Now that I'm an adult (ha), how do I bank, invest, & budget?
February 16, 2013 10:59 AM Subscribe
I'm starting what feels like my first "real" job soon, so it's time to straighten out my good but messy financial situation. Need advice on: credit cards, banks, brokerage accounts, & budgeting.
I've been working & saving aggressively since I was very young (I'm 25). Here's my situation at a glance:
25k in checking account (BofA, linked to my parents' account)
45k in brokerage account (Schwab, simple/Roth/individual) -- note, this isn't due to my own savvy. My extended family's policy was that children could do menial labor at the family business and get paid pretty generously, but 100% had to be invested. I haven't contributed anything in ages (which I will change ASAP).
New salary: 65k, with 2500/month left after rent, utilities, & insurance
First, I need a checking account that's not linked to any family members. I had one while working abroad, but never bothered to open one when I moved back home. I'd like something with excellent online banking and easy transfers. Schwab (no ATM fees) and my dad's credit union (a bit far from my new place) are both options, but I'm open to anything. Also, how much should I keep in my checking account & savings account (assuming no big purchases on the horizon)?
Second, I need a credit card just to build credit & shop at sketchy websites. Aside from no annual fees and sign-up rewards, how do I choose if I don't need a specific limit or interest rate?
Third, I am happy with Schwab but curious about all the Vanguard evangelists. What's the difference? Also, what should I read to learn about asset allocation for someone in my situation (young with no defined goals)?
Fourth, what are some good budgeting resources? I've looked at YNAB and it seems designed for getting out of debt or a paycheck-to-paycheck lifestyle. I guess I could budget a ton for savings and get to "zero balance" from there, but I don't know if that's sensible. I am pretty frugal, but what I do spend is not particularly wise-- cheap clothing, snacks, impulse buys. I'd like a system that helps me stay very conscious of individual purchases.
I've been working & saving aggressively since I was very young (I'm 25). Here's my situation at a glance:
25k in checking account (BofA, linked to my parents' account)
45k in brokerage account (Schwab, simple/Roth/individual) -- note, this isn't due to my own savvy. My extended family's policy was that children could do menial labor at the family business and get paid pretty generously, but 100% had to be invested. I haven't contributed anything in ages (which I will change ASAP).
New salary: 65k, with 2500/month left after rent, utilities, & insurance
First, I need a checking account that's not linked to any family members. I had one while working abroad, but never bothered to open one when I moved back home. I'd like something with excellent online banking and easy transfers. Schwab (no ATM fees) and my dad's credit union (a bit far from my new place) are both options, but I'm open to anything. Also, how much should I keep in my checking account & savings account (assuming no big purchases on the horizon)?
Second, I need a credit card just to build credit & shop at sketchy websites. Aside from no annual fees and sign-up rewards, how do I choose if I don't need a specific limit or interest rate?
Third, I am happy with Schwab but curious about all the Vanguard evangelists. What's the difference? Also, what should I read to learn about asset allocation for someone in my situation (young with no defined goals)?
Fourth, what are some good budgeting resources? I've looked at YNAB and it seems designed for getting out of debt or a paycheck-to-paycheck lifestyle. I guess I could budget a ton for savings and get to "zero balance" from there, but I don't know if that's sensible. I am pretty frugal, but what I do spend is not particularly wise-- cheap clothing, snacks, impulse buys. I'd like a system that helps me stay very conscious of individual purchases.
What to do about a credit card depends on whether you trust yourself to pay it off every month no matter what. If you do, then it makes sense to use it for most of your spending because then you can to look at what the largest category of your spending is and get a credit card that offers you cash back or rewards for spending there. I've used bankrate to compare cards in the past. It also tells you how good your credit needs to be to get the card (although in my experience they tend to overestimate how good your credit needs to be). Personally, I prefer cards that give me either straight cash back or airline miles, as I think they're the best deal.
If you don't trust yourself to pay the card off every month no matter what, don't get a credit card.
posted by matildatakesovertheworld at 1:09 PM on February 16, 2013 [3 favorites]
If you don't trust yourself to pay the card off every month no matter what, don't get a credit card.
posted by matildatakesovertheworld at 1:09 PM on February 16, 2013 [3 favorites]
Regarding a checking account: Do you need an account with a physical branch close by? If not, USAA is all online and it has been great for me. Transferring money between accounts is very easy, you get free checks and if you need to make a deposit you can do so at almost any UPS store, and they reimburse ATM fees. If you set up direct deposit your paycheck will be available the day before payday. Also, after linking my other accounts to USAA, I like their interface better than Mint or YNAB for budgeting and keeping track of spending.
