Many of the reader questions I get here at Get Rich Slowly follow a familiar formula. The person sends me a breakdown of her income and expenses, also sharing how she’s allocating her savings. From these figures, my correspondent wants to know if I’d make changes to her budget.
Unfortunately, I’m not qualified to answer questions as specific as these. (And I don’t have time to answer them all!) That said, there are often certain themes, such as: “Am I saving enough?”
For instance, Kailey wrote recently with the following question. To me, it’s clear she’s saving plenty — but how should she allocate what she saves? That’s the question. Here’s her e-mail:
I’m 25 and about three years into my professional career. I’m pretty diligent about savings and contributing to my 401(k). Of course, I never feel like I’m saving enough, even though I’m fairly confident that I save much more than many of my peers.
One-third of my income goes directly into my ING account for my emergency fund (which is fully funded for approximately one year of living expenses) and now is being used to accumulate money for a down payment on a house/condo. Unfortunately, I live in Southern California, and in an area where that 20% down payment doesn’t seem to be within reach in the next couple of years. In addition to the 33% of my income being directly saved, I also contribute 8% to my 401(k). This 8% allows me to take full advantage of my employer’s generous matching contribution each year. I also have an automatic annual 1% increase to my 401(k) contribution.
The problem lies in that I never feel like I’m contributing enough to either my savings or my 401(k). How many GRS readers actually max out the federal contribution limit of $16,500? I don’t feel that this even seems realistic or attainable on a decent life style. And is it really a good idea to increase that amount by significantly decreasing the amount going into my savings each month?
Taking advice from GRS, I opened a Roth IRA a few month back with $3000 of the $5000 limit. This definitely increases my percentage of income saved. However, it would still be interesting to hear other readers percentages and/or thoughts on my progress given my age.
First of all: Wow! Kailey is saving almost half of her income. That’s awesome. Although she’s fretting over how to maximize her money, I think she should congratulate herself for what she’s been able to do at such a young age. If she continues down this path, she’ll be in great shape twenty years from now.
So, Kailey’s problem is a good problem to have. But if you were in her position, it’d still be a problem. How much should she save for the near future? How much should she save for retirement? These sorts of decisions can be perplexing, and unfortunately, there are no easy answers. Because we can’t know the future, we can’t know what the best choice is for our individual circumstances. Instead, we have to make best guesses based on who we are and what our goals are.
That last part is important. I always preach the praises of conscious spending — the notion that we should spend lavishly on the things we love while cutting back ruthlessly on everything else — but I think there’s something to be said for conscious saving also. (In a way, this is why I’m a fan of targeted savings accounts.)
When you have specific goals, goals that mean something to you, you’re much more motivated to save. If I have a trip planned, I’m more diligent about saving than if I’m saving for some undefined future, for instance.
In Kailey’s case, it sounds as if buying a house is important to her. That’s a good goal, and it will help keep her motivated to save. If I were her, I’d stay focused on that. She’s already putting 8% of her income into her 401(k), plus $3000 a year into her Roth IRA. That’s a good start, and if she can maintain those contributions as she saves for a home, I think she’ll be fine. Then, once she’s accumulated enough for a down payment, she can attack her retirement saving even more aggressively.
Really, though, I don’t think there’s any one right answer in this case.
What do you think? If you were in Kailey’s position, would you save more for retirement? Would you save more for the down payment on a house? How do you find a balance? And, at the same time, how do you make sure you’re not depriving yourself in the present?
Yea I think the emergency fund has to be number one..
Once you have this – you have some security..
1. You need to track it.
So build a little spreadsheet.
Target – X,000 for the deposit.
Each month track how much is in that ‘deposit account’.
Predict when you will get that deposit. (simple growth on a fund, plus monthly deposit).
If you manage to contribute another 500, then you can see by how much the target date has come forward.
That’s the incentive.
A spreadsheet or other financial tool is a great idea. it really helps you get a better sense of what your goals are and when you can expect to achieve them. I’ve been using a spreadsheet for years for my 401(k) and my husband’s. I’ve tweaked it over the years using conservative estimates. Each year I update it with any changes in salary or contributions, and I can also play with different scenarios such as retiring earlier or later, etc. You could do the same with setting up a goal of a down payment for a house and when you plan to achieve it.
I’m 28, living in the DC area (so pretty expensive in and off itself).
I contribute only 3% to my 401k (that’s all my employer matches), approximately 11% to my Roth to fully fund it, and then 10% to my savings account. After I deduct money for my bi-weekly budget and bills the leftover goes into a “short term” savings account. It’s not really savings, but it’s money I set aside to pay off car repairs, insurance, donations, and smaller purchases for myself, what have you.
I also feel that I am neither saving enough, nor have enough to spend on things I’d like to do (e.g. going out to eat, going out to the bar, vacation,etc.) There are things I could cut back on, but I don’t really want to, I’m not living high on the horse as it is. The luxuries (vs. necessities) that I have in my life are, for the most part, not something I’m willing to cut out. I could if I had to, but that would be more in an extreme situation where I needed to and in most cases, I probably wouldn’t be as happy if I did.
Ultimately, in my case, I just don’t think I make enough as I would like. I’m not poor, but I’m definitely not making a whole lot either for the area I live in.
You seem to be doing pretty good. I think the key for both of us is to learn to be happy with what have, since it appears neither of us is struggling to get by.
I think you nailed it on the head! I am definitely trying to be happy with what I am able to save and with what I have currently. I seem to be doing pretty well at this point and can only change how I percieve my current situation!
