doing something I love, yay! For the first time in my life I have a substantial income, and I want to be smart about my money. My chosen industry is notoriously unstable, so I figure I should develop good financial habits/build a solid financial foundation while I can.

Unfortunately, I feel a little overwhelmed. Prior to this I only worked random small jobs, and I made barely anything. I never bothered making a budget since my income was so insignificant. Things like 401K’s and pension plans and complicated taxes were just hazy future-things that future-me would deal with! Now it’s suddenly very real and there is so much information and so many options I hardly know what to do. I feel like I should know all this stuff at 24.

Here’s where I am:

I make about 69K/yr, which works out to around 3550/m after taxes. I’m single, I have no debt, and I live at home—so no rent. I do plan on moving out eventually—sweet freedom!—but I want to save up a little bit. I didn’t keep very good track of my earnings for the first few months (paid off a car, spent too much on meals & frivolous things), but now I want to make a plan and stick to it.

As of now I’m paying gas (about 250/month), car insurance (109/m), union dues (31/m), health expenses (just until my insurance kicks in, but pretty much nothing right now anyway)…I also tithe10% of every paycheck (Christian), pre-tax amount (536/m). I know I need to build up an emergency fund, and I’d like to save at least 1K-1.5K every month. I haven’t applied to my company’s 401k plan yet, but I plan to do that soon. I was also thinking of setting up a Roth IRA, but do I need both?

Other budget items for which I don’t have exact amounts: future car maintenance (shouldn’t be too bad—2010 Honda), short term savings (techy items, classes + I’d like to travel a bit), gift fund (for birthdays/xmas)... I’m also thinking of paying some amount of “rent” even though I’m living at home, mostly so I won’t be so thrown when I finally do get my own place.

I’ve never had a credit card, and plan on getting one (co-signed or under a family member’s account) to build some credit history.

1) How does the above look? What are some things that might not be considered, which should be included in a budget?
2) Knowing what you do now, what are some things you wish you had done when you first started making a steady income?

Also, any general advice regarding retirement accounts, credit, finance hacks, etc would be greatly appreciated! Sorry if this was overly detailed! Thanks in advance :)
posted by sprezzy to Work & Money (19 answers total) 30 users marked this as a favorite
If your company does a 401K/403B matching plan, throw in the maximum amount you can for them to match. Compound interest is epic win in the long run.

Sign up for an account over at Mint, as well. It helps a lot with budgeting.

Use NerdWallet to find a credit card that best suits you and use it to pay for everything. Then pay it off in full every month. I'm not sure why you need a co-signer, however, unless it is because you have no credit history and they're not willing to issue you one.
posted by griphus at 8:11 AM on January 17, 2011

Also, you're doing very very well for a 24-year-old in this economy, if you're going to continue living at home, definitely start contributing to the household.
posted by griphus at 8:13 AM on January 17, 2011 [2 favorites]

6 months emergency fund, 10% of your gross into your 401k, 5k into a roth every year. Any left over put toward a vacation.
posted by TheBones at 8:14 AM on January 17, 2011

You can probably get a credit card on your own, without a co-signer.

You don't say where you live, but 1/3 of your net income makes a nice approximation of a hypothetical rent. Obviously this can be lower if you're in a small city in the Midwest or higher if you're in NYC, but it's a good ballpark guess.
posted by Tomorrowful at 8:22 AM on January 17, 2011

Union dues? Do you have a pension plan through them? That affects what you should do.

You may want to think about putting $5k into last year's Roth, which you can do up to April 15th. Then you have until next April to put in this year's $5k.

With that much tithing, your taxes may actually be a bit more complicated since you are into itemization territory (which usually would only come up once you have a mortgage). Keep records of everything, including canceled checks and any acknowledgments.
posted by smackfu at 8:28 AM on January 17, 2011

I was also thinking of setting up a Roth IRA, but do I need both?

