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« Help a Friend: Federal Debt Relief System | Main | Star Money Articles and Carnivals for the Week of February 18 »

February 21, 2008

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Definitely some good points in here. Being a graduate 3 times over, and knowing how much I owe, is a killer. My road to glory is finally coming to some understanding that my student debt will take a while to eliminate, but i've finally gotten rid of my revolving debt, which had been a monkey on my back for the past 15 years or so--i.e., the beginning of my college career until now. Feels good to get rid of that monkey--but more education needs to happen so that young people understand how much of a burden credit cards, student loans, and any other debt weighs on you into adulthood.

New hire and new college grad here.

Question about the disability insurance:
My employer offers long term disability insurance that will reimburse 60% of income if the disability lasts longer than 90 days. But it can be paid either by me or them. If I pay for it, the premium is paid with post-tax dollars and I get the advantage of having a tax free benefit in the event I become disabled. If my employer pays for it, the annual benefit gets taxed and therefore reduced.

So it appears more advantageous if I pay for it, but am I missing something? Is there a catch? Shelling out a few extra bucks a month (post-tax) initially doesn't seem like a big deal, but keep in mind I live in New York (high living costs) and I'm going to be making less than $50K, base salary. Every dollar counts.

Part of me also thinks that I'm still young and healthy so is it even worth shelling out for insurance I may never use? However I find this last one a less convincing argument...you never know what could happen.

Thoughts?

Saria --

Think about it this way. Your employer is offering you two options:
(1) Pay a basic cost each month for a basic disability benefit.
(2) Pay more each month for a higher disability benefit.

If your employer wasn't offering the second option, would you go try to buy extra disability coverage else where? If not, why would you buy it from your employer???

Also keep in mind that right now 60% of your income is $30,000. If you make $30,000 a year, your tax bill will be very low anyway, since a big chunk of your income will not be taxable once you consider exemptions and the standard deduction.

Overall I would not pay the extra few bucks a month for what amounts to a hundred bucks a month or so if I get disabled.

Very good advice for the new-to-the-workplace.

I would also add that if your company has a Stock Purchase Plan (SPP) to max it out.

I like your advice about automating savings and it's what I have done (been out of school <2 years). It makes things very easy. With my 401k, SPP, and automatic transfers to EmigrantDirect I save nearly 50% of what I make post-tax. The remaining I'm free to "go crazy" with.

One piece of advice for new college graduates from me. Don't but a new car or house within the first year or so. I know you want to feel grown up and you have the money but this is not the time. Please wait until you have more job security and you've decided that you're at the right place. You have no point of reference so just a few months is definitely not the time to decide you like where you work.

-Josh

This post is all well and wonderful, but honestly, pretty unrealistic. The writer advocates saving/giving away 15% of your pre-tax salary and 25% of your post-tax salary for various things, AND maxing out your Roth IRA. For the average starting grad, who is probably making 30K - 50K, this would be extremely difficult and take a lot of self-discipline.

If you were making 30K and followed this advice, you would have $8,387.50 left to live on for the year, and if you were making 50K (a pretty good starting salary for most college grads), you'd have $17,313 left.

I'll second Sara's post. I was going to post that, but I've said something negative about every Marotta post for the last month or so, so I was making an effort to be less critical. The average college grad makes something in the 30k-40k range, and saving/giving 40% of that plus $5000 leaves you with a tiny post tax budget -- think ~$500/month for rent, ~$35/week for groceries, $0 on entertainment, $0 on eating out, turn off your heat and AC etc.

Josh, how on earth do you save 50% of your income? If it's not too personal of a question, roughly how much are you making? I'm guessing you are bringing in more than a typical college grad.

Saving and investing regularly is very important. If you are just starting out work on an emergency fund for all those unexpected expenses, start an IRA, preferably a Roth IRA, and work on a diversified portfolio. Eventually start a non-retirement investment portfolio with regular (even if small) investments. Having money deducted from your checking account each pay period or each month is excellent advice because of the discipline it instills.

But saving 50% is not only unrealisitic, it can also be counter productive as it sets people up for failure. Young people (as well as old folks like me) need to have some of the immediate gratification that spending will bring. This kind of plan sounds like you won't even be able to go to the movies or buy a 6-pack of good beer. 10-20% is much more reasonable, attainable and will give people the results and positive reinforcement they need to keep it up, while also enabling people to enjoy the fruits of their labors and experience the thrill of finally being on their own.

I put advice advocating saving 50% in the same circular file as trying to pay off a mortgage in 5 years, especially for someone just starting out.

Saria --

I'll try and post your question in a couple weeks (I'm booked next week) and let readers take a shot at it.

Saria:

The other thing to check is to see whether if you pay it, it becomes portable (can be taken job to job) or not.

As to the post:

I think it is incredibly unrealistic. By all means, they should be saving, but 50% of take home pay should be saved? Great if you can do it, but I don't think this is realistic at all.

Giving away appreciated assets, in my view, is a dangerous suggestion for most people. The last thing someone who is giving a basic tithe to their local church wants to be doing is giving away his likely long-term asset gainers. You give away appreciated assets to charity when (a) you have a lot of appreciated assets and (b) after they have appreciated. In other words, unless this person is in his 50s and on and is facing some major tax management decisions, I wouldn't be recommending giving away that stock that just appreciated. Not when you are in the asset accumulation phase of life, which is what the post is meant to be addressing. You do that in the retirement phase where you are going to sell the asset anyway. There it makes sense to substitute giving it away rather than selling it to give the money away, etc. But not for a new person starting out.

Ok I did some calculations so let's see how realistic this is.

So for instance let's take a 45k salary assuming someone single (Using Rounding):

401k pre tax 5% - $2,250
HSA maxed out contributions pre tax - $2,900
- Income Taxes - $6,310

=Take Home Pay $33,540 or $2,795/mth
Long Term Disability - $100/mth
Fully fund Roth - $415/mth
5% of take home pay to savings - $140/mth
Big ticket items 10% of take home - $280/mth
Unknown Unknowns 10% - $280/mth
Charity 10% - $280/mth (No tax savings unless you have more itemized deductions)

Let over money = $1,300

This would probably be very tight to really live off of for a graduate at this salary. Add to the fact this assumes you have no prior debt (Education loans, credit card balances, car payments). While I like the general idea of the post this would be hard to do for many IMO.

Has anyone noticed that all of this discussion assumes that the graduate has no student loans? That alone can take a big chunk of your take home pay. In my case that adds up to 11% just to make minimum payments.

On a side note, what are people's opinions on whether to save money for an emergency fund versus paying extra off high interest private student loans? Three months expenses is the standard ideal, but unreasonable for someone who is losing out because it is sitting in a bank account instead of lowering their balance (and more importantly accumulating interest!) on their loans.

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