Help a Reader: What to Do with Excess

Here's an email I recently received from a reader:

I am 22 years old and just graduated college in May. I worked my way through college to make sure school was paid off. Among the jobs I held:

Assistant at a 3rd Party Logistics company, Package Handler at FedEx, Supervisor at UPS, Owner of an exterior house painting company, and some other small scale things. I thought of this when I read your post about kids working through college. For all of the people who said working hurts the experience... you are wrong. My experience was enhanced by working through college and got me a pretty decent starting salary along with a promotion within my first few months (not monetary, but it has gotten me more recognized by some of the higherups). When I wasn't working in school for 6 months I was not doing as many productive things, although that is when I picked up bicycling and started training for 100 mile races... so I got something out of it. And yes, I still had a life outside work and school. I was an officer of an academic society and I had a 3.8 GPA in a major for which my school was ranked 10th in the US. BUT anyways, back to the point...

I graduated debt free and lived very frugally in order to manage that. I am now 4 months into my new job with a large company in the food and beverage manufacturing and distribution industry. Here is a snapshot of where I stand:

IN
Gross Income: $2,000.00/biweekly (or 52/12 = $4,333.33/mo if you prefer to look at it that way)

401k Contribution: $160.00 ($320.00)
Healthcare Contribution: $46.30 ($92.60)
Dental Contribution: $15.16 ($30.32)

Taxable Income: $1,778.54 ($3,557.08)

Taxes: $510.11 ($1,020.22)

Net Income: $1,268.43/biweekly ($2536.86/month)

OUT
Rent: $449.50
Cell phone: $48
Electricity: $50  (I split it with a roommate... and it has never gone over $100, but being that it is variable I like to play safe)
Gas: $35 (Same as above)
Water: Free (Hot water gets charged under gas, though)
Internet: $28
Gas: $160 (To/from work and to visit the g/f)
Groceries and Restaurants: $100
Bars and Entertainment: $200
Car Insurance: $2000/12=$166.67

Total Out: $618.59/biweekly ($1237.17/month)

Leftover: $649.84/biweekly ($1,299.68/month) This all just goes into my savings accounts at this time.

Accounts:

BOA Savings - $3,981 (remainder direct deposit, which I then transfer around)
BOA Checking - $701 ($300 direct deposit every two weeks so I can write a check for rent and gas)
AmTrust Direct Money Market Checking - $6,857
E*Trade Savings - Pending Open
Fidelity 401k - $709 (down from $740)

BOA Visa - $556 (paid off monthly)
Shell Credit Card - $191(paid off monthly)
Chase Freedom - $239 (paid off monthly)

TOTAL: $10,553

As you can see I am putting 8% into my 401k (traditional :( ). The company matches 50c/$1 up to 4%... so they are giving me an additional 2%. Furthermore, they give me another 2% as a pension into my 401k. So altogether, biweekly $240 is going into my 401k.

I was thinking of putting about $6,000 in my E*Trade account for the higher interest. AmTrust Direct used to be my interest bearing account @ 5.26% but it has dropped below 2% and it is time to jump ship. I will keep $500 there just to keep the account open in case they ever increase interest rates to the old rates. I am thinking I should take $3,000 and do a Vanguard Roth IRA. And then I will leave the remaining $1,500 in my BOA account for easy access and emergencies.

Obviously my monthly expenses are very low, so I am hoping to get some good suggestions with what to do with the excess money as I am not needy and would rather save then spend!

What advice do you have for him?

Comments

[Liz]

I have one question - does this guy eat? How does one spend only $100 per month on groceries and restaurants? Or have I missed something in my haste...

[savvy]

I would establish an efund of six months expenses (he's most of the way there with the AmTrust account). After that, I would increase the 401k contributions as much as possible in order to take advantage of the tax-deferred status.

Yes, I don't buy it. 100 dollars on food is about 3-4 bucks a day. I have my doubts he's actually doing that.

But taking his numbers at face value, isn't the answer obvious (assuming he wants to save the money)? He should balance his needs for emergency funds and increased retirement savings. He's leaving tax-free and tax-deferred possibilities on the table.

[Kevin]

My next step would be(since you seem to have the emergency fund covered) to max out a Roth IRA. That would be about $415 a month, leaving you about $885 a month.

Put that towards any other goals you may have...new car fund, house down payment, more retirement savings, etc.

Don't forget to have fun with some of it though. I wish I was this financially savvy when I was your age.