Yes, do both. Don't turn down any opportunity to save money with tax breaks. You want to save as much money for retirement as you can, as early as you can. Don't limit yourself to matching your employer's contribution - put as much into the 401k as you're comfortable removing from your paycheck (console yourself with the fact that anything that goes into your 401k will be tax-free, so it'll likely reduce your tax rate too). And learn a little about what it means having money in market-based accounts so it doesn't stress you out when there are fluctuations (esp. downturns) in the markets (you're interested in the return over decades, not just how the DOW/NASDAQ is doing this week).

If you want to buy a house someday, start saving for a down payment as soon as you can (separate from your other savings like house fund, saving for a new car someday, or emergency reserves). If your folks don't expect rent, put what you would pay for rent or a mortgage into savings every month to get used to having that expense (and to create the fund for your future down payment or security deposit).

If you have ANY debt (student or car) work on a plan to pay that off efficiently. Resolve to pay off any credit cards in full every month.

What you'll realize is that once you do all the adult responsible stuff, you won't actually have much more spending money to goof around with than when you were 'poorer' -- but you'll be building this big foundation of savings and investments for your future. Your 65-year-old self with thank you for it, particularly if conservative forces succeed in getting the government to abandon social security and gut pension plans for those in unions.
posted by aught at 8:31 AM on January 17, 2011

It sounds like you're already well on your way to creating a useful budget - you have a decent grasp on where they money is going. Many people stop tracking where the money is going, and it gets them in trouble - so keep that up and make sure that you actually are spending 250/mo on gas, etc. That way you'll be able to recognize leaks before you lose tons of money.

As for what else to consider in a budget, it sounds like you're ignoring or not giving enough attention to "fun" money, which is the money you spend on things you don't need. If you have a great budget of regular expenses, and don't control your spending on trips, gadgets, drinks, etc, you're in trouble because those expenses will eat you up. You have to have a monthly ceiling on how you spend on unnecessary things so you will know when to say "no" to a purchase.

Finally for budgets, a savings goal should be part of the budget. Savings should not be "whatever is left over." For many people the default is 10%; I prefer 20%. Each month, ask whether you hit your savings goal, and if you didn't figure out why and what you can adjust to hit your goal next month.

When I got my first job a few years ago, it was tough to be concerned with savings because "savings" was just a meaningless hunk of money. So I put my savings into "buckets" which filled up as I saved more. First, there was the Emergency Fund bucket, which is targeted at 6 months of my gross salary. As I put money away, the EF bucket filled up until I met that goal. Any savings above that went into the second bucket - for me, that was savings to buy a used car without financing. I filled that bucket, so now I'm saving for a downpayment on a house, and after that's filled I'll start saving for an engagement ring. All of this money is in the same interest-bearing savings account - the "buckets" don't actually exist - but organizing it has some real advantages:

The point of the buckets is to remind yourself of why you're saving, which helps you control your spending. It also reminds you of what you should use your money for. For instance, if I decide that a certain expense is worth putting off buying a house, I can spend a little money out of the downpayment bucket. But I will NEVER spend money out of the emergency bucket unless I am destitute (unemployed and/or significantly ill), because that's what the emergency bucket if for - preventing bankruptcy.

I think you should also track you "rent" payments as you put that money into savings. That way you'll know whether you will hit your savings goal when you have to pay rent. Also, the "1/3 of your net income for housing" schtick is a MAXIMUM, and I think it's too high. When I started working, my housing was 23% of my net. Since then my salary has increased by 50%, but my housing costs have only increased 16% because I kept my expectations reasonable, and this makes savings so, so much easier. So try to keep your housing expenses as low as humanly possible - saving $500 on rent is way easier than saving $500 on gas, groceries, or lattes.
posted by Tehhund at 8:53 AM on January 17, 2011 [4 favorites]

A decade ago, I was in your situation almost exactly, and decade-later-me is incredibly thankful for setting up automatic savings accounts. Every payday, my salary shows up in my bank account, and much of it is whisked away to never-never land, so I can't waste it on beer and popcorn.