Kailey, I agree with the above poster. And as I am in (almost literally) exactly the same situation as you, I will add something that I must remind myself of:
You can’t save your way into absolute security. There’s no such thing.
I don’t know if that’s an issue for you, but I’ve realized that part of my extreme saving comes from trying to ward off any hardship. But I can’t control fate.
After saving 15% of your income for retirement, maybe something for a far-off, potential down payment, and a little for short-term savings…just spend the rest, man. If you don’t HAVE any savings goals, then why save? Why not use more of your money to enjoy life here and now?
I believe you should be maximizing the contribution to your 401k before you even think about contributing to your Roth.
However maybe someone else more knowledgeable can comment…
@Alan – Not necessarily. You should ALWAYS contribute the minimum amount or percentage required in order to max out the employer matching contribution. For instance, if your company matches dollar for dollar up to 6% of your salary, you should contribute AT LEAST 6% so you can get the full amount of “free money” from the company. After that, it may be wise to switch focus to the Roth and max that out, since there are income restrictions and it’s the only vehicle that grows tax free (no taxes paid when you withdraw at retirement). After you max that $5,000, then any extra money could go back to increasing your 401K contribution or another retirement vehicle. Be careful with $ over the company match amount in a 401K – some plans do not have very many or very good investment options (high fees, low returns, etc).
@LC, because the contribution limits on a 401k and a Roth are completely separate … you can contribute the maximum to both … taking the tax savings with the 401k is a good idea. Especially if your investment horizon is long, as Kailey’s is at 26.
Kailey is saving from 10 – 38% on every contribution to her 401k at the time of the contribution. In today’s environment, it is hard to find any investment that earns that kind of return. Imagine being able to buy a bond with a 38% discount.
She will have to pay taxes on the money eventually, yes, but that is over 44 years in the future. While everyone is “sure” that taxes will increase, no one really knows. We DO know that that the tax advantages today are real, and bankable.
Depending on tax bracket, a younger person should look closely at the tax advantages of contributions to an IRA or 401k, and consider the time value of money.
@Frank – That is true, too.
I suppose the point is that there are many variables and many angles to consider. For me, I find it best to have my money diverted several ways, including those which tax now and those which tax later.
One should also take into account their current and future projected income. One benefit to maxing a Roth now is that, if you expect your income to grow above the limit, you will at least have a nice egg in that account which can grow tax free with no tax on the earnings. If you don’t need the tax savings now, or if you are in an income bracket where you are gaining negligible current day tax benefits, it may be more advantageous to put the money in a Roth. You can then divert more funds to the 401K or other retirement vehicle once you are over the limits or when you have enough to max out, etc.
If you have money in both types of investments, you can decide how to best withdraw at retirement regardless of what the US tax code does.
There’s no right answer or one-size-fits-all approach. It’s not formulaic. There are risks, disadvantages and advantages from all sides.
Kailey- great job on savings. The one thing that I have found, and I am now in my mid 30s, is that it get’s harder to save as you get older if you plan to someday have a family. We still save a lot of money, but I was able to save more when I was single. I am SO glad I saved as much as I could when I was younger.
In terms of whether you should save more for a home or retirement. 401ks and Roth IRAs are great accounts b/c your savings can grow tax free. If you can, I think you should save as much as you can in each of those vehicles.
If you really want to buy a house can you do a little research on how much the kind of house you would like to buy costs? Then you can put a concrete number on what you will need for a down payment. Also, think about when you might want to buy this house. There is nothing wrong with renting and having flexibility to move, especially when you are young. If you think about when you want to buy a house you can then say, ‘I need to have X amount of dollars in Y number of years’ and get a better idea of how you should be allocating your savings.
I feel the same way, a year out of college. What works for me is designating some amount as “fun money” and what I need for bills and then the rest goes into saving. So I don’t feel like I could be saving any more. My emergency fund is a lot lower (about 3 months of expenses) but this is due to having a few back up plans for emergencies. I will probably bump it up soon.
In my savings account, I have several goals set up and these keep me motivated to save. I like setting even smallish goals too. For instance, I have a travel fund, a moving fund, and a new car fund in addition to my emergency fund. I like being able to allocate my savings towards these goals; it’s what motivates me.
About your down payment: if you are discouraged, maybe look and see if you really want to buy a house. Is it practical? How long would you have to save? Would you be willing to pay some PMI and put down less than 20%? Some introspection might help you decide what you really want. And then you should go for it.
And your retirement savings are about what I am doing as well, and I also plan to increase 1% a year. I think it’s easier for people with more experience to get closer to fully funding their retirement as their salary increases.
I think Kailey’s doing a fabulous job. My wife did something similar before we met, but she did save more and her lifestyle was more spartan. That she’s saving to take full advantage of the employer match and is beyond 50% on her IRA I think is great. It might be better to save more, but if she’s consistent, she can certainly build momentum within her accounts that can make up for a non-maxed out contribution. I think consist saving is more important year in and year out is the important habit to get into.
We’ve been struggling with this recently as well. http://nicoleandmaggie.wordpress.com/2012/01/09/we-may-not-contribute-to-the-ira-this-year/
We’re maxing out our 403(b) and since we’re state employees, we have the option to save another 16.5K in a 457. This year we’re maxing the 457 for DH but not for me. We can definitely feel it in terms of how much free cash we have on hand each month, even though we haven’t changed our spending. In previous years we threw that extra money at the mortgage each month which was more relaxing because it provided more flexibility.