[friend]

Save in a liquid type of account now with low risk. You should start saving for a house now and with the current market you should be able to get a great deal on a place. Save as much as you can, not in a 401k or IRA to avoid the penality, so you can get to the money quick when you find the house you want.

[Anonymous]

Hmm...why the two checking accounts? Also, the AmTrust account is promoting a 2% interest rate. I'd get the primary checking at BOA up to about $1000, do my best to keep it there, then move the AmTrust stuff over to ING Direct and get 3% instead of 2%.

Then I'd fill out the 3 months of expenses in the emergency fund.

After that, I'd go back and up the 401k contributions before I upped the Roth.

Also, I'd set up another account at ING Direct- "Vacation Fund." Start putting some dollars in there and plan to go someplace fun.

[Jim]

He's doing good. He's got about $1300 or $15,600 annually a month extra after expense and thats after putting 8% into retirement.

I'd go ahead and max out a Roth IRA annually.

Other than that... what do you want to do with the money? What are your goals? To know where best to put your money, you should have goals for it defined.

If you want to buy a house in the next few years then you should save money in a safe savings vehicle like a CD. But if you want to save towards retirement then more aggressive investments like stocks or mutual funds would be best.

If nothing else, you can't get hurt by putting your savings into high yield savings account until you know what you want to do with it.

Jim

[Sarah]

Just want to address the "does this guy eat" question. His finances almost exactly match my own (so I'm really interested in the suggestions he gets :). I routinely spend about $100/mo on food. How? I shop savvy and I cook from scratch. You'd be amazed how much father your food budget goes when you don't buy prepared meals.

actual advice for the post--check out bankrate.com to find high-yield savings accounts and good CDs if you want short-term insured savings. Most of my money is earning 4-5% right now from deals he posted about (no affiliation, just a happy reader).

[rkudasik]

Consider giving to a charity or organization. There are a lot of needy people in the world. May I suggest http://www.bloodwatermission.com/index.php

My girlfriend's grandfather just passed on. He left 1.25 million dollars. He was very tentative to his finances, but in the end he is dead without his money.

Ask Rockefeller http://en.wikipedia.org/wiki/John_D._Rockefeller#Philanthropy or even Bill Gates http://en.wikipedia.org/wiki/Bill_Gates#Philanthropyabout the importance of giving.

Seriously, you'll feel good giving even $100/mo to a charity. I personally shoot for 10% of my net.

[Michael]

When I was single I probably only spent $3-4 per day on food most days. Store brand cereal for breakfast, a PBJ and an apple for lunch and some rice and beans or noodles for dinner. It's not that pricey.

I am only a couple years older than you and had similar costs. I have to say just keep saving saving saving and don't worry too much about rate chasing. Build at least a 1-year emergency fund. My biggest lesson is that 1 year fund calculates your normal living expenses for 1 year w/o income, the thing is, factor also that you may be out of work and increasing expenses. Lets just say you not only end up out of work, but must pay legal fees and/or medical costs beyond what you were regularly paying. That 1 year fund suddenly becomes a 6 month fund due to the double whammy of no income and increased costs. A lot of people advise 3-6 months emergency fund but don't take the above variable into account.

[Ken]

It is possible to spend $100/month on groceries. That's what I do and I actually buy a lot of frozen dinners.

I agree it's a good idea to put money into the E*Trade savings account. Get a great rate while keeping liquid assets.

I also agree that the food budget is a little light. What about the following:

Clothing budget
Vacation (you have to live a little)
Disability insurance
Renter insurance
Giving

After maxing out retirement, I would then put the extra money into index mutual funds. At your age, you can deal with the ups and downs and this will help you build wealth in the long run.

[Plex]

I have a similar budget to the person in question here as well. Similar age as well (24). My income is almost exactly the same as well, pretty scary.

It is totally possible to live on $100/month, at least if you aren't in one of the really expensive areas like NY or CA with their ultra high taxes.

My advice is similar to some those above, when I was 22 I was in a similar position. I put my money in a Roth and have continued to do so. If you don't take advantage of it each year, you lose the tax-free space you could have created. The market is also really great to buy into right now, as an early-accumulator, you want the market to be doing terribly, that means what you are buying is cheap and will shoot up in the long run. You have the time horizon to not care about whether the recession ends next week or in a few years.

One new thing I would suggest, you should be checking out www.bankdeals.blogspot.com, not bankrate, bankrate is a very highly advertised sub-par information site on CD's and high-interest savings accounts. I bought a 6% a year ago thanks to the information from bankdeals.