My accounts are in an internet bank, which offers high interest and makes my money more inaccessible; I need to transfer it back to my "daily" account (the one with the ATM linkage), which takes a few days. (In an emergency, I use a credit card, and pay it back once the money gets to my daily account.) Currently, 40% of my take-home goes to an account called "To Be Invested", which funds both the 401k/Roth equivalent, with the extra going into a third investment account. 10% of my take-home goes to an account called "The BSF", as in The Buyin' Shit Fund, which covers the budget items for which you don't have an exact amount for; I use it for tuition, gifts, occasional big-ticket durable goods like furniture and computers, and for travel. Once money is in the BSF, it's okay to spend it on whatever I want, no guilt. But money not in the BSF is untouchable until "later" (i.e. retirement.) I have a third internet account which is my emergency fund; this was what the 40% funded until it was at a comfortable level (6 months of spending).

Yes, the lede was buried a little bit; 40% long term savings, and 10% short term. This has evolved over the years; the BSF has gone up from 5% as I discovered a real love of travel, and the long term part started around 65%. It's mentally very difficult to increase your savings, and cut out expenses you've gotten used to. I don't miss the money that disappears automatically. And I don't worry so much about budgeting once I remember that both my intermediate term wants and my long term needs are being well looked after.

I recommend as aggressive a savings level as you can handle. You are used to having a small amount of money coming in; you can shovel most of this newfound wealth to savings, and still experience the pleasure of more money coming in than you used to have -- this is a rare opportunity. Money can be spent or saved; if you decide you saved too much, you can turn around and spend it. If you decide you spent too much, you're screwed.

Also, I concur on paying off debt first, and at least offering to pay rent at home.
posted by Homeboy Trouble at 8:59 AM on January 17, 2011

Contragulations on the new job! I was where you are at 24. My first real job, a nice paycheck and woefully uneducated about personal finance. I did a lot of reading through the personal finance blogs listed below but by far my favorite resource for young people is I Will Teach You To Be Rich. Ramit Sethi offers a lot of practical information and his casual style makes it seem like you're having a conversation from a friend instead of your parents nagging at you.

Coincidentally, I re-read it last night. I'm now 26 with a good bit saved up. I wanted to see if I'm doing all I can. Opening a Roth IRA was a step I skipped and I regret it. When I started, I didn't want to see all my money being put away. What if I needed it? What if I wanted a nice apartment? A new car? A Vegas vacation? I didn't get any of those things. I didn't need them. And now my money is sitting in a bank account accruing a pittance in interest when I could be investing that.

You're already ahead of the curve by thinking of this stuff now. I'm assuming you have no debt. If you do, start paying off as much of it as possible every month. Then

- Open a 401k and contribute up to the maximum amount your company matches. Nothing beats free money! If your company doesn't match, start with a smaller percentage. Mefites, any thoughts on what's a good number?

- Open a Roth IRA. You'll save on taxes and your return investment will likely be better than any savings account interest. Ramit summarizes your investment options in his book and makes it easy to choose one. One IMPORTANT thing I didn't know is most accounts will allow you to withdraw your principle (the money you put in) after 5 years. So if you need it for a house or some other major expense, it's there for you.

- Get a credit card as you've mentioned to build your credit history. Get two in fact to build more credit. I use one for all the day to day stuff like groceries, gas, going out and the other for automated bill payment. Keeps it simple.

- Start a Mint account to keep track of your expenses. You can link it to your bank accounts and it will automatically update with your latest transactions. You can then determine your budget categories and how much to allocate for each category. Your budget looks fine so far but prepare for an adjustment once you move into your own place.

- Spend consciously. There's no need to penny pinch. The things that make you happy are worth it. I have what I call the happiness ratio. If item B costs more than item A but it would make me much happier to have item B then I go for it. If I'll only be a little bit happier with item B, I'll get item A instead. As long as you don't love too many things and make balanced choices, you should be just fine. I should mention I saved aggressively my first year of working and waited till my second year to buy a lot of the things I wanted. By then, that list had shrunk. I carefully considered the things that truly makes me happy and prioritized my budget accordingly.

- Save with goals. Either use a spreadsheet to keep tabs on how much of your savings account is for what goal (car, house, travel etc) or use an account that allows you to allocate your savings. I think ING Direct offers this.

