Reader Profile: LN

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.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

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

Please tell us a bit about yourself.

I’m a 27 year old female, single and live in a large city. I work as a nurse, so my job is pretty secure as long as people continue to get sick. I went back to school for my nursing degree in my mid-twenties, so what little savings I had accumulated before that point were used for school/living expenses (we were not allowed to work during my program). I started my current (and first) nursing job a little less than two years ago, and it was 6 months ago that I really began to focus on budgeting and saving. I currently share an apartment with my sister, so we’re able to live pretty cheaply in a fun (and otherwise expensive) part of the city.

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

Average Take-Home Pay: Post-tax and insurance pay is about $4100. I’m an hourly employee so it varies based on if I work overtime or take vacation.

Monthly Expenses:

• $725 rent
• $175 utilities/phone/internet/TV
• $80 gas and auto expenses (I live very close to work)
• $20 renter’s and flood insurance
• $300 food (includes eating out)
• $95 gym membership
• $30 charity
• $270 misc. expenses
• $640 savings (this is what I budget for, but it’s usually closer to $800)

Discretionary: ~ $1,750

Assets:

• 2003 Honda Civic - paid off
• Old 401K - $2,900 (in the process of rolling this over to an IRA)
• Cash Savings - $13,000 (divided up as below)
• Emergency fund - $7,000
• Travel fund - $600
• Xmas fund - $300
• General Savings - $5,100
• Cash - $3,000

Debt: NONE!

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

I just finished paying off my students loans this last month. (yea!) I’d been paying about $800-$1100 per month because I wanted to get rid of them quickly for my own peace of mind. Now that I have that extra money freed up every month I’m not sure the best way to allocate it. I’ll also be getting a raise next month, which will give me a bit more money to work with as well.

My long-term savings is obviously lacking, so I’d like to tackle that first but I’m a little more afraid of putting money in the market as aggressively as I had been with paying my student loan. I’m also a bit naïve about where to put my money in terms of specific funds. I’m reaching the two-year mark at my work which will make me eligible for a 6% match on my contributions to our 401K, so I intend to use that as soon as it’s available. I’d also like to max out my IRA. Beyond that I’m not sure if I should put the excess in short-term savings, the market or some other financial option.

I’m also wondering what people think the best option is for saving for a house. I know that you are able to take money from a 401K penalty free if it goes toward your first home, but I’m not sure if this is the best place for me to put that savings or not. Just to clarify, I’d be putting money in this account specifically for this purpose in addition to retirement money, not taking money from my retirement allocation for a house.

What are your plans for the future?

I have many plans! In the next 1-3 years I’d like to replace my sturdy Civic for a newer vehicle. At this point I’m planning to let fate decide the exact time based on when something major breaks. I’d also eventually like to get a home, but probably not for another 5-7 years as I’d like to live in a few different places before settling down. I’d also like to go back to school for a master’s in nursing within the next 10 years (preferably closer to 5). They have a lot of options through hospitals that provide partial reimbursement for education expenses.

Also, the flexible schedule in nursing makes it fairly easy to go to school and work at the same time, so I don’t anticipate there being a huge change in my financial situation, but I’d like to have some extra money set aside for this anyway.

What is your best piece of financial advice?

I love using percentages. When I first started budgeting this year, I broke down what percent of my income was going where every month. Then I was able to see if this was in line with what was important to me in my life. For example, before I started tracking my finances I had been spending A LOT of money eating out and hardly any money on travel. But I enjoy travel so much more than I enjoy food! So I started allocating a certain percent of my income every month toward travel, and if I don’t use it that month it goes in my travel savings. Because of this (and again, the flexible work schedule) I’ve been able to go on three trips in the last two months.

I’m also a huge fan of getting rid of the feeling that I’m “checking account rich.” Anytime I see that my checking account has gone above the average amount I keep in there (and I know I don’t have a big expense coming up) I immediately get rid of it into savings or paying off my loan. This way I always end up saving more than I budget for without really feeling it, and the temptation to spend it on something frivolous is taken away.

