Reader Profile: CR

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader CR. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 22 year old male working in a major city on the east coast.  I graduated from college in May of 2011.   I have a B.S. in Finance and started working in August of 2011.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

I am lucky enough to be living at home so I do not have a rent expense.  Most of my money goes toward building my savings as well as paying off my student debt which stands at about $55k.  This has been a struggle to cope with.  It’s frustrating knowing that amount of debt hangs over you.  It makes you feel as if you cannot move forward in life with some of the things you’d like to have happen but I continue to make the most of my situation because I realize others have it worse.  I am grateful for having a job and having the chance to get a college degree – albeit at a high price. 

Here is a snapshot of my monthly financial situation.  I take home roughly $2,900 a month.  I direct deposit $1100 of that each month into a savings account.  My savings account is at about $5500 at the moment.  I have about $2k in my ‘general’ checking account and about $600 in my ‘bills’ checking account.  I direct deposit enough to cover my monthly bills into my ‘bills’ checking account and the remainder (after savings account deposit) into my ‘general’ account.

I pay off $750 in student debt each month.  I plan to move into my own place towards the end of 2012.  With this in mind, I will be trying to pump as much money into my student debt before that happens – living near a major city is pricey and I’m preparing as if I won’t have much to save.  My plan is to build my savings up to about 11k which should happen around June.  At that time I will begin to direct deposit less money into my savings, about $550, and begin to put about $1300 towards my student debt per month.  I’m hoping that my savings will reach about $14k at the time of moving out.  With respect to my company’s 401k, I plan to begin to contribute once the match kicks in (after a certain time of employment).  I realize it is very important to start pumping money into a 401k early – time is the critical factor IMO.

Other expenses are as follows:

• Car/Insurance/Gas: $550
• Cell Phone: $60
• Gym: $20
• Cable/Internet (live at home but I chip in): $85
• Food: $50 (as I said I live at home but set aside a little money for lunch  out a few times a month)

This leaves me with about $375 a month for spending freely.  I usually don’t spend that much and I think that’s why my ‘general’ checking account has reached $2k.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

Paying off my student debt.  It’s been looming ever since I was approaching my graduation date.  I constantly thought about it but I’ve recently been able to cope with it much better.  Direct deposit is great because it allows me to stay disciplined in both savings and paying off the debt.  I’m not sure if my current approach is the best one.  I wanted to build up a big enough savings while taking into account my expected move out date and subsequent rent expense.  I’m not sure if I should be focusing more on student debt NOW rather than in 6 months.

What are your plans for the future (retire early, build your career, etc.)?

In reading FMF, I’ve had the pleasure to pick up useful tips and words of encouragement.  One thing that I am and will always do is further build my career.  It’s my biggest asset and will have the most effect on my financial situation moving forward.  At this point it’s really my only plan for the future.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

A lot of it comes down to just utilizing a variety of tools that keep you disciplined.  As I mentioned, direct depositing my paycheck into certain accounts helps me a lot.  It keeps me organized and sets me on the path that I’ve chosen (although I’m not sure if my approach is the right one at the moment, it keeps me on it each month – that’s why I’m writing to FMF).  I think starting early is very important too.  Getting a hold of my budget  at an early age really prepares me for all the curve balls that I’m sure will come my way as I grow older and gain more responsibilities (wife, family, career).

Comments

[Rick Francis]

CR,

It sounds like you have a reasonable plan- I do have some suggestions:

Set up the 401K plan even if you are only contributing 1%- that way when you are eligible for the match you can just boost your contributions. This will get you into the habit of investing.

I understand you want to get rid of those student loans- but there may be more important things to do. You didn't state what the interest rate on loans. If it is very high prioritize paying them off. If the loans are low interest- consider putting some money into a Roth IRA instead. If intermediate do some of both. You can still contribute for 2011 until Apr 15th. Even if you only contribute a small amount this year set up the account is worthwhile as it makes it more likely you will contribute in the future. An automatic contribution from your checking account each month is a great way to ensure you contribute your goal amount.

-Rick Francis

[I Am 1 Percent]

CR, you're doing quite well for man your age. I think you should begin contributing to your 401k regardless of the match OR contribute to a Roth IRA. The best thing I did was invest early to capitalize on the compound interest.

You make a decent income, so I wouldn't worry about the student loans. The interest is tax deductible for you.

As you stated, the best thing you can do is apply yourself on the job. Take on projects. Take initiative. This will lead to more opportunities. See if your company will pay for an MBA.

Otherwise, you seem like you're not spending excessively and are certainly within your means...

[Luis]

Can you use public transportation to save on gas, car maintenance and car insurance? Not to mention stress. This is also a habit that can save you thousands over the long haul. Most big cities have these Park N Rides where you can leave your car and go bus into the city. You didn't say what your work hours are like, don't worry if you are 50+ hours or need flexibility.

Direct withdrawal $416.66/month into a Roth IRA account. Vanguard is great, hint hint. Index funds or no load mutual funds are the preferred ways to invest the Roth IMO.