It’s much easier to optimize money than it is to optimize happiness… if you want to optimize money, max out all your tax-advantaged savings vehicles. Only you can make the decisions about what kind of saving will maximize your happiness. And there are probably several different choices you can make that will make you equally happy.
My one caveat would be to keep saving 10-20% of your income in retirement accounts and to really make sure you have that 20% down before buying a house. Especially someplace where houses cost a lot. You don’t want to be stuck underwater on a house and you don’t want to be in a situation where your job situation changes and you can’t pay your mortgage anymore. Having had the discipline to save 20% down makes it less likely you’ll get into that kind of trouble (even if interest rates go up).
I would say to put money where it matters most. I think her retirement contributions are enough right now. I personally would try to maximize my Roth before saving up for a house, but would use any extra to go towards the down payment.
Saving can be for number of things, we need to prioritize our saving goals and allocate funds for each of those goals. You should continue saving for as long as your goals are not met. I don’t think that need for saving would ever stop. Once you get all you wanted, you might want to grow your estate or give to charity. You need a saving goal for each of them..
Here is one shameless promotion of my own post on this saving priority thing, hope this community find it ‘ok’ to share.
http://onecentatatime.com/how-to-prioritize-savings-goals-a-5-step-fix/
I never have a problem with commenters leaving a link to their blog article as long as it’s relevant, as yours is. It’s the shameless recurring plugs that have nothing to do with the topic at hand that are irritating.
Thanks Mary, appreciate the feedback. This community is great!
Wow! Kailey’s progress is impressive. Having faced turmoil in my career, I agree that establishing an emergency fund would be my #1 priority if I were in her shoes. However, I would set an amount based on her future lifestyle, not her current one. I’m close to meeting my downpayment amount, but having a home means I want a larger cash cushion as my monthly expenses will be higher, not to mention repairs and maintenance. I agree with the comments above to do some serious research about the type of home she wants to buy. I’m making sure I boost my emergency fund before I buy.
One thing I wish I had done sooner was set up separate accounts — one for fun money and one for charity — to which I made automatic monthly contributions that weren’t part of my net worth calculations. Both are helping me find some financial balance.
One last thing: when you’re a dedicated saver, it’s always going feel like you can never save enough. Sometimes you just have to remember you’re doing the best you can and while it’s great to plan for the future, you have to live in the present too. Seeing how much other people save can be daunting — but ultimately you have to do what’s best for you.
My husband and I max out our 401k (or 403b/457) and Roth IRA accounts. One big difference it that we are in a much lower cost of living area than Kailey.
I’d say to make sure you are saving at least enough in the 401k to get the company match and also max out your Roth. I think the automatic 1% increase you are doing is a great idea, too.
It seems your emergengy fund is fully funded, so saving for a house is a good idea. From looking at house prices in your area, get a savings goal for a down payment and a timeline.
Don’t feel that you need to rush this–we rented for 5 years before buying a house and are glad we did. Some housing markets are actually better deals for renters than buyers. Your family situation might change, you may get a job in another part of the country, and the type of house you want might change, too.
Finding balance between current wants and future needs is tough. However, I know that in my case that any additional luxuries won’t really make me happier that I am currently.
I am curious, like the original writer, whether when you say you “max out” your 401k you really mean the $16,500 limit? Or do you mean pay the most that gets you a company match? It boggles my mind when I hear people say that they max (like you have said). Two 401ks and two Roth IRAs is $43,000 a year! Even if you made just under the max to contribute to a Roth (just under 160k) that’s still more than a quarter of your income. I know you said in a low cost area, but really I’m rather and impressed (and jealous) that anyone is able to make this happen. Of course I am also just starting out, so the amount one would have to contribute to max out these accounts is more than I made last year in a high cost metropolitan area. Kudos to you!
Yes, I actually do “max out” the accounts as you described. It took me a few years to work up to this level, though.
I started like the poster with 5% in 401k and $4k in each Roth, and increased from there a few % each year. Savings is a little addictive that way. I didn’t really miss the money I was putting away.
I do live in a low cost area (small city in the Midwest). I have a high income compared to others in my area, which makes it easy. Even the Jones’s here aren’t living too extravagantly, so there is less temptation to spend.
My answer to the question “How much should I save” is “100% of what you do not spend,” and I’m not trying to be a smartass. But to me, it’s a lot easier to budget out your rent, utilities, food and other necessities first, then say, “I have x leftover, That’s what I should put it into my savings account.”
For people who have a hard time saving anything, I think then you should make it a priority to “pay yourself first” to make sure you’re saving some amount of your income on a monthly/bi-weekly/whatever basis, and trimming the fat in your budget elsewhere. Currently, Kailey is up to 33%, so she doesn’t really fall into that category, and I think has got to be way above the average savings rate. The only way to increase it is to take a good hard look at what you’re spending, and determine if its worth it to your happiness (JD’s conscious spending idea) to cut back somewhere.
I have maxed out Roth IRA and 401K since I started working fulltime 20 + yrs ago. ( believe me, it doesn’t add up to as much as you think it should. ).
My thought was and what Keaily should think too is :
“Wow, I’m working fulltime! I have never made this much money before! I wouldn’t miss the amount I “don’t see” that is taken out for retirement right away.”
“How many GRS readers actually max out the federal contribution limit of $16,500? I don’t feel that this even seems realistic or attainable on a decent life style.”
