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December 29, 2009

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The reader really hasn't provided enough information.

Where does the reader want to go with his life? Does he want to retire early? Work part-time for some time after retirement?

Does he feel like he's enjoying his life now? Is he spending $ where he wants to spend it and cutting back on things he's not interested in?

It can't hurt to have a solid safety net built by the time you're 30, so that you'll have options later, but only the reader can truly answer this question.

Although it's aimed at couples, I think "Smart Couples Finish Rich" provides an excellent overview on focusing on where you want to be, and defining a good trade-off between spending for now and saving for the future.

You should have a 6 month emergency fund in a high interest savings account or Laddered CDs. That would give you a $12,000 emergency fund with another $15,000 from your Roth (you can borrow your contributions penalty free). If you already have a 6 month emergency fund, your job is secure then I'd lighten up a little and enjoy life. If you cut your saving to $750 and have fun with $250 each month. You could also cut your saving to $500 and use $250 invest in the stock market on your own and have fun with $250.00. Either way, keep up the good work.

Definetly define what are some goals. Security? Investing? House? Marriage? Travel? Retire at 65?

Define your tolerant risk and decide what percentage you feel comfortable in investing in to reach your goals.

Personally you need to put more money in your 401k. The more you put in now the greater chance of it growing over the 30 years before you even think of retiring.Compound interest is your friend. Catching up in those later years will be murder.

I've run into the same questions about myself. I am a young 25 and save $1000 that go into mutual funds, max out my 401K and match at 6%, save $500 each month for a future car (to replace the college vehicle) and have a few other small accounts to pay for things like bridesmaids dresses or weekend trips.
I think we are both on the right track, but you can't beat yourself up. If something comes up that is a great opportunity (like flying to a college bowl game, and a trip to Alaska with my boyfriend's family next year, for me) you have to take it. Now is the time to enjoy yourself.
My situation is probably different than a man's though. My boyfriend pays the mortgage each month and I save even more and invest. So when we do get married we can afford whatever we want in the wedding and have options for the future. I work as an engineer, but eventually want the option to stay at home.
I think he is doing the right thing saving plenty now. Don't worry about saving too much or too little, you obviously have the right saving habits, and it's always nice to know that if you wanted to do something crazy with your money, you could. ;)

dont beat yourself up, i started where you are four years ago. it has worked out well for me, plenty of options now.

if you feel you are shorting yourself on something, work it in. you can go out and do what you want without breaking the bank, choose your vices/entertainment to get the most happiness per dollar.

saving money without a plan becomes confusing. define your goals/path, even if you change it later. i am content b/c i know where any investment dollars would go, in any amount, so no anxiety with "what to do"

best of luck

Kudos to you for being such a great saver! I do believe you need a purpose for this remaining cash. If you don't own a home, create an ING account for 'down payment' savings. You can have 'fun' money. Designate a set amount that you can have fun with and spend it on doing things you like to do. It's OK to spend. Many young people could learn from your good financial habits. You might also consider giving to a cuase you believe in. Seek out local charities and learn about their mission. Go visit the places and see first hand what they do and who they benefit. There is great joy in giving. Good Luck!

I hardly remember what I was doing when I was 25! That was over 20 years ago.

One thing I did right was I put away the max allowable into a traditional IRA--just $2000/yr in those days. And I managed to do this for only the 2 years before I started grad school even living in a very expensive city and on my low salary of $20K/yr (my ex and I had very low expenses--we basically lived in a tenement and shopped at thrift stores because we'd just recently been poor students and that was our lifestyle).

That meager $4000 I saved in 1980 and 1981 is now $25K (even after losing a lot of value last year in the stock crash). I sure wish now that I'd put away more cash back then!

So I agree with what some others have said here---shovel as much cash as you can now into some kind of tax advantaged retirement account. Time is definitely on your side, and you will most likely have higher expenses in the future that will prevent you from saving as much even though your salary may be higher. Mortage, kids, and your eventual longing for actual furniture and a nicer place to live will cut into your ability to save.

Personally, if I were you I'd wait a couple of years to travel the world. Get yourself financially solid and get your career established first.

Right now is not a great time to quit your job to travel for 3 months because you might have trouble finding a new one! And traveling only for a couple weeks during your vacation is not going to give you a very satisfying experience.

My advice is to wait to travel for a couple years until the economy improves and maybe the dollar will be stronger against the Euro or other currencies then too. Then take 3 months off between jobs and travel. It's not like the world is going away soon--and possibly some destinations (Egypt, Russia, Mexico, Israel) might be safer to travel to then, too.

Sounds like he doesn't have a plan - what he's saving for, when he'll need the money, how long it will take to get there, etc. 25 and (presumably) single is a great time to have fun in whatever way you enjoy, whether it be pubs and clubs, travel, gigs, camping, a personal trainer, whatever. I'd target a balance (eg six month emergency fund) and then loosen up a bit - or, hell, divert some of the savings to something like a travel fund.

