Saving without a goal
December 16, 2015 8:55 AM   Subscribe

I know absolutely nothing about money (I'm talking feral-child-raised-by-wolves-level "nothing") and want to get my finances in order. I'm not saving up toward any kind of goal except eventual retirement in 40-50 years. What should my next steps be?

I am in my mid-20s and am fortunate enough to have the better part of a year's worth of living expenses saved up, due to a financially stable employment situation and spending some time living at home with my parents.

Background details: I currently store all of my savings in a checking account and use my debit card for purchases. (Yes, getting a credit card is definitely on my list of things to do.) I carefully track my spending as part of a monthly budget, and every month I budget to set aside a portion of my take-home pay in savings, which I just keep in the checking account. I also contribute to my 401(k) up to the percentage that is matched by my employer.

I have no debts and no particular savings goals. I'm not considering homeownership, buying a car, grad school, a big blowout wedding, or kids. All I really want is to plan so that one day, whether in the case of a very expensive emergency or my eventual retirement, Future Me looks back and says "thanks, Mid-2010's-Era Me, you're a pal!"

Question #1: My current thought is: keep an emergency fund of a few months' expenses in my checking account, invest the rest in index funds. Where does this fall on the spectrum of smart to crazy? Would you recommend something else?

Question #2: Should I set up some time with a financial consultant? If so, is it a bad idea to go through my bank (which also does fund management and has these folks on staff) to do so?

Question #3: Anything else you would tell me in terms of what you picture when you imagine "financially secure twenty-something"?

Sorry if this has been asked before. Most of what I could find here was about paying off debt (again, I don't have any debt) or saving up for a specific goal.
posted by robot cat to Work & Money (24 answers total) 26 users marked this as a favorite
 
Question #1: That sounds fine. Very forward-thinking, actually. If it's just in a checking account, it's doing nothing for you. You should make some solid choices about investments that can pay off in several years.

Question #2: Yes, a fee-based financial consultant is what you want, not someone who is getting commission on products they sell you.

Question #3: You sound like you have a solid plan. You're maxing out your 401K to your employer's match, but if you're saving so much now, why not just sock away up to the federal limit each year? That will allow you to retire much earlier, considering your age.

Mostly, if you have a year's worth of living expenses saved up and no major goals, the main thing you should do is fund your future. There could come a time when you'd like a house, or to travel, or to take some time off. And the unexpected could happen...you could be unemployed, or injured, or ill, and having a big lump of money in several places (investing for retirement in tax-beneficial accounts, in savings you can get to tomorrow, and in between) is the way to do it.
posted by xingcat at 9:01 AM on December 16, 2015


Forgive the ridiculous title, but I Will Teach You To Be Rich is the book for you. It's basically a personal finance primer.
posted by the_blizz at 9:02 AM on December 16, 2015 [4 favorites]


Open a Roth IRA with Vanguard, contribute the max you can (after continuing to meet the percentage match on your 401K). It's $5,500 for 2015 and I believe the same for 2016. I would recommend actually taking some savings and investing in it as well (general advice is 3-6 months saved up). Once you do that, max your 401K ($18,000 for 2015, not sure on 2016).

Then depending on what you have left, and how soon you want to access the money - I would recommend investing in some medium to high risk stocks with a low expense ratio; maybe even doing the Bogleheads lazy portfolio just to earn more.

Then figure out what you're doing with life goals but if you have no goals like home ownership or anything like that - pretty sure you'll be able to retire much sooner then 50-60 years. Just don't go on a coke binge in Vegas and you'll be fine.
posted by lpcxa0 at 9:02 AM on December 16, 2015 [7 favorites]


You are not a 'feral wolf' if you have a year's worth of expenses saved up.

Index funds certainly are the way to go, I'd say. If interest rates were better, I'd say keep your emergency fund in a savings account, but I'm not sure it's worth the bother right now.

As far as being goalless, that's easy enough to fix. Here's a basic retirement calculator. You can play around and see how much your current rate will give you for retirement at different ages, always fun.
posted by Trifling at 9:03 AM on December 16, 2015 [2 favorites]


You sound way ahead of most people. #1: Sounds good. #2: A financial advisor is overkill at this point. You're an average person, so need average advice. Spend $10 and a few hours and read a book, such as Get a Financial Life: Personal Finance In Your Twenties and Thirties. You'll be able to get the same info online, but a book will answer not only the questions you want answered, but also many questions you might not have thought to ask.
posted by Mr.Know-it-some at 9:04 AM on December 16, 2015 [1 favorite]


Shit, I'm twice your age and you're MUCH better than I am with the finances! You are rocking your shit, fo-sho.