Keep in mind that you’re early in your career. In not too much time you’ll wonder how they expect you to retire by ONLY letting you put in $17,000 (2012) a year! :)
I hope we all get to that point, BIGSeth :)
Companies set limits too. For example, I can contribute up to 25% of my income pre-tax to my company’s 401(k) plan. Thus, if you make under $66,000 per year, there is no possible way to contribute the max.
I put 8% of my pay into my employer’s version of the 401K. 5% of that gets matched.
Unless your company’s 401K plan has great investment accounts, you might consider only contributing up to the max and switching the rest to another investment vehicle. Many 401K plans have limited investment options and some have higher fees, etc. Just an idea someone shared with me early on. :)
If you know you plan on leaving the company within a few years, I say you should max out your 401K no matter how bad the plan may be. When you leave you can rollover that money into an IRA with presumably better choices, but if you don’t contribute you will not have the option to make up for those years of lost contributions.
But if you’re not paying taxes on the money now – it would have to be a pretty stellar alternative option to make up the difference. for example – if I contribute 10K to my 401k I’d only have 8200 to contribute to a none 401K vehicle since i would have to pay taxes on it.
Great job! I’m really impressed. I think first you should relax because, as you acknowledged, you are way ahead of most your age (and probably ahead of many much older). Also, you acknowledge that your company has a generous matching, so it’s not just you contributing to your retirement.
I also work for a company with generous matching and profit sharing that is contributed each year. Most years, 25% or more of my income is put into my 401k, but it doesn’t all come from me. I sometimes get concerned that *I’m* not maxing out, but I also have to consider other financial goals (college tuition assistance for my kids, vacation, home repair, etc). It does make your head swirl sometimes.
Kailey,
I struggle with similar thoughts quite often! I’m 26, I contribute 16% to my 401(k) and have a VERY generous employer match, but my own contribution alone does not get me to the max amount. And I still save for the EF, travel, short term expenses, etc. Sure, if I traveled less and got a roommate I could save much more for a variety of things. But you know what? I want to live alone. I want to travel while I still have the ability to trek around. So even though I feel like I should be saving more, I don’t want to be 60 and have $5 million saved up and no life experiences to go with it.
What I’m trying to say is that it sounds like you’re doing more than enough to make sure you’re in a financially sound place. Yes, you can always do more but you somehow need to figure out how to make peace with your situation. As your earnings increase with age and experience your savings will increase as well. You have the right foundation. :-)
I agree with everything you just said. I also want to at least have the flexibility of traveling before I settle down and have kids, and live in a location where I know I will at least enjoy my surroundings. I guess the saying of “live every day like it is your last” really holds true. I could put so much into my retirement, but what if something happens to me that I can’t even utilize it when the time comes?
It sounds like Kailey is a great saver. But more info is needed in order to get a complete picture of her financial status.
What’s the gross income? Is the 33% going to ING a gross or net percentage? If net, is it net after deductions for health ins, FSA’s etc? Does the 8% in the 401k (assuming that is gross) include the co. match? If not, what percentage is the match. The answers to these questions can drastically change her financial picture.
Great points. I didn’t want to bombard JD with all the details. 33% of my net pay is automatically distributed to my ING accounts (deductions include medical, vision, dental, 401K, and taxes. I don’t use a FSA). 8% to 401K is gross, and no, it does not include my company match. They match 50% of the first 5% of your base salary contributed by an employee.
I can definitely relate to you, Kailey.
I maxed out my 401(k) last year at $16,500 and I plan to max it out again at $17,000 this year. What I would suggest is to come up with a percentage of your gross income that you want to save for retirement each month and then allocate that. For example, my goal is to save 20% of my gross income for retirement. I accomplish this by maxing out my 401(k) and then contributing to my Roth IRA with 20% of my bonuses. If you want to contribute 20%, I would consider breaking that down as follows:
* Contribute enough to your 401(k) to get the full match
* Contribute up to $5,000 to your Roth IRA each year
* Contribute any further up to 20% to your 401(k) until it is maxed out
* Once your 401(k) is maxed out, invest in taxable accounts
20% of $50,000 is $10,000 and I count my employer match in my 20%. So if my employer matches 3% when I save 6%, this would work as follows:
* 3% + 6% = 9% gives you the full match on your 401(k)
* $5,000 to your Roth IRA is 10% of your gross income
* This means you should contribute 7% of your gross income to your 401(k).
Total: 3% match + 6% to get full match + 10% to Roth IRA + 1% extra to 401(k)
Now if you gross $100,000 with the same employer match, that breakdown would be as follows:
* 3% + 6% = 9% gives you the full match on your 401(k) and $6,000 in employee contributions
* $5,000 to your Roth IRA is 5% of your gross income
* This leaves you with 6% more to allocate, which I would put towards your 401(k).
Total: 3% match + 6% to get full match + 5% to Roth IRA + 6% extra to 401(k) = $3,000 in employer matching, $12,000 in employee 401(k) contributions, and $5,000 to Roth IRA
I apologize if all that math is confusing, but hopefully that helps a bit.
One of the problems that I found with debating buying a house is that it’s a LIFE decision as well as as financial decision. Financially, you have a year’s worth of expenses in reserves and are working towards a 20% down payment. Keep in mind that closing + moving costs can run anywhere from $5,000 to $12,000 depending on the size of the loan, your move, the appliances the place comes with, etc.