You're only saving 5% of your salary into your 401K? You need to first max out your 401K, and then also save $1,000 a month.

Don't feel like you are saving too much.

There's no such thing as being TOO aggressive where saving is concerned.

If you are 25 years old, are happy and content in your lifestyle and for a variety of reasons your expenses just happen to be that much lower than your income, don't put a number on how much you should save. Save all you possibly can.
Life changes - and with it expenses change and income changes.
At age 25 you are a long way from being secure financially so the motto to follow is, "Make hay while the sun is shining, because tomorrow it may start raining". If you do this you are well on your way to having a wonderful life.

The next thing to address is where do I put the money that I'm saving. The very first place is to max out IRAs and 401Ks. That said, you need to have enough cash in a Credit Union saving account that is immediately available for unanticipated expenses and unanticipated events. Next you need to think about long term appreciation of investments. The main three being stocks, bonds and real estate. The stocks and bonds should be held by owning no-load mutual funds in order to have diversity. The first real estate purchase should be the home that you live in, once you are sure that you know where you are going to be living for quite a few years. There are plenty of bargains right now in real estate and for future appreciation the first thing to consider is location, location, location. If you are handy there are fixer uppers that don't require major surgery, just some cosmetic surgery to make them stand out and look very attractive. If instead of real estate you prefer to concentrate on stocks and bonds, don't just go for a fund that invests in the whole stock market, or the whole bond market, and become a Buy & Hold investor like so many. Start reading and learning all you can about the world of finance - it's all there on the Internet, you just have to sort out the wheat from the chaff. You need to get a feel for what the next year has in store and you need to find out which sectors in the bond and stock markets are currently in nice, stable, low volatility uptrends, and put your money there. When the uptrends start levelling off start getting nervous, when the uptrends start turning into downtrends, get out, and start searching for nice uptrending sectors again. The beauty of IRAs and 401Ks is that the money keeps compounding year after year, free of all taxes - it's the absolute best type of money that you can have.
Following this approach your future wealth still very much depends upon where the real estate, stock, and bond markets go in the next 25-30 years, and nobody has a crystal ball, but at least you will have done the best you can to have an enjoyable life and a great retirement.

At 25 you are going very well compared to the typical 25 year old.

If I had to do it over again at 25 years old this is what I would do.

1) If you are going to stay in the area for a long time, consider purchasing a cheap house. Why not build equity while housing prices are depressed. Then after you salary increases, rent that puppy out!
If you have a good friend or roommate, consider renting out a room to that person. It could be a win-win for the both of you!

2) Most things I would keep as you have them except with one small twist. I would invest in a blue chip or robust international stock with great fundamentals that provides a 3 or 4 % dividend (Maybe MCD). I would continually put the $1000 into that company and starting using the dividend for fun money like going out on dates, etc. Once you have enough of a dividend yield (and your Roth is maxed out), I would consider either maxing out your 401K or putting that money in a non-dividend yielding growth stock that is safe. You don't have to go for the big homeruns, double and triple hits are fine too. ;)

Well, that's me anyway, Good luck!

Agree, the reader needs to supply more information about salary, where they live, what they like, etc. I am 24 and in a top balance of trying to save for the future as well as have fun and try to travel. My suggestions is to lighten up on the savings a bit. Enjoy life, this may be the only time in your life where you have the flexibility to do some things for yourself, take advantage of it.

Saving 30% is very good. Saving 20% would be very good too though. I think its OK to cut back on the saving some if you want. I is really up to you though. If you are happy saving as much as you do and not really missing spending more on 'fun stuff' then thats great, go ahead and keep saving. But if you feel like you're constantly denying yourself any entertainment and starting to dislike saving because of it then Its ok to cut back saving some.

I think you are doing great, but if you aren't happy, you need a new plan.

My husband and I have a very strict budget, but we included monthly "fun" money and a vacation account into the mix. We are also young (26 years old) and believe life needs to be enjoyed now as well as in retirement. We budget for fun so that we don't feel like we're missing out on anything while we save a bunch for our future.

Based on what you make, this is what I would do:

1) Continue to max out your Roth IRA.

2) Continue to contribute the maximum matching into your 401k (I'm assuming that they match up to 5%...if they will match more, make sure you contribute at least that).

3) Build up an emergency fund of at least 6 months of living expenses ($12,000 like Meoip suggested above).

4) Once you have a sufficient emergency fund, you'll need to sit down and create a plan based on what you want from life.

In our case, we want to retire early, so we budget for more retirement contributions and long-term investments. My husband is a teacher ($43,000 a year before taxes) and I'm a cubicle office worker ($35,000 a year before taxes), so we stretch our money as far as it can go...