- If you still have money leftover, put more in your 401k and Roth IRA


The Simple Dollar
Get Rich Slowly

Feel free to contact me. I'm still learning and love discussing personal finance.
posted by vilandra at 9:14 AM on January 17, 2011 [5 favorites]

You don't need both a Roth IRA and a 401k unless you are maxing out your 401k or you feel very sure that you will be in a higher tax bracket in retirement than you are now (unlikely IMO). I would suggest maxing out your 401k first and then looking for alternate savings vehicles.
posted by GuyZero at 9:15 AM on January 17, 2011

This Ask thread (if you haven't seen it already) has a bunch of good tips on blogs, books, and other personal finance stuff to get you started, too.
posted by polexa at 9:22 AM on January 17, 2011

I think this thread already covers systematizing and automating a saving plan, so I'll just add this:

I was in a similar situation some years ago, and started saving just because I could, with no particular goal. Eventually my job became unbearable, and I quit to strike it out on my own. This was not such a hard decision, as I had enough savings that going a few years without any income wasn't such a big deal - without this money I think it would have been an unfathomable risk.

For me, the lesson is that the one major thing that a stockpile of money is good for is to allow you for a little while to forget about the need for money. You never know how you may need this in the future, but chances are good that you will, so I would start on that stockpile.
posted by tempythethird at 9:48 AM on January 17, 2011 [1 favorite]

car insurance (109/m)
109 a month on car insurance? Did you wreck something? I pay 220 every six months on my 2009 Subaru. Standard tips to lower that are:
* comparison shop for quotes
* raise the deductible, and put aside extra money to cover it.
* don't get tickets or accidents
* double check that you're getting all the discounts you qualify for, and that they have your correct address
* take a defensive driving course
* find a place to live close to work to lower your total commute (and mileage expenses)
* build up your credit rating, since more low cost carriers are using that as a valid actuarial input

Also, $250 a month sounds a little high for gas if you're driving a Honda. I wouldn't be surprised to discover that moving out of your parent's house to live closer to work and whatever other destinations you care about will be cheaper, once you consider your commute time, gas and car depreciation. By my guestimate, you're driving a honda civic 2100 miles a month, which is 30 hours a month at 70 miles an hour. You'll need a new car in five or six years at this rate. If these numbers sound wrong, you should double check my math and see if 250 a month for gasoline still sounds right when you're done.

sprezzy: "I haven’t applied to my company’s 401k plan yet, but I plan to do that soon. I was also thinking of setting up a Roth IRA, but do I need both? "

Both can't hurt, but if you're eligible for the 401k now and have any form of employer match, you get that right now. As in, find the company HR benefits website and start reading up on your options and forms. You'll be hard pressed to find a better return in the market than employer 1:1 or 1:2 matches.

The Roth is less risky, since you can pull out contributions anytime, and earnings for special occasions (certain medical expenses, downpayment on a first home, and a few others) after five years.

What are some things that might not be considered, which should be included in a budget?

Pretax paycheck deductions. Most people just operate post tax, but it's much easier to see how beneficial deductions are if you know your marginal rate and overall taxation. It also reminds you how much you'll need if you go independent contractor some day. Also, food isn't present, as well as lots of small ticket items that can add up. I'm guessing a lot of this is covered in the form of parents. Do yourself a favor and at least ask to look at them now, so have an idea of what to budget for when you leave.

2) Knowing what you do now, what are some things you wish you had done when you first started making a steady income?

I wish I had known you can open a Roth IRA with a payroll deduction instead of a lump sum, and that I had done it sooner, because of the 5 year waiting period.

I also wish I knew it was possible to pay off my Discover card in full every month and not incur a finance charge. I made several big ticket purchases that could have gotten a bit of cash back on if I had. I also wish I had looked up my FICO score earlier, since it came as a surprise to me that I had a good one. At the very least, you should pull your annual credit report and see if anything shows up you weren't expecting.
posted by pwnguin at 10:02 AM on January 17, 2011

You don't need both a Roth IRA and a 401k unless you are maxing out your 401k...