If you had all of the funds necessary to buy a house right NOW, would you? I realized that I wouldn’t. I don’t want a house right now. Do you want to buy a condo? I decided that I do, but if you don’t, then I would consider putting more away for retirement now and less towards a down payment since you never get that $16,500 or $5,000 contribution room later if you don’t use it up. I’m not saying to max it out now, but even putting in as much as you can and want to now is good since you can’t do it in another year. On the other hand, if you see yourself wanting to live in a house in 2 years, maybe it does make sense to only save 10-15% for retirement now and plow all of your money towards a down payment. Or are you just saving towards a down payment because it feels like that’s the Right Next Step in Life? It’s a heck of a lot easier to save towards a huge goal when you really know that you want it.
Do you also have a travel fund? Having smaller, shorter term savings goals could also be helpful as you try to tackle the large beast that is a down payment fund. Something that helped me as well was projections, using spreadsheets to see how far I was from the goal at all times and how much faster I could get there if I saved $X more per month.
Good luck, Kailey, and keep at it! You are doing well.
I’m a big fan of conscious spending and conscious saving. I think some personal finance advice is too rigid, almost to the point where you lose sight of why you are trying to save/get out of debt.
Retirement is such an uncertainty, as is anything 20-30 years down the road. When you allow people to control their spending rather than simply tell them “DO NOT SPEND,” you get closer to some advice that might actually be followed, and advice that will make people excited about personal finance.
I’d say that since she’s young, and already maxing out her employer contribution AND has an IRA, she should focus on saving for a house. Thing is, she can’t touch the retirement money for a really long time, so it’ll be good for her to have a big chunk of money in fairly liquid savings for a house, etc. If she wanted to avoid losing money to inflation and poor interest rates right now, she could look at putting some of it into short term cds. She could also think about getting a second job to bulk up her savings.
At 25 I was traveling Europe in a great job, getting ready to welcome my first child. I was saving about 3% of my income. The next six years I stayed home and we saved 10% – but he was in a job with a pension. We then spent the next twenty years living on one income and saving the other- about 30% of our overall income. We lived in rentals until we had been married 16 years because we knew jobs move people. We are now retired- but having chosen jobs the traveled we have ticked off most people’s bucket list while still mobile. Our kids were raised on three continents.
What has this got to do with your question?
I fear that you are missing life to save for a retirement that may or may not be there in 40 years. You may not even want to retire when you are 50! If your stats are right- you are saving more than 40% of your income. You are well on the way To sitting in an amazing home without cool pictures to decorate it. Take some time and money and enjoy your young life!
Don’t get into major debt. Save. Enjoy your life!
I had a middle-aged colleague pass away suddenly this year who fretted about retirement and money. All the cool vacations she didn’t take and the comfortable car she didn’t drive, for what.
Yes, it’s sad when people miss out on experiences because they are too focused on savings. For this reason I take what people call a “Once-in-a-Lifetime” trip each year (Machu Picchu, Egypt, African safari, etc). It’s not as expensive as people think.
However, if I died with millions in savings, I don’t think I’d care about not having a nice car or fancy house during my lifetime. Whose biggest regret in life is not owning a Mercedes?
Think about this when you are making a decision to save or spend your money on something.
Most regrets I hear are that people didn’t spend enough time with those they loved. Or that they spent too much time in bad relationships.
I’ve never heard anyone say regretfully that they never went to Maccu Piccu. What is this Up? And wasn’t the point of that movie that the couple actually had a great interesting (if ordinary) life.
We often contrast experiences vs. things. And yes, studies show experiences are better guarantees of happiness. BUT, what those studies don’t seem to show is how to maximize the dollar value of those experiences so you get the most happiness for every dollar.
It seems to me that spending on faraway vacations isn’t necessarily going to increase happiness measurably either. At least in my experience it doesn’t. I loved going to Europe, but other much cheaper vacations were just as much fun (or more). Will an exotic far away destination yield more happiness than a simple beach rental? And if not, is a wise use of my money?
In retrospect is it wise to spend my limited funds in ways that yield the same result for more outlay of cash?
I often wonder if I can change my spending in this area to maximize happiness?
Heather, that sounds like a GREAT idea. I’d be really curious to hear about how you do it and would love to read your guest post here or on my own blog. :)
I’ve looked at the prices of these once-in-a-lifetime trips and once every year seems so difficult – with both money and time – but what a great idea that would be. And last night, my fiance looked at me and said, we’re only on this earth for so long. Nothing like mortality to give you a kick in the pants.
Travel may not be for everyone, I just think it’s important to spend money on things that really matter to you. And I have grandparents that wish they would have gone to Egypt or Peru when they were younger and more mobile, although they are happy in their current lives.
I don’t really have enough info for a post or a blog, but an inexpensive dream trip right now would be to Egypt. Although there are some political issues there right now, I know several people who have traveled there recently and found it peaceful and free of tourists. Of course, inexpensive is a relative term.
Airfare is the biggest issue–$800 a person from OHare. Once in the country hotels, food, and transport are cheap, especially with the lack of tourists. Lonely Planet and Rough Guides have budget recommendations.
The pyramids and most major sites cost from $25-$50. If you have a student ID (ISIC) you can get in for half price.
If you still want to see pyramids and this is too expensive, head to Mexico City and see the Pyramid of the Sun. Airfare would be less than half of a trip to Egypt and there is tons to see there.
Janette, thank you for your points! You are completely right, and for that reason I just started my travels last year! I was able to go along with a Habitat for Humanity Global Village trip to Fiji, where we built a home as well as saw the sights. I was also sent to Europe for work. So I think I am just starting to realize the importance of those things along with saving!