Aside from fees and reward programs (and interest rates and credit limits), the only thing that differentiates credit cards are customer service and card benefits. Some cards offer special benefits like trip insurance, concierge services, extended warranties, etc., but any card with no annual fee is unlikely to be distinguished by fantastic perks. Honestly, if you never carry a balance I'd focus on choosing a card with a rewards program that will get you the biggest bang for your buck.
My understanding is that Vanguard's primary benefit is that it offers a variety of mutual funds with very low expense ratios. If you're going to invest your money primarily in index funds, it makes sense to choose the fund with the lowest fees. Vanguard is also owned by the people who invest in its funds, so the company's incentives are aligned with those of their customers. That being said, a brief look suggests that the index funds offered by Schwab are comparably priced, so you probably don't have much to gain by switching.
posted by exutima at 3:21 PM on February 16, 2013
Aside from fees and reward programs (and interest rates and credit limits), the only thing that differentiates credit cards are customer service and card benefits. Some cards offer special benefits like trip insurance, concierge services, extended warranties, etc., but any card with no annual fee is unlikely to be distinguished by fantastic perks. Honestly, if you never carry a balance I'd focus on choosing a card with a rewards program that will get you the biggest bang for your buck.
My understanding is that Vanguard's primary benefit is that it offers a variety of mutual funds with very low expense ratios. If you're going to invest your money primarily in index funds, it makes sense to choose the fund with the lowest fees. Vanguard is also owned by the people who invest in its funds, so the company's incentives are aligned with those of their customers. That being said, a brief look suggests that the index funds offered by Schwab are comparably priced, so you probably don't have much to gain by switching.
posted by exutima at 3:21 PM on February 16, 2013
acidic: "First, I need a checking account that's not linked to any family members. I had one while working abroad, but never bothered to open one when I moved back home. I'd like something with excellent online banking and easy transfers.
Seconding Capitol One 360 (ING). There's others out there. Simple, Smartypig, etc.
Also, how much should I keep in my checking account & savings account (assuming no big purchases on the horizon)?
Given that savings is higher interest rate than checking, as little as possible in checking and the rest in savings. It's hard to give absolute numbers when rents and expenses vary widely, but I'd say 1 month's expenses in checking, and five months in savings. Probably this means less than the 25k you have now. How much you need depends on how well you are insured against things like job loss, disability, fire, etc.
how do I choose if I don't need a specific limit or interest rate?
Rewards, mainly. I like having two credit cards with different rewards schedules. There are many benefits to this! Firstly, if you need to carry a balance, you can carry exactly the amount you need to borrow on one card, and continue to throw daily expenses on the other without incurring immediate interest charges. Secondly, it nets you more cash back when you match expenses with the higher reward card. Thirdly, you can play them off one another. When build a history with one card, then stop, card issuers notice and send retention offers your way (I recently received a 500 dollar bonus offer this way.) Fourthly, it improves your credit score by having more than one account open.
I also recommend that you pay in full every month, and use the card's website to set up automatic payment in full, scheduled two or three days before the deadline. This gives you time to make good and avoid penalties if something screws up, while taking advantage of the interest free 30 day loan credit cards are offering you.
Also, what should I read to learn about asset allocation for someone in my situation (young with no defined goals)?
If you have the time, Siegel's Stocks For the Long Run, and Malkiel's A Random Walk Down Wall Street. As far as specific age targeted advice, the personal finance academic literature is mixed. Some conclude a glide path is best, some say a static mix is best. Some conclude a young person should be invested 130 percent S&P 500 and -30 percent bonds, and ease out of that leveraged position as retirement nears.
Fourth, what are some good budgeting resources?"
Probably the best resource is information about what other people are paying for things. What your friends are paying in rent, what the last renter was paying in electricity, how much companies are paying other people for the same job duties you're performing, etc. Government data is really helpful here. The Consumer Expenditure Survey, for example, has data sliced up every which way on how people earn and spend money.
The next best resource is likely a spreadsheet. I use one for an annual budget. Every year I make it a little bit better; smarter calculations, more granular line items, etc. If you're starting out, the CEX can be a helpful starting point.