We max out a Roth IRA ($5000 a year), pay into my husband's pension plan ($2500 a year), contribute 6% into my 401k which is matched at 6% ($2100 a year for my 6%), and put $2500 a year into high dividend-yielding stocks. We spend $15,000 a year on our mortgage and overpayment of principal, property taxes, and homeowners insurance. We are also currently paying $8000 a year for graduate school for my husband. The rest of our money is put in an auto and home account for future expenses ($6000 per year), a vacation account ($3000 per year), $250 a month to "fun" money ($75 for each of us and $100 for joint dates and activities...$3000 a year), and regular living expenses (the remaining $19,500 after taxes).

Next summer we will no longer need to pay for graduate school and will decrease our auto and home account monthly contributions. We will use this money to start saving for a downpayment on a rental property and to open and fully fund another Roth IRA.

What do you want from life? If you want to own a home, I'd start saving towards a downpayment. If you want to retire earlier, then you can increase your 401k contributions or plan for some other long-term investments. If you want to take annual vacations or fund a few hobbies, I'd add that to my budget. So what are your goals?

Others have said that you should put more into the 401k. I don't think thats necessary a good idea. For one their income after tax is about $40k so maxing a 401k would be more than they're saving now leaving nothing for other saving goals. You're maxing the Roth for $5k which is about 10% of your income and putting 5% into the 401k up to the match. Thats around 20% of your income into retirement accounts. Getting 20% towards retirement is pretty good. Putting more into the 401k won't get you a match so its not a great incentive to do that. You may be better off putting money into savings towards something like a home down payment.

Create an entertainment budget for yourself. Figure out how much it's worth to you. Do you want to spent $250/month on entertainment and cut your savings to $750? Or would $50/month be plenty for you to have the fun you want?

My entertainment budget is $50/month, and my wife has the same. We find it's a good level -- it gives us enough to get some interesting things, but it's not enough that we get everything we want. This means we tend to get the things we think are really going to be fun, and skip the things that are of marginal value.

I'd recommend starting with something like $50 in your entertainment budget -- just enough to go out a couple times or buy a couple of games or some music or books. Give it a couple months. If it's too restrictive, raise the cap by $25 or $50. Repeat until you find a good level.

Lots of good advice here. In fact I can't add anything new but one small opinion. If you are asking this question, then clearly --for you-- you aren't saving enough. You're 25. Figure it out for yourself. Then re-visit some of the good advice here. Better yet, print it out, keep it and refer back to it at least annually.

Financial Samurai, I don't believe he should fully max out his 401k and save an additional $1000 a month right now.

He is only making $40,000 a year after taxes. Putting $16,500 into a 401k and saving an additional $12,000 a year would only leave him about $14,000 a year to live on (that takes into account the tax break of the 401k contributions).

Depending on where he lives, he'd need at least $6000 a year for rent ($500 a month) and I think that is a low estimate since that's a cheap apartment in Houston, TX. That would leave him only $8000 a year for everything else (utilities, food, medical expenses, car expenses, etc).

It would be possible if he lives somewhere inexpensive but really harsh...plus he really would need to be lucky enough to not have any type of medical or life emergency that would just eat up his $12,000 a year savings...

Wouldn't he be better off having some liquidity built up before he starts shelling $16,500 into an account that he shouldn't touch for 40 years?

As long as you are doing the following:
1. Managing cashflow (i.e. spending less than you earn in take-home every month)
2. Contributing to your 401k at least enough to get the full match
3. Maxing out your Roth IRA every year
4. Carrying at least two to three months worth of expenses in a liquid emergency fund

I would say you are fine. If you want to save more, save more. But at some point, you do have to live life, and if you are doing all of these things above, you shouldn't feel guilty about going out and having a night on the town once in a while and spending some money.

What if you don't KNOW what you want? A lot of these comments say that he needs to have a "goal," "plan" or "reason" to save. What if he doesn't? Can you just manufacture a goal out of thin air because you feel like you should? That's what most people do, but if the goal isn't concrete or real then it's pointless to set it.

At 25 you're probably saving in order to have options, even if you don't know what those options are yet. Here is what I do. Imagine the grandest (read: most expensive) thing you might possibly want to do or buy within the next 10 years and try to save so that if you wake up one day and decide to do it, you CAN.

Do you think there's a chance you might want to...
...buy your girlfriend a $10K engagement ring?
...travel the world for a year?
...be a stay at home parent?
...buy a home?

In this sense, you can never save too much. The more money you have, the grander - and closer to reality - your dreams can be.

By the way, here's a direct answer to your question: YES, you CAN take a breather on saving if that's what you want. From a financial perspective you are doing fine - more than fine even. And you have few obligations on top of that (mortgage, family, etc).