This is a random question that I thought of while reading these comments. I am also of the “do people REALLY manage to max out these accounts each year?” camp. Does the employer match count towards the max? I’m going to assume it does – but never heard a distinction. That makes it a little more attainable in my head, since my company has a great match.
It should.
But if you do include it in your %, then you need to include it in the denominator as well since it is effectively increasing your income, not just your savings.
(saved + match)/(income+match) * 100
The employer match DOES NOT count towards the max. Your employer 401K contribution limit is entirely up to them – but the max on total contributions (employee plus employer) to your 401K in 2012 is $50,000 (or 100% of your salary, whichever is less). Technically, this means that your employer could contribute up to $33,000, if they wanted to, and it would not count against your $16,500 personal contribution maximum .
I misread the question– thought it said “does it count towards the percent you should contribute towards retirement.” I shouldn’t be online in the morning.
Actually there is an additional limit – an employer cannot put more than 25% of your income into your 401K for you. So, you can really only get to the 33K mark if you’re making significantly upwards of 6 figures, and your employer is contributing their max of 25% of your salary. most employers do not come close to the 25% since most people don’t consider all that money in a retirment fund to be a competitive advantage.
Employer contributions do not count towards the max. There is a separate maximum as to how much the employer can contribute. I believe it’s about 40%.
Kailey. I’m 7 years out of college and was in a similar predicament. Full 15k seemed impossible at the time. What I have done, and it has made me happy is this.
Year 1 – 8% to 401k to get full employer match, build up emergency fund.
Year 2 – Get a ROTH and max it out (4k at the time), while continuing the 401k contribution. Usually a good chunk of my ROTH contribution comes out of my end year bonus.
Year 3-5 – Each January bump up my contribution by at least 2 percent or more if I got a good raise. That way you never make less money, just pocket the raise.
That has made me reach the maximum without having to suddenly cut expenses or other savings elsewhere. I did do a significant raise at year 5 because I was soooo close to maxing it out I didn’t want to wait another year.
Year 6 – get an dependent care FSA, since there is now a child in play, and when getting 5k reimbursement put that into the ROTH, and save the year end bonus for down payment on a bigger house.
The trick is baby steps. Radical changes don’t stick very well, the small ones do. That applies to cuttings costs and saving money.
I think for me, I’d look at how long I could tolerate living *without* a house. Obviously you don’t want to be waiting decades. But if it’s a question of wanting to move in so you can start a family, or because you find apartment living that miserable, I’d bump up directing money towards the house. On the other hand, if you don’t find living in an apartment that bad and don’t have any houses you’re really eying, I would keep with what you got and take a little longer to get to the house.
That being said, an above poster mentioned something about enjoying your life, which I fully ditto. I’m only a grad student, and while I save well for my income, it’s not like I’m saving a whole lot. I still make sure to spend when it’s something I feel strongly about (trip to visit my sister overseas was my recent big purchase).
Kailey, I was where you are thirty years ago. I lived in SoCal, had a good job and wanted to buy a house. This was about the time that Roth IRAs were introduced. I didn’t participate, as I knew I would need the cash for a down payment. I saved diligently and finally had a year’s salary in the bank. I was so focused on the house goal that I had no idea what my employer’s retirement “plan” was. This was in the days when it took many years to become vested. I left two jobs in my twenties without becoming vested. (Thankfully, that’s changed. Search ERISA for more on that topic.)
I did not begin to save in retirement accounts until after I had purchased my first home. I now own two homes (#3 & #4), and am playing catch-up with retirement savings. I could never afford the home/area that I live in now had I not bought a starter home so early on. My payments are low enough that I can throw money into retirement accounts.
Since you’re starting at a young age, you will need to save less for retirement as it will have longer to compound. I’d set the retirement savings at 10-12% max and throw the rest into taxable accounts that you can access for down payment/improvements on your first home.
If blogs like this had existed back then, I’d have done a few things differently, but I’ve never regretted owning my own home.
My husband maxes his 401(k) which will be $17,000 this year. That’s about 17% of his pay. He gets a 100% match on first 7%.
I max my SIMPLE IRA at $11,500 which is about 20% of my pay. I get 3% match.
I am now focusing on paying off mortgage so I can begin saving money that can be used if we can retire before age 59.5 when we can easily access retirement accounts.
I have to second what some people are saying about this question writer needing to stop worrying about saving more/enough and start enjoying her life.
Absolutely what JD says about conscious spending. She sounds rather OCD about saving enough when she’s saving well beyond what one would need to be comfortable in retirement and has a year’s full salary emergency fund? At 25?
Life is about a lot more than saving half your income for a rainy day that may never come. Go enjoy the sunshine.
I have found that I never regretted having savings. Even if at 27 (when I first got a high-paying job) I didn’t need to look for something to spend on, a few years later something I really wanted to spend on found me, and I was glad to have those additional savings.
I don’t think a person needs to find things to go out and purchase or spend on. Spending opportunities will happen. In the mean time there’s nothing wrong with saving that extra money. If that money is put in retirement savings, that means later if the money is wanted or needed, retirement contributions can be cut. Better to cut long-term savings later rather than earlier in order to let growth and compounding do its magic.
Savings now means flexibility later. Just because someone isn’t spending on expensive things or traveling the world doesn’t mean they’re not living life to the fullest. Forcing those things just to fit other people’s perceptions could limit opportunities for what a person really wants later. And there will always be something later– career changes, geographic changes, the perfect house, the perfect vacation, the chance to make a real difference with a charity, financial independence, etc.