Q1. If you have a tolerance for risk, I think this is a dandy idea.

Q2. Yes, but a fee-based financial consultant. Not your bank, which has an interest in selling you things, but a dispassionate third party who doesn't benefit from where you put your money.

Q3. I have a hard time imagining a 'financially secure twenty-something' because my friend, you are a unicorn. A gorgeous, purple and golden unicorn.

Do you have a retirement account as such, either a Roth or a 401(k) or an IRA? If not, fund one of those on the regular (depending on what your CFA recommends.)

If anyone is talking to you about life insurance....RUN!
posted by Ruthless Bunny at 9:04 AM on December 16, 2015


You should not keep a few months of living expenses in an account with a debit card attached to it. You probably won't get much interest by putting it in your financial institution's high(*) interest savings account, but at least it won't be available for spending if your debit card gets compromised.

(*) for certain values of high, that include 'not high at all'. But high is relative in banking.
posted by jacquilynne at 9:07 AM on December 16, 2015 [4 favorites]


With a year's expenses saved up, you're in an excellent position. Assuming historical stock market returns, if you save about 10% of your income starting at age 22, by the time you're 62 you'll have a big enough nest egg to make withdrawals equal to your income more or less indefinitely. So give yourself a big pat on the back!

The big thing is to get the money into the stock market without paying high fees. Admittedly, this is not such a great time to do so, as both stocks and bonds are at or near historic highs, so you're not, immediately, going to see returns like we saw from 2009-2015. So check your employer's 401(k) funds, look for broad index funds that have low fees, and start making big contributions. You might be able to make the full contribution for 2015 if you let them know now. Decide how much of a cash cushion you want (6 months expenses, say), and then plan to invest the rest over time. If your employers funds are really lousy and/or you're up for the hassle, a Roth IRA is also a good idea. There you can pick the fund company (Vanguard unless you have a good reason why not) and put the money into their target date funds (pick the date of your retirement, they handle selecting the investments). You can also make that contribution for the whole year if you do it before the end of the year.

Then, do your best to forget you even have retirement savings. Check it quarterly, less often if you're the kind of person who would panic and sell if it dropped 30%. And it will drop 30%, at some point. If you are that kind of person, you're better off investing in treasury bonds, which you can do yourself, though you'll have to save more like 20% of your income annually to retire comfortably.
posted by wnissen at 9:08 AM on December 16, 2015 [1 favorite]


See if you qualify for a fancy-pants credit card like a Chase Sapphire and pay it off in full every month. I was debit-only my entire life until I finally got one last year, and I wish I had done it earlier. I've been able to fly across the country and back three times on points alone.
posted by theodolite at 9:15 AM on December 16, 2015 [1 favorite]


I have to recommend Phil Towne's podcast, InvestED. I still learn from it! He adheres to the Warren Buffet style of investing.

Speaking of Warren Buffet, a B share of Berkshire is $134 right now. Getting at least 1 BRK-B share gets you four credentials for the Berkshire Hathaway Annual Meeting in Omaha. If you can go, go! Warren Buffet and Charlie Munger still have sharp minds and amazing insight into investing. Plus, it's a crazy amazing atmosphere with people from all over the world. You can get your picture taken with the Geico Gecko and the Fruit of the Loom guys, and also hear the world's most respected billionaire investor speak. It's so much fun.

An index fund is fine, and probably pretty safe. But you should also learn how to do financial research on your own. You don't really need a financial consultant. Just start researching the companies that you like. I like Costco, for example. I shop there, I like how the company's run and how they treat their employees. I'm not crazy about their competitors. So I have Costco stock. It's done really well. Pick a couple of companies that you like and research them .... just doing that will teach you a lot.

If your employee matches retirement fund contributions, always max that out. Not doing so leaves money on the table.

Pick up a Wall Street Journal occasionally and read it to see what's going on in the business world. It's worth it (also a good way to get ideas for companies to research).