If your goal is early retirement, I would suggest continuing to save 50% of your net income. It will allow you to safely retire in your 40s (which is my goal as well). I can assure you that you will be constantly pressured by others to make choices that may conflict with this, whether it is to get an expensive car that you would only really enjoy a lot for a short time, expensive clothes that you won't regularly use, going out to restaurants or giving to charities you do not support.

You only have so many healthy years in your life, if you don't love your work, save your money so you can be freed from it and do what you really want to do, whatever that may be.

[ryan]

my monthly financial breakdown is also very close to the poster, though i am 27. I have a simple IRA that pulls 3% monthly plus match, but other than that all i do for retirement right now is the ROTH.

i go balls to the wall from Jan 1st to hit the 5K max and then I am free to do whatever I want without guilt for the rest of the year. What i do is then take the leftover monthly and pile it up and shoot down an investment property.

I didnt start to learn finances until 24, so later than you. But to point out where you can easily go, GF and I own our house and four rentals. You have the cashflow to do anything you want if you focus.

but before that (or indexes in taxable accounts, your choice), as others have said, you need cash reserves, trust me on that.

[Richard]

You've got a gf. Save for a ring, a wedding, a house, kids, kids college... :-)

[dogatemyfinances]

(1) Spend money on food/drink, also known as dating/socializing.

(2) Throw the rest in a money market to buy a home/ring/wedding.

[Margo]

^funny. I too was wondering how he keeps food to $100/mo total, especially with a girlfriend.

Here's how I'd suggest he put aside the extra $1300/mo:

Starts an engagement ring/next GF fund. Either, she's the coolest and most understanding GF in the world (and thus he will want to marry her) or she will get tired of the cheap college lifestyle and find someone else, in which case he will find that dating is terribly expensive. First dates, in particular, are a big cash drain! Rings are expensive! I'd recommend $300/month for this.

Housing, too, will be a big pain when he tires of roommates. That may be 5 years away, but if he can bank the difference between a modest mortgage and his current rent (say, $500/mo) this will be a substantial down payment by then.

Put $400/mo into a Roth IRA.

Put the remaining $100/mo away for opportunities - travel, a great sale on clothes or electronics, etc.

[DiaryofADink]

Open a ROTH IRA.

Nice job graduating with no school debt. Smart moves!

[Dan]

One glaring omission, where's the insurance? You got medical, but what about your life. Some policies offer a great way of getting a better rate of return, with positive tax consequences. So your ror is even better. Of course term is good just to make sure your bases are covered should anything unexpected happen. At least it will cover most of the expenses of burial.

[ryan]

it amazes me how this country has people programmed that the first thing they spit out for financial advice for this guy is RING->WEDDING->KID'S COLLEGE

get your financial self right first, live your life, then think about those other things if they are right for you.

[Andrea]

Well, he is in the food and beverage industry so it's not too hard for me to believe he only spends $100 on food per month. I'm sure there are some perks with his job.

[Duncan]

His financial profile sounds a lot like mine was when I graduated 9 years ago. Here's what I think you can learn from my experience--liquidity. You may want to go back to grad school in the near future, buy a house, buy a car, or take a nice trip. While it is important to fund retirement, you're current 401k contributions should be sufficient. Putting money into retirement accounts makes it unavailable for cars, houses, getting married, or grad school. Before putting money into a Roth, I'd focus on building up a large amount of liquid assets necessary for grad school or a house downpayment. Retirement is still 40 years away, but those other expenses will come in the next 5-10 years. I've been kicking myself sometimes for focusing too much on saving for retirement and not enough on the need for liquidity.

[Duncan]

Dan,
I'm not clear why a 22 year-old single guy with no kids needs life insurance. His current assets ($10k) and near term savings should cover funeral expenses should something happen. I'd think that the disability or personal liability insurance would be much more useful. I'm open to hearing any explanation for why he should buy life insurance.

[Kevin]

I agree with Duncan - skip the life insurance until someone is depending on your income for their livelihood - like a wife or kid. He's already got enough money in savings to cover burial costs should that unexpectedly happen.