This!
And, I agree, with Adam P. Go out and enjoy the sunshine. It’s free!!
This. So many people seem to equate “living” with “spending.” A they say, the best things in life are free.
Great job saving Kailey. Another question you may want to ask yourself, in addition to whether you want to buy a house, is when would you like to retire. Most folks automatically accept that they will be working until they hit the magic social security age (65-68). Others have no choice but to work until and beyond age 65 because they didn’t save enough when they were your age. But there is another option. Keep saving at the rate you are saving and save even more so that you can become financially independent and not rely on a J.O.B.
Kailey is to be congratulated! At this point, the only recommendation I would have for her would be this: re-adjust your contributions to your various savings accounts.
Here’s why: Kailey has one year of living expenses in her emergency fund. She is probably the type of person who could stretch that to 18 months or two years should it become necessary. She has the first goal nailed.
The one savings vehicle she is not taking full advantage of is her 401k. At 25 years of age, she has many, many years of compounded earnings she can take advantage of, and she should divert money from one of her other savings vehicles into her 401k. The compounding effect of that over her working life, even if she has to reduce the weekly contribution later, is the most effective wealth creator she has available.
A 30-year old person saving $100 a month, and earning 10% a year, will amass $379,664 at age 65. If that person waits a single year to start saving, the account is worth $37,125 less. And that’s not including the lower income tax she will pay today.
I don’t think the 10% return per year is a reasonable assumption these days–I’ll be happy if I average 5%.
Can you consider the employer’s match on your 401k contribution a return?
Right, the 10% return seems unrealistic. But any percentage you put into that equation works the same way, even if you calculate it at 3%.
And a 401k has a built-in return because of the tax advantages.
Depending on her tax bracket, Kailey is also saving from 10 to 38% on her contributions to her 401k. That 10%+ tax savings starts from day one. Maxing out her 401k, with the instant, 10%+ tax advantage, plus maxing out her Roth IRA (with after-tax dollars) would give her both exempt and non-exempt principle to draw on in her retirement years. When she retires or changes jobs, she can roll over that 401k into a rollover IRA. Between retirement and the required withdrawal years for the IRA (currently ~70 1/2), she will be able to draw on the Roth IRA proceeds and be taxed only on the gain, putting her into a lower tax bracket.
Kailey,
I think it is most important that you have a plan that YOU are comfortable with. I sat down and made mine when I first started working, running projections for what that balance would be in 40 years with various rates of returns and saying “I’d be okay with that.” Every time I read a blog where the person states they are maxing out their 401(k) and their Roth it makes me feel like I should be doing more since I could be doing more, but I remind myself that my plan gets me to where I want to be.
Thus, I’m 27 (now), doing 5% in the 401(k) and 3K in Roth every year and I’ll increase it when I originally decided to do so (at 30) or when I feel like I am not sacrificing my other goals. Occasionally, I grab some money from my savings to toss in my Roth when the market tanks, but only $500 here or there and only if I feel like my cushion is large enough.
In your case, I think you need to remember that you STILL have the option of using those savings for retirement, even if it isn’t in a tax-advantaged account. Similarly, you have the option of withdrawing earnings from the Roth for a first home purchase, so if you wanted to cover BOTH situations you could contribute above the 3k on your Roth. Feel free to keep track of it in a spreadsheet as excess house savings so you wouldn’t feel guilty pulling it out later. Keep in mind contributions can always be withdrawn from Roth IRAs without penalty, regardless of the reason.
Liz Pulliam Weston recommends saving “10% for basics, 15% for comfort, 20% to escape”.
I’m 33, single, currently saving 15% for retirement (5% 401k, 5% Roth 401k, 5% Company match) which doesn’t come close to maxing out my 401k.
I’d have to contribute 25% of my gross pay to max out my 401k. That wouldn’t leave much room for other goals.
I’m trying to save 15% of gross for a major house repair (replacing the a/c) and to beef up my car replacement fund among other things. At the end of the year, it will probably end up being a 5% savings rate.
I would encourage Kailey to question the house-buying goal. For so long owning a home has been fed to us as the path to riches, but I think the last few years, and the goal/attempt by politicians to eliminate the mortgage interest tax deduction, means we need to start questioning this assumption, and make the decision on much more personal grounds.
I’m sitting with a home that is underwater, and which I don’t know if I’ll even break even by the time I need to sell it. Even though I bought it well before the speculation prices (1999), in hindsight, I question if it was a wise thing to do from a financial perspective.
I definitely agree with the commenter who mentioned flexibility. In my 20s-early 30s, starting out in my career and getting my post-graduate degree, geographic flexibility was key to being able to take advantage of opportunities. And now that I’m responsible for maintenance/repair issues, I recall with fondness being able to delegate this to the owner of wherever I was renting while I went on with my life.
Hi Kailey,
I’m 26 and have been an avid GRS reader for 4 years. It sounds like you are doing an awesome job and plenty of people have already chimed in to give some pretty solid advice.
Instead of getting into the granular “have an emergency fund, pay off debt, have some fun money, etc” advice, I just want to encourage you about this season of life.
My husband and I have been in a good (somewhat boring) financial groove for a couple of years and I started getting antsy that we weren’t doing enough or achieving our big goals (20% house down payment)more quickly.
However, this fall we hit some unexpected life change in a couple of areas at the same time. Because we had had that cushion of a few “building” years, we had far more flexibility in the decisions we made and I am so grateful for that. I’ve even been able to start my own business!