But do it with a purpose. Maybe one of your "dreams" isn't far off; maybe it's something you want to improve about your lifestyle today. To be a member of a fancy gym? To try a new 4 star restaurant twice a month? To have an iPhone? To bump up your wardrobe a notch? Work it into your budget!

Bad_Brad:
You are quite right that you do have to live an enjoyable and enriching life because you only get to live it once. The other thing that's also very important is to realize that the window of opportunity for some of life's great experiences doesn't stay open until you take your last breath. I am particularly talking about an activity that was extremely important to me, and that was "Adventure Travel". You can be wheeled up the gang plank on to a huge cruise ship in your wheelchair at any age and have a pretty nice experience but for adventure travel you need to be much younger, very healthy, in excellent athletic shape, and be willing to rough it. This may not be important to many people but it was very important to me, and to a somewhat lesser extent also very important to my wife, so we managed to do our fair share of it while also raising 3 children, having satisfying careers, saving for a nice retirement, as well as all the usual enjoyable activities that you can share with your kids while they are going to school and living under your roof.
It must be very disappointing to finally be able to afford to have an experience that you always wanted only to find that you left it too late and that now there are major obstacles that prevent you from doing it. The most common obstacle is your health but in recent years another major obstacle has surfaced and that can be big changes in the political situation and the health & safety risks in 3rd. world countries. Now at age 75, several of the trips my wife and I made between the ages of 45 and 50 would be far too dangerous today, as well as being beyond our physical capabilities.

ALRIGHT. THIS WAS MY QUESTION TO FMF few weeks ago, I didn't think he would post up and let me get tackled by you guys. Here are the supplemental information.

1. I do have a goal. I do plan to buy a house by 30. I'm still single, so this may get pushed back until I'm ready to get married. I had 30 because that's when I thought I'd get marry (it doesn't look like it's going to happen, ha). I live in somewhat expensive area of DC metro. I'd need at least 50K for a good townhouse.

2. I do have some fun. I'm not a total loser! I travel twice a year outside of mid-Atlantic region. I plan to go overseas in 2010 for two weeks. However, I have set apart $200/month for travel budget, so I'm on target.

3. I hear more money on 401K. No, I do not agree, I have Roth that I'm going to max out every year no matter what. I get 5% matching from company, so it really makes it 10%. I don't plan to retire early, I plan to work as long as my brain functions, 65?

4. Emergency Fund sounds good. But I work for federal agency - where layoff is very rare. My performances are pretty high compare to other ppl, so I should be fine. I'm also hospital-clean guy. Workout regularly.

5. I'm very aggressive on saving because I rarely buy any expensive clothing lines. I shop at Gaps, Jcew etc. Nothing I own is more than $100/piece, even jackets.

I feel like I'm okay with my savings. I currently have 13K in Cash and 17K in Roth. I could use 10K and put into ING (which I have $62 in it) or open taxable fund account and invest more. Anything you want to know more?

Josh,

The only thing I'd say is that it's important to spend money on your social life right now if you want to get married. If you're doing that already, then you're fine. If you're not doing that, or need to do a little more, then notch down the savings a bit and spend more time and money looking for a long term mate.

Having money/savings is an important ingredient in happines, but relationships are important, too.


I agree with the general concept of perspective and goal.

I save about 60% of my annual gross. If all I wanted to do is save enough for a 3 month emergency fund, clear my credit cards, and save up for trip on a cruise ship, I've saved entirely way too much.

If I wanted to max out my Roth, contribute my 401(k) to the max employer contributions, beef up the emergency fund savings to 1 years worth, and save up for a car, house down payment, and a trip on a cruise ship? No, 60% still isn't enough.

But I do what I can, and right now, 60% will have to do....

Josh, it sounds like you have it all figured out pretty well--so why did you ask?

Just a comment based on your info: If you can, you should probably try to buy a home this year rather than 5 years from now. It appears you have a solid job and you're planning on staying in the area. Mortgage rates aren't going to be this low in 5 yrs, same for home prices. Plus you might be able to pick up a foreclosure for even cheaper. Housing in the DC area is always going to be a good investment due to all the gov jobs there making demand high.

Thanks all for wonderful comments,

My primary goal is to get a house. I'd like to be able to buy one now, but just don't have enough funding for it. 15-20% is what I should put down as down-p, but I just don't think my 15K cash is enough to get me anything in this oh-so-newyork-like real estate market. Decent looking townhouses go for 400K easily. I've been doing some research and housing prices won't go up until 2012 (i sure hope). By then, I'll have more cash and hope to purchase a nice place for myself.

Keep in mind that I also do not view house as an investment. I'd do my everything to keep money in my Roth as that is my nest to protect :)

Happy new year!

Sounds like your doing great!!! My short advice. Live within your means. Don't spend more than you've got. Don't let anyone rip you off. And remember..Life is for living!! Or as Marlon Brando said - The idea is to have a ball!!

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