Your move out plan sounds good to me, but do budget conservatively on selecting an apartment with moderate rent when that time comes (i.e. no pools, etc.)

[Young Limey]

I understand your frustration with your student loan debt. However, you are taking the right steps by reading this blog. I'm 35 and it feels like I was in your situation just yesterday. My advice:

Top priorities:

1. Open Roth IRA before April 15 and fund it with $5000 for tax year 2011. You can pull out this money if needed for an emergecy. Number 1 priority each and every year. This money grows tax free. Vanguard Index funds, or index exchange traded funds are great tools.

2. Contribute 10% to your 401k, even with no company match. Try it for a month, trust me, you will barely miss it, and it will help build the foundation for you.

3. Continue what your doing, you've got a great start! You can focus on 3/4 priorities at once.

[Luis]

Young Limey suggested putting 5k of your $5500 savings account into the year 2011 Roth. Were you planning to use it for a down payment on a home? I do not have any problem with the suggestion but you might want to think about depositing the Roth contribution into a regular money market account and then draw from that account into a mutual fund using the dollar cost average approach. The stock market is way over valued at the moment IMO.

[Young Limey]

I completely agree with Luis to dollar cost average into the mutual funds. You can spread that out over the course of the year. I typically try have my trade commission be 1% of my investment cost. (i.e: Invest $700 at a time, if the trade costs $7.)

[Rick Francis]

@Young Limey

> I typically try have my trade commission be 1% of my investment cost.

Even better some brokerages have 0 comisions for some ETFs-I'm using TD ameritrade which has a whole selections of vanguard ETFs comission free. I beleive Schwaub offeres their ETFs comission free as well.

-Rick Francis

[Leigh]

CR, it sounds like you are doing well. What interest rate is your debt at? Are you sure that paying it off as quickly as possible is the best decision? What about buying a house or saving for retirement?

What I would probably do if I was you is as follows:
1) While making the minimum payments on your student loans, build up emergency reserves of 6 months expenses (at a level including your estimated future rent). I like to keep 2 months of expenses at a savings account with my checking account for easy access in emergencies and the remaining 4 months with ING Direct or Ally earning higher interest.
2) Once you have that savings account established, think about your next goals. Do you want to buy a house? Do you need to replace your car? Is contributing to a Roth IRA in addition to your 401(k) part of your retirement plan?

One of the problems with paying off debt instead of keeping the cash is that you don't have that flexibility later to be able to use it for something - once you've paid off the debt, the money is gone.

What are your financial priorities? And for each order, why is that one in that order? Why is paying off debt a higher priority than building savings? Keeping your finances in check is a constant balancing act between the various priorities.

Good luck - it sounds like you're off to a good start reading FMF and thinking critically about these things.

[CR]

Thanks so much for the responses. I appreciate all of the feedback and it's exactly why I wanted to post my Reader Profile. I'll address a few of the questions some of you posted.

My interest rates vary from lender to lender. A third of the $55k I owe is at an average of about 7.5%. Another third is at about an average of 5.5%. The final third is at about 6%. I pay the minimum payments on the two lower interest bearing loans and pay double the minimum on the 7.5% third of my loans.

I currently do take public transportation into work. I'm leasing the car I have now (its something that I regret now but at the time needed a new car and felt leasing was the smartest decision). I'm planning on moving to an area where I won't have much use for a car - at that point I'll have about 2 years left on the lease. When I move out, I'm hoping I can somehow unload the car and get rid of the car payment/insurance payment (working on a deal with my parents - fingers crossed they help me out).

I'm not planning on using my savings to purchase a house. When I do plan on moving out at the end of this year it will be to an apartment where I'll rent.

I guess the reason why I want to get rid of the student debt as quickly as possible is because it just seems as if its looming over me and getting in the way of other things. I realize that there are ways that I can benefit from putting my money towards other areas but to me the feeling of no debt (or at least on my way to becoming debt free) is something I'd like to experience sooner rather than later.

I plan on pursuing opportunities to build my career. I am looking into the CFA program - this should certainly help my career. I'm still trying to figure out if my current industry is something I will be interested in for the long haul and won't pursue the CFA until that becomes a bit clearer.

Thanks again to everyone that took a moment to read my profile. I truly appreciate the comments and advice given.

[JR]

Your off to a great start CR, good job. Couple of questions:

1. with the car lease what do you intend to do at the end of the lease or how do you plan on getting out of it if you don't need it.

2. buying a home will come up sooner then you think so i'd start to at least think about it.

[Young Limey]

If you have not already, I'd also look into consolidating your student loans. (You can do this only once.)

You may have an opportunity to consolidate them all to one company, at a lower interest rate. Just my last $.02! Should be able to find details if you google it.

[JP]

I agree with Young Limey, dump $5k into your Roth before April from your savings. You don't have to invest it into the market (yet), but make the contribution.

Watch out for rent when you move out - it sounds like your future budget could become a lot tighter when you make that step, especially with such high transportation expenses.