Some people would argue that it's not so simple. I've actually seen this recommendation:

1. 401k up to the maximum matched by company
2. Roth IRA
3. Additional 401k up to legal maximum

But we're getting into the trees here. If you're putting that much away, that's good.

You may want to think about putting $5k into last year's Roth, which you can do up to April 15th.

True ... but only if you made at least $5k last year. (It sounds like you did, but just making sure.)

My chosen industry is notoriously unstable

The normal guideline is that you should have 6-12 months worth of living expenses as an emergency fund. Given your description, 12 months would be better. This should be a priority.

Be careful with the credit card. Some people go crazy with their first one and then need to dig out of a hole. It doesn't sound like you're that type, but I'm just sayin'.

BTW, no one has mentioned where to put your 401k and Roth investments. I'd suggest indexed stock (80%) and bond (20%) mutual funds. Indexed funds because they're cheaper (compare expense ratios) than actively managed funds, and are at least as successful over time. That 80/20 should be adjusted gradually over the next 40 years to reduce the stocks and increase the bonds. (Or just get a target date fund for the approximate year when you expect to retire, and they will automatically make that shift for you.)

You don't need a large number of funds. At its simplest (not counting a target date fund), you could do it with two or three funds (a U.S. stock index, an International stock index, and a U.S. bond index).

Morningstar is a good site to read about mutual funds; much of it is free, some of it pay-only.

Spend some time searching some other AskMe threads, too. This sort of question comes up a lot.
posted by pmurray63 at 10:23 AM on January 17, 2011

Tehhund mentions the "fun" category briefly, but I'll make that the focus of my entire reply.

It sounds like you're doing really well for a recent grad. You're in the enviable position of being able to set yourself up well for future contingencies and retirement, and have some money left over to spend on non-necessities. Spend some time thinking about what entertainment/discretionary spending is really going to give you the most enjoyment for your money, so you can spend it on *your* passion rather than what everyone around you thinks a 20-something should drop their bucks on.

I didn't start making a steady comfortable income until I was well into parenthood. Looking back, I wish I had been in a financial position to travel more when I was young and single. I'm also finally in a position to pursue a pricey and semi-athletic hobby that seemed way our of my price range when I was in my 20s, but which is a lot harder on my middle-aged body. Things like travelling or time-consuming hobbies become more difficult to fit in the older and more complicated your living situation becomes. If you have long-term plans for marriage/family, DO (and budget for) THEM NOW.

Also, if you've been living with your parents all along and haven't been paying room/board, you may be surprised at how much groceries cost. Even after all these years, I can walk out of the grocery store with a bag of groceries and wonder how the hell a couple days' worth of food added up to $50.
posted by drlith at 10:31 AM on January 17, 2011

Another recommendation for ING Direct. I have several subaccounts where I sock away $50-?? a month, such as: vacation, new car, retirement (money I will put in a Roth before April 15th), camera gear, etc etc.

My paycheck gets direct deposited into my local bank account every month, at which point I automatically move $X over to ING and then the next day it automatically moves $Y into each subaccount.

If you are thinking of buying a house in the future, maybe estimate what houses in your area cost/what are you comfortable paying in mortgage, and start putting that amount away each month. That way, you will have a nice down payment and when you do buy a house the mortgage won't be a shock to the system.
posted by sararah at 12:39 PM on January 17, 2011

Yes to what sararah just said -- you sound a lot like me at your age! I bought my first house when I was 22 just by living with my parents for a year during grad school (and working FT on top of that). I have since sold that house, but I have never regretted buying it.

Given the current economy (depending on where you live, your situation may be similar to here, or not...but think about it), REALLY nice houses are on the market for $20,000+ or more (sometimes much more) than they were just a few years ago. You could buy a house like ours for almost $30K less than people were paying in this neighborhood when my boyfriend bought it 10 years ago. So with that in mind, prioritizing putting away a down payment is not a bad idea. The mortgage interest deduction on your taxes will save you lots each year, improve your credit, and (fluffy reason, but important to me) mean no landlord can ever tell you no painting the walls, no cats, or whatever else floats your boat.