Comments

[LN]

I just wanted to clarify a couple of things that I left a bit hazy in my post. The discretionary income section includes the funds that had been used to pay for my student loan that have not been assigned in the new budget yet. That $1750 divides up to be:

$1000 – Recently unallocated funds
$750 – Discretionary

I realize this is still a pretty high amount to allow myself for discretionary income, but I’m cutting back slowly and usually don’t spend this full amount.

Also, I finally got my Roth IRA set up and my old 401K rolled over. For now I've invested in a lifecycle fund because it was the simplest option for someone new to the market. I’d like to get involved in index funds when I have more capital available and when I learn more about investing.

[DM]

"I know that you are able to take money from a 401K penalty free if it goes toward your first home"

Note that this is considered a loan from yourself and you would still have to pay it back. You may be thinking of a Roth IRA, which lets you take out your contributions anytime penalty free, and you don't have to pay it back.

In terms of where to allocate your savings, I would divide it up among your future plans for a new car, a house and a masters, based on importance to you/expected timing of the event.

[Kurt]

You're in good overall shape, congrats!

A few thoughts:
- I'd accumulate the house down payment in an FDIC-insured savings account at a place like Ally, CIT, or American Express Bank (I mention these only because they typically offer among the highest APYs). Yes, the interest rate will be low (less than 1% today), but your plans will never be derailed by a stock market crash (there have been two in the past 13 years). Alternatively you could invest in a short-term bond fund, but I think the rate would be comparable, you'd be sacrificing insurance, and you'd be subject to interest rate risk.
- Since you live in a large city and close to your work, if you can use transit or walk to work, consider joining a carsharing organization instead of replacing that Civic when the time comes. Could save you a lot of $$. If you're determined to be a car owner, start saving in an FDIC-insured savings account so you can pay cash for the vehicle. Don't bite on even a 0% financing offer--you can get a better price for the car if you pay cash vs. 0% financing.
- Of course you want next to max out all retirement savings vehicles, even if there's no immediate tax benefit (a current year deduction).
- If you still have surplus cash after retirement saving, car fund (if desired), and house fund, you could either dive into getting educated about investing or hire a fee-only financial planner.

[VA]

Great job and kudos on paying off the student loans! What is the difference between "emergency savings" and "general savings"? Is general for your future home?

Since you don't have exact plans for buying a home, I'd suggest a Roth IRA as the best vehicle for saving for a home. The account has to have been open at least 5 years in order to apply earnings to a home purchase penalty-free. It's riskier than a savings account, but it doesn't sound like you plan to buy the home anytime soon. Plus if you decide not to buy a home, no harm done.

In general, based on your expenses I don't think you need more than 10K in cash savings. You have stable employment, and investing is what will help you grow your money. You're 27 so time is your greatest asset! It's all about the compound interest.

Good luck :)

[Walden]

Sounds like you're doing great, and congrats on paying off your student loans! If you think nursing is a career you want to stick with, I would absolutely recommend getting your MSN. I'd also recommend pursing as many additional certifications as possible, with an eye towards what kind of nursing you may want to do in the future. Quality, Compliance, Utilization Review/Management and Case Management are all growing fields that can offer opportunities for more traditional work schedule down the line (easier if you want to have a family). Good luck!

[B]

In my opinion, you shouldn't save for a house until you are fully funding your retirement plans each year. Others will disagree. But a house, in my opinion, is a consumption item, for the most part (so many unexpected costs); whereas, your retirement savings are going to compound and you should be super focused on maxing them out, most especially while you are young.

[Mark]

I think those lifecycle funds are a good option for most people. If you have such funds in your 401K I recommend using them. If you don't choose a solid balanced mutual fund. Balanced funds buy a mix of stocks and bonds.