You are in an excellent position. With the power of compounding interest you'll be very successful. Just think long-term.
posted by Ostara at 9:16 AM on December 16, 2015 [3 favorites]


Reddit gets a lot of hate here, but the personalfinance wiki covers a lot of what you should know. Also the Bogleheads wiki has a lot of good information as well.
posted by Candleman at 9:25 AM on December 16, 2015 [1 favorite]


If you think that, at some point, you will buy a car, do the following:
1. Go ahead and save the amount of cash you will need to buy the car.
2. Buy your car at a time when you get 36 MONTHS INTEREST-FREE FINANCING!
3. Pay off your car in exactly 36 months, being sure to pay on time each month.

This will be great for your credit rating because it shows you are responsible enough to hold down a loan, but it also will cost you nothing out of pocket (aside from the cost of the car, obvs).

Other than that, put part of your excess cash into a Vanguard index fund each month. Personally I like the one that tracks the S&P 500. Vanguard is user friendly to the newbie investor, very straightforward, and has very low "expense ratios" - that's the amount they charge you each year to have your money in their index fund.

In general, it's a good idea to keep your savings in a separate account from your main account because then you can pretend it doesn't exist (for purposes of day to day planning) but know it's there if you really need it. On the opposite end of the spectrum, you could also consider setting up a small "slush fund" account which is for total useless frivolities - that way you only pay for the absolute necessities out of your main account. The reason to do this is it makes it easier to budget small vs large frivolities - it's easier to balance a daily latte for a month vs a new Playstation than if both of those are coming out of your big account.

And yes to getting a credit card that you use in moderation and pay off every month. Make sure you get one that doesn't have an annual fee. Again, demonstrating responsible use of credit is good for your credit rating and will help you qualify for that interest-free car loan and a better mortgage rate waaay down the line.
posted by telepanda at 9:30 AM on December 16, 2015 [1 favorite]


Lots of good advice here. Definitely get a credit card, and work up to putting all or most of your expenses on it and pay it off every month. This does a few things: if your life ever gets more complicated and you don't have the time to track your expenses manually, they will all be recorded on your credit card and easily tracked that way. Second, get a card that gives you miles or a cashback bonus or something and get a little extra out of your normal expenses (my groceries help buy my work clothes through cashback bonuses). Once you have one credit card that you have a good history with - that is, you use it and pay it off - you'll get a few more credit card offers, pick the one with the best benefits and get a second card so you have another line of credit to build your credit history with and as a backup. Stop at two cards. Never get cash advances and never think of the cards as anything other than the cash you actually have - unless you end up unemployed and with no resources, but that's a different thread.

I think one of the best things that someone in their 20s can do is to max out their retirement contributions: compound interest is your friend and earlier contributions are going to go a long, long way towards letting you retire earlier.
posted by ashworth at 9:57 AM on December 16, 2015


Thank you for all of the answers so far! I just have a quick clarifying question for folks who said I should increase my 401(k) contribution. The year's worth of living expenses, as I mentioned, is what I saved up when I lived with my parents. Now that I pay rent, I only save a few hundred dollars a month after you factor in vacations and other major expenses. (I suppose I could save more if I stopped participating in social activities that take place at bars/restaurants, but I'm 24 and want to live a little!) With that knowledge, do you think I should still be putting that into my 401(k) instead of a bank account that I can access at any time?
posted by robot cat at 10:14 AM on December 16, 2015


OMG, yes, you should be upping your contribution to your 401k. It's effectively hiding money from yourself. I wouldn't necessarily put a big lump sum in, but starting 1/2016, I'd up your percentage as much as you can. Keep in mind it's pre-tax dollars, so you'll see less of a hit than you think you will.

I'd also put 6m of your savings into a 6month CD- it'll be just enough of a pain to access if you need it that you'll only use it for emergencies, and in the mean time it'll earn you small amount of interest.

I maxed out 401k contributions my first 5 years working, and even with the economy going to shit in that time, I'm where 50yr old me "should" be retirement wise. I now contribute just to my employee match and have comfort of knowing old lady me is somewhat taken care of. It's really, really nice to have that taken care of.
posted by larthegreat at 11:36 AM on December 16, 2015 [1 favorite]


Here's what I would do in your place:

- Keep six months' living expenses in a savings account where it's liquid (because emergencies tend to be unplanned and immediate)

- Open a Roth IRA and contribute as much as is comfortable while keeping it within the contribution limits

- Invest the Roth balance in a low-fee Target Fund for your planned retirement date.

- Plan to "inch up" the percentage of your 401K contributions, even if it's just by 1% every year or two. You don't have to rush it at your age, but you do want to get used to paying for your future first, before anything else, and that's a low-pain way to do this.