If you want to eke out the last few percentage points of budgeting utility, roughly 80 percent of my income is represented in GNUCash scheduled transactions, and most of the unplanned stuff goes on credit cards. Which means I pretty much know exactly how much I need in checking to cover the next 30 days (...okay, maybe it's 90 days and I have undiagnosed OCD).
posted by pwnguin at 12:32 AM on February 17, 2013
Seconding Capitol One 360 (ING). There's others out there. Simple, Smartypig, etc.
Also, how much should I keep in my checking account & savings account (assuming no big purchases on the horizon)?
Given that savings is higher interest rate than checking, as little as possible in checking and the rest in savings. It's hard to give absolute numbers when rents and expenses vary widely, but I'd say 1 month's expenses in checking, and five months in savings. Probably this means less than the 25k you have now. How much you need depends on how well you are insured against things like job loss, disability, fire, etc.
how do I choose if I don't need a specific limit or interest rate?
Rewards, mainly. I like having two credit cards with different rewards schedules. There are many benefits to this! Firstly, if you need to carry a balance, you can carry exactly the amount you need to borrow on one card, and continue to throw daily expenses on the other without incurring immediate interest charges. Secondly, it nets you more cash back when you match expenses with the higher reward card. Thirdly, you can play them off one another. When build a history with one card, then stop, card issuers notice and send retention offers your way (I recently received a 500 dollar bonus offer this way.) Fourthly, it improves your credit score by having more than one account open.
I also recommend that you pay in full every month, and use the card's website to set up automatic payment in full, scheduled two or three days before the deadline. This gives you time to make good and avoid penalties if something screws up, while taking advantage of the interest free 30 day loan credit cards are offering you.
Also, what should I read to learn about asset allocation for someone in my situation (young with no defined goals)?
If you have the time, Siegel's Stocks For the Long Run, and Malkiel's A Random Walk Down Wall Street. As far as specific age targeted advice, the personal finance academic literature is mixed. Some conclude a glide path is best, some say a static mix is best. Some conclude a young person should be invested 130 percent S&P 500 and -30 percent bonds, and ease out of that leveraged position as retirement nears.
Fourth, what are some good budgeting resources?"
Probably the best resource is information about what other people are paying for things. What your friends are paying in rent, what the last renter was paying in electricity, how much companies are paying other people for the same job duties you're performing, etc. Government data is really helpful here. The Consumer Expenditure Survey, for example, has data sliced up every which way on how people earn and spend money.
The next best resource is likely a spreadsheet. I use one for an annual budget. Every year I make it a little bit better; smarter calculations, more granular line items, etc. If you're starting out, the CEX can be a helpful starting point.
If you want to eke out the last few percentage points of budgeting utility, roughly 80 percent of my income is represented in GNUCash scheduled transactions, and most of the unplanned stuff goes on credit cards. Which means I pretty much know exactly how much I need in checking to cover the next 30 days (...okay, maybe it's 90 days and I have undiagnosed OCD).
posted by pwnguin at 12:32 AM on February 17, 2013
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Rule of thumb for the amount of liquid cash to have is 6 months' living expenses--the minimum you'd need to survive that long, without drastic lifestyle changes, should your company go belly-up tomorrow. If you're in a field where decent jobs are harder to find than average, increase the amount to 9 or 12 months (note: this is going to be a lot less than 6-12 months' salary, because you won't have income or payroll taxes to consider; on the other hand, it would be wise to include enough money for COBRA payments to ensure continuous medical coverage). The rest should go in investments, though I would suggest setting up a non-retirement account, both because your Roth isn't available until retirement (except with substantial penalties) and because there's a limit to how much you can put in it each year.
I use CapitalOne360 (formerly ING Direct) as an online savings bank, and my local mutual savings bank for checking. I set up an automated savings plan that transfers a set amount every pay period into savings, so I don't need to think about it. Depending on where you live, you might find that a local bank offers advantages over the big national chains like BOA; my little bank offers free checking if you have your paycheck deposited directly, and they have an interest-earning checking account option if you use your debit card frequently.
Kobliner's book covers investment allocation and budgeting at a basic level. I'm not terribly qualified to give advice in those areas. But one great budgeting trick is to leave your credit card home and pay cash for everything. Plenty of studies show that most people are less likely to make unwise spending decisions when paying with cash than they are when using credit cards. If you take out a week's worth of spending cash and put it in your wallet, you can see how each purchase reduces your options to spend money on something else.
A final thing to consider is your employer's 401k program, if it has one (or 403b, if you're at a non-profit). If they match contributions, you're effectively starting with a 100% return on investment up to the limit of the match. It's hard to beat that.
posted by brianogilvie at 11:47 AM on February 16, 2013