So, if I were you, I would, in order:

* max out contributions to any 401(k)s, etc to get maximum matching amounts
* do a Roth IRA also (don't forget what was said above about contribs to last year being valid til April)
* save over 6 months' expenses, just in case
* start saving to buy a house (and investigating low down payment programs such as FHA, which is what I used).
* start a vacation/fun fund so you can do a little traveling with those first few sweeeeet weeks of paid vacation.
* put your 6-months-plus and other saving funds into an internet bank account such as ING (I have used them and like them) -- link it to your regular account, so if you REALLY need money for something, it's accessible, just not necessarily immediately.
* use Sharebuilder.com to start buying some mutual funds or index funds -- you can set it up to automatically withdraw from your account on the same day every month and buy for you, and you'd be shocked how fast it adds up!

You're doing great, though! Congrats and feel free to yell with any questions!
posted by bitter-girl.com at 1:28 PM on January 17, 2011

Response by poster: Wow, so many great answers! mefites are the best :)

I only have a little spare time right now so I'll try to address some things mentioned, and come back and read more thoroughly later.

"I'm not sure why you need a co-signer,"
"You can probably get a credit card on your own, without a co-signer."

I applied for one recently and was rejected for insufficient credit history :( I was hoping that financing my car would put me on the map, but methinks it was not enough. I think it also might have been because I went for one with good rewards, which I suppose requires a much better credit score. I do get some mail for basic, high-interest cards (no problem, plan on paying off in full) but I was considering the two options I mentioned because I could earn a little back.

401K, etc

I do have pension offered through my union. I'm looking through the info now and it looks like there are two pension plans where I don't put $$ in and the employer puts in an amount based on hours in qualified years. A third plan is the union's own 401K. It's optional and doesn't offer employer match, so I guess it's just for making "tax-deferred savings contributions". Eh, I'm thinking I should go for the Roth IRA, too.

pmurray63, thanks for mentioning Roth and 401K investments. Up until recently I though I would just sign up and contribute. I had no idea about all the different investment options and am still pretty clueless about it.

109 a month on car insurance? Did you wreck something?

I know :( I didn't really shop around (yeah, I know) and just added a new car to my family's plan. I should take a second look at that , I'll keep your tips in mind! 250 for gas is based off of my receipts for the past few months. I usually get 30-35 mpg, but those numbers are correct (or close enough). Do you really think 5 or 6 years? This is my first Honda and I heard they're incredibly hardy.

definitely start contributing to the household.
I definitely will! If I offered rent, my parents are the type who would tell me I'm nuts and just go save it, but I'm thinking I can contribute to home renovations (the house could really use updating) and groceries.

Tehhund, I've been giving TOO MUCH attention to "fun" so far (ha!) but you're right, it's because I'm not properly budgeting for it. I plan on treating savings like a bill. I like your bucket idea!

Homeboy, your "Buyin' Shit Fund" made me laugh.

Oh, and for those giving advice about future rent...I live in sunny, expensive SoCal. :) I commute 40 miles-ish to Burbank. I will probably be looking at high cost of living for the rest of my life, if I'm lucky enough to keep working in my chosen industry. The jobs are all in the Bay Area, SoCal, and NY.

Thanks for all the advice so far!
posted by sprezzy at 1:53 PM on January 17, 2011

The one thing I wish I had done when I first started earning a real income was to see a tax advisor. For about $100, I could have saved thousands on tax my first year. It was only at the end of that year when I did my tax return and freaked out about having a $9000 tax bill that I saw someone and he was all, "Well if you had X and Y and Z we could have saved you 1000 here..." etc.

(For what it's worth, the particular things he suggested that made the most difference were putting certain accounts in my husband and my shared names instead of one or the other, and getting private health insurance, but the fact that these particular actions save thousands is probably Australia-specific. Hence the advice to see a tax advisor rather than just implementing these things now.)

This is particularly worth while if you are going to be saving a lot of money. You don't want to have to pay a heap of tax on the interest you earn on that, on top of being taxed on the money when you first get it!
posted by lollusc at 4:20 PM on January 17, 2011

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