While the boglehead 3-fund portfolio is totally fine--indeed, that's how most of my own portfolio is invested--it's going to require some work (e.g. determining how much stock versus bonds according to your risk tolerance, and annual re-balancing to maintain your allocation percentages). A Target Date fund does all that for you.

Last but not least, have fun but live below your means.

Best wishes, you're doing great!
posted by Short Attention Sp at 1:12 PM on December 16, 2015


If now me could go back and slap old me from 20 years ago, I would. I had the "I just want to live a little attitude." You never know what turns your life is going to take next week, next year, in 10 years. Going on vacations and spending money in bars and restaurants is great if you have 8 months of living expenses set aside as an emergency fund (and that's not 8 months of rent, that's 8 months of rent, utilities, food and necessities, car payments, car insurance, co-pays, student loan payments if you have them, veterinary bills if you have pets, prescriptions, etc. etc.). My rule of thumb is the most expensive month times 8. If you were out of work in a bad economy, that money disappears quickly, and no memories of dinners and vacations will comfort you when homeless. Before I met my husband, he was insured and got cancer and ended up filing bankruptcy because he couldn't cover the medical bills even after insurance (this was 25 years ago but it can happen).

NEVER abuse credit cards by buying more than you can pay off at the end of the month. Made that mistake as well and it takes YEARS of living bare bones to climb out of that hole.
posted by archimago at 1:18 PM on December 16, 2015 [2 favorites]


I subcribe to r/personalfinance and find lots of good discussions on there. Another up and comer is r/financialindependence.
posted by dgeiser13 at 3:03 PM on December 16, 2015


Hey, this anonymous question was me and I think there's a lot of value in there. The opening question, which, being anonymous I did not respond to, asked me about my life goals. Mine are in line with yours: my only goal is don't get poor.

Some things I did after that question:
-added a bunch of money to my Roth IRA buying mostly VTMSX
-started a fuck you fund so I could walk away from my job whenever I wanted without worry
-continued adding generously to high yield savings accounts (check out the Barclay's dream account; I believe it's still the best value out there)
-lightened up on comfort spending (I am not an extravagant person, I'm talking like if I saw a $70 dress I liked, I bought it without even blinking, or I bought a chromebook just because I was curious)

Some things that happened:
-I lost my job


I lost my job over a year ago and because I'm so good about saving, living below my means, and was good about planning ahead, I have been able to live comfortably for over a year without working. It was really only a few months ago that I felt like I needed to start looking for a job (which, if you scroll a bit down the green today, you will see that I have and will be starting soon, hooray!). I cannot even begin to explain to you the value in not having to worry. I was able to take a break, a much needed break, pretty much guilt free. Building yourself a safety net, and not just emergency savings but a whole system of financial responsibility, gives you a tremendous amount of sanity-saving flexibility.

I'm not saying that anybody should want to lose their job or that you should quit your job or anything like that, just that if you want a goal, a pretty good one is to be prepared. To answer in terms of your #3, a financially secure 20 something won't have their whole life thrown out of whack by a temporary loss of income.
posted by phunniemee at 4:30 PM on December 16, 2015 [5 favorites]


-added a bunch of money to my Roth IRA buying mostly VTMSX

This is a typo. I mean the index fund, VTSMX. VTMSX is also a thing but not the right thing. AAACKKronyms, amirite? Carry on.
posted by phunniemee at 4:48 PM on December 16, 2015 [1 favorite]


Seconding the Bogleheads wiki and also the Bogleheads forum. The wiki is great for covering the basics and giving you some background. Once you've gotten started, the forum is terrific for good advice on the specific questions that will come up.
posted by kristi at 11:09 AM on December 19, 2015


Also, check out the blog Mrmoneymustache for lots of really great living-below-your-means advice.
posted by eglenner at 2:58 AM on December 22, 2015


Thank you all for your help - here's what I did:
1) opened a high-yield savings account with Radius
2) got a Chase Freedom credit card
3) upped my 401(k) percentage (and may potentially up it more once I see how it affects my paycheck)
4) opened a Roth IRA with Fidelity since I already had accounts with them and trying not to obsessively check it for daily fluctuations in value aaahhh

I love all the blog/book recs and will keep them in mind if I have further questions.

Extra thanks to phunniemee for some additional back and forth MeMails that were very helpful in clarifying things.
posted by robot cat at 5:58 PM on January 11, 2016 [1 favorite]


Congrats!
posted by phunniemee at 4:15 AM on January 12, 2016


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