[Orig Poster]

OP Here –

To all those who asked about the $100 for food per month. I buy food from local markets and on sale at large grocery stores. I love cooking and my favorite food is rice (and man does that help being frugal! $10 for a 20lb bag). The girlfriend is Kosher so she buys a decent amount of food (like meats) for me to cook for her when I visit. I don’t see why it is so hard to believe $4/day in food when I make all my food. Breakfast might be a bagel or a banana or something. Lunch will be a sandwich and an apple. Dinner will be rice and veggies and chicken. And these are actual portions people, not American portions.
In regards to those of you who mentioned maxing out my tax deferred or tax free investments… I am contributing $160/biweekly (and my employer is contributing $40 match and $40 pension biweekly) which equates to $4,160/year into my Traditional 401k (or $6,240 when you count my employers match and pension contributions). What is the total amount that I can contribute without overage penalties?

One poster mentioned funding a Roth monthly… is there any advantage to doing it monthly? I was considering just putting like $3,000 into a Vanguard Roth IRA and then doing smaller amounts monthly. Another poster mentioned keeping my money liquid for future investments. I viewed the Roth as a way to do just that since you can always remove your principal without penalty... am I wrong in this line of thinking?

For insurance. I have work provided life insurance @ my annual salary. I can add more for extra money… but I have no dependents and no wife. I have medical/dental. I have accident/dismemberment provided by work, as well (I am pretty sure!).

I have two checking accounts because one was opened when I was 10 and linked with my savings account. The Amtrust is a money market and had 5.26% interest when I opened it… so I stored my money there. I just put all but $500 of this into my e trade account since it gets better interest.

I think I need to define my goals a little more clearly for myself after reading a few of your posts. And I do intend to go on vacation. I am going to Montreal for a long weekend in a few weeks and I am taking the g/f to Chitown (her hometown) or California for a week vacation in a month or so. So for the poster on a high horse, she is not “understanding” as that insinuates she puts up with how I choose to spend money. She actually is very much like that... and we both do not see the point of buying a brand new Lexus when a 3 year old Toyota will do just fine. Or the point of getting a $100/mo cable on demand subscription when hulu.com exists.

She would choose a quesadilla and rice while drinking a miller lite watching college football over a fancy dinner in downtown Manhattan. And she wants a small house. And a small wedding. And no ring that requires me to start an engagement ring savings account that I deposit $300/mo into.

Thanks all for the different sites and suggestions. I will surely look into the two bankrate sites, CDs for 6 month terms for keeping money accessible, and other things noted.

[Sara]

@Dan Why does he need life insurance? No one is dependent on his income, and the money in his retirement accounts would cover funeral costs in the unlikely event that he dies.

[Julia]

OP, you are doing awesome! I graduated with a big school loan to pay off, but I lived frugally and saved lots for years. In 10 years, you'll be amazed at how living frugally in your youth and investing for the future has paid off even then! (Even with this crummy economy....)

The maximum that an employee at your age can contribute to a 401k is $15,500. However, I'd look into doing a Roth IRA max contribution before maxing out your 401k. With the market being so far down already, it's probably okay to just make a big contribution to your Roth at once, or perhaps put half in at once, and then the second half. If you do the monthly contributions, then you are taking advantage of dollar cost averaging. When the shares are more expensive, you're buying less of them. When they are cheaper, you're buying more. One thing to keep in mind is that your initial contribution may need to be a minimum depending on who you go with, like $1000 or $2000 anyways.

I agree that you don't need life insurance. If you keep up your lifestyle and get married, if your wife can maintain her own living, there still isn't a reason to buy life insurance, IMO.

You can give to charity now or you can invest your money and give to charity off those investments. Bill Gates may be respected for donating a ton now, but if I recall correctly, people used to give him a hard time because he wasn't charitable in his younger days.

[Susasn]

Refreshing Mr. 22 year-old,

I don't think you will need that many suggestions. You have the discipline and the desire necessary to create a really smart and tidy financial profile and a safety-net when the unexpected happens. Good luck, I know you'll be great!

[Big Cheese]

Skip life insurance but go for disability insurance.

I made about the same as you after I graduated with a Masters at age 23 - this was back in 1996 though. Save it up in cash, take 50% and invest it in equities (risky but you could make a lot of money in a recovery). Keep up your discipline and live frugally even as you make more money- or at least raise your lifestyle slower than your income gains.

I was where you were at 23 and now at age 35, have a net worth of about $1.5 million. Interestingly I didn't get any big windfalls through inheritance, stock options or crazy housing appreciation, or equity gains. It was almost all through savings and small appreciation of smart investments. I'm sure you will get some fast compounding as well and will do just fine.

-Big C.