Realistically, you will need to save 15% (more is better!) of your gross pay for retirement, consistently for decades if you want a decent retirement. You can comfortably afford it, so do it! Personally, I would NOT mix retirement savings and house savings in a retirement account for lots of reasons. Just save for the house in a separate savings account.

Good balanced funds that are common in 401k plans (any of which would be good choices, but my favorites would be on top of the list):

T. Rowe Price Capital Appreciation
Oakmark Equity & Income
Vanguard Wellington
Dodge & Cox Balanced
Invesco Equity & Income
American Funds Capital Income Builder
American Funds Income Fund of America
American Funds American Balanced
Janus Balanced
Fidelity Balanced
Fidelity Puritan
T. Rowe Price Balanced
Vanguard Balanced Index

[ALR]

Congratulations on paying off the student loans and the newfound freedom that goes with it!

If I were you I would max out an IRA and then save enough in a 401K to either get your full employer match or have total saving 15% of your income in retirement vehicles.

I'd split the rest of your savings 30% travel and 70% house but if the house purchase is further off you can adjust those percentages.

I wouldn't put any money in the stock market that you'll need in the next 5 years. I think the best place for your short term savings is 2 yr CDs and then you can revaluate when they mature.

[FMF]

This is from JNEW -- he's having trouble posting a comment.

I agree you are doing great!

When you are young, you have a big advantage. I am a big fan of time and compounding interest. It is a great tool for accumulating wealth. Obviously you, at 27, have that advantage available to you and you should take advantage of it.

That means you need to start investing money asap. Start maxing out your 401k (and get the match) and maxing out your Roth too. Do this every year from now to 65 years old and you will probably be a millionaire.

You have to bulk up your emergency saving a bit I think. In this day and age I usually like to see 8 months expenses available.

After that--I would start saving as much as possible in an investment account. I like Vanguard because they are customer friendly with the lowest cost investments around. But fidelity or another discount brokerage is ok too. You can use this account for increasing your liquid net worth and when you need cash for other investments(I) for your down payment for a house and (II) for you education.

I absolutely think you should go back and get your masters degree. That will most likely increase your lifetime earnings and your potential to save and invest. Get your job to pay for as much of the cost as possible.

I love percentages too. I use them the same way you do-- to make sure my money is going to places that are important to me. I do the same thing and it’s a great exercise. I also think your idea about avoiding feeling "checking account rich". Great system in my opinion.

Finally-- as far as feeling a bit vulnerable in the stock market? I get it....we all have that feeling a little bit. But the fact that you read this blog means you are educating yourself and that is exactly what you need to do. Keep it up.

What I have found is that for money that you do not need for a long time (20+ years)-- that money should be invested in stocks or stock funds or stock indexes/ETF's. Money you need mid term ( 5-15 years-- like for your house) should be invested a bit less aggressively in balanced funds or the like ( with both stock and bonds). Money you need soon (<5yrs) should be in cash in the bank in a CD or a money market or a savings account. Obviously this is a bit of an over simplification but generally it is solid advice.

Whatever you do-- make sure you are comfortable with it. Read the Millionaire Next Door. Read Personal Finance for Dummies. Read the Bogleheads Guide to Investing. Check out the Vanguard website too. Its not all that hard to understand once you start to educate yourself.

Good luck !

JNEW

[LN]

Thanks for everyone's advice! I've already started putting money in my IRA, with the goal of maxing it out before the end of the year (which I believe you can keep contributing to the 2013 limit until March 2014..correct me if I'm wrong).

I'm going to try to hold on to my car for as long as possible. Unfortunately the city I live in is not easily maneuvered by public transit and is also not all that bike friendly (to be honest, the roads are not really car friendly either). Since I live in the middle of the city, I did purchase a bike and I've been using that to travel to nearby locations. I've been working nights which provides me with free parking. However, for my sanity I'm switching to days, and my plan is to ride my bike to work to avoid the high parking fees.

Thanks again to everyone for the advice and encouragement!