So, all that to say this: even if you don’t know exactly the best method of saving right now or feeling like it still isn’t enough, be encouraged that someday you’ll know and your future self will thank you!
Kailey is certainly to be congratulated! As the variety of responses here shows, she should sit down and think about what she really wants. If I were in her enviable position I’d stop contributing to the emergency fund (as others have noted, she’s responsible enough that a one-year cushion could be stretched further if necessary), start throwing large amounts toward my son’s college fund, beef up the house contributions, and (this is just me) start saving for a car (my 12-year-old car is still reliable but they don’t last forever) and a vacation, if there was anything left.
But if you don’t have a kid or a car to worry about… well, do what works for you! Maybe map out your three top savings priorities? I’d definitely encourage her to build in some fun money, for the occasional massage or fancy coffee or travel… some kind of reward for her diligence.
Kailey, you’re doing an awesome job!! You are way ahead of most people (even those older than you).
One thing that would help you determine whether you’re saving enough is a goal. Your emergency fund is fully funded, so that’s done. You have a goal for downpayment amount in a couple of years, so you know how you are tracking to that. What you also need is a retirement goal. This will give you the amount you need to save, as well as the amount of time you have to save up for it. You can then compare this to what you’re doing right now and adjust accordingly.
Keep up the good work!!
Most of the other comments have focused on how to save more/differently/better, so I wanted to bring up a point about home-purchase financing options.
It seems like Kailey would be a first-time home buyer and could qualify for a fixed-rate FHA loan that requires a 3.5% down payment, much less than the 20% she is saving for.
Certainly there are several factors to consider before going this route (larger monthly payments, PMI, general housing upkeep costs), but for responsible first-time home buyers without a 20% down payment, this can be a great loan. I used one to afford my first place a few years ago and it has worked out very well.
I agree that the FHA loans help first-time homebuyers immeasurably, but I’m in the camp that unless you can afford a 20% down payment, you’re probably not quite in a financial position to be buying a home.
If you buy a place with a 3.5% down payment and then values drop 50% as they did in 2008, you won’t have enough equity to be able to sell. This would be fine if you *absolutely* knew that you wanted to stay in that place *forever* and it was big enough to have some room for expanding, but if not? You could end up stuck with a house/condo that you, life-wise, don’t want to live in anymore, but you can’t sell it.
Keep saving as much or more than you are, and then extend your time horizon for buying a house or condo. 27 years old is still awfully young to own property in one of the most expensive markets in the US. Give yourself at least 5-10 years. Save a giant chunk to put down. Gain certainty in your career and in the fact that you won’t want to move cities. Realize that your life might change a lot in your twenties, and if you buy too young, you might end up wanting to sell it in just a few years. And if you find yourself getting married in the next several years, you’ll suddenly have way more income with which to buy a place.
Sure, if/when you get married, you might have more income to buy a place, but you’d probably also want a bigger place, perhaps one ready for kids, or maybe you want one of your to stay home, which means that you don’t actually have more income to buy a place.
Buying a place based on what you can afford on one person’s salary is a good plan.
The obvious answer is ‘it’s up to you’. Goals and dreams drive that.
As a bit of advise from a 42 year old who went gang-busters saving in my 20s and 30s: I now have 4 kids and though I still save, I don’t save as much as I’d like to or as much as I used to.
There will come a day when you can’t save as much so there should be no concerns with saving ‘too much’ now. You can’t save too much when you’re the one making the decision to do so.
In my 20s I saved for: retirement, car, house
In my 30s I saved for retirement, car, boat, college
In my 40s I saved/will save for retirement, college, kids’ activities, other kids stuff.
My wife and I aren’t currently able to save nearly as much as Kailey… but we still make sure we have a “fun money” account for each of us. We don’t put much in per paycheck, but it lets us spend however much we have in that account on what we want, guilt-free. We also have a targeted savings account for vacations – when there’s enough there, we can use it for a vacation (generally not a very expensive one!) without feeling guilty.
Sounds to me like Kailey has her savings in a great place – now she needs to allow herself to enjoy life a bit while still meeting her longer-term savings goals. Even setting aside $25 a month in a “to buy whatever I want” fund can be immensely freeing!
Hi Kailey, I am in the same boat as you (25, saving a bunch but never feeling satisfied). I choose my savings a bit different in that I put 40% of my income into my ROTH 401k (post-tax). This will allow me to hit the 17,000 limit for 2012 by the end of Q3. All the funds over the 401k limit automatically gets pushed into a post-tax account which I will withdraw from January next year to contribute to the ROTH IRA for 2012.
The reason I do it this way is that I don’t ever see the money as it gets taken right out of my paycheck. What I do make in my paycheck I save a bit for the future; however, I don’t have a large emergency fund.
Hope this helps to get a gauge where other readers are in their financials!
While it’s admirable that Kailey is saving so much, it’s arguable that the house down payment doesn’t count as true savings. I’m not one of those a house is a lability crazies, but the truth is that a house is a living expense. People max out 401k accounts by NOT devoting a third of their income just to housing.
When I first started reading this blog years ago, I was saving 0% in my 401K and maybe 1-2% of my total salary in an ordinary checking account. I didn’t feel like I was saving enough and wasn’t really sure what I wanted to save for.
Over the last several years, I gradually cut down on some of the unnecessary spending, increased my saving rate, and achieved some substantial salary increases. Now I max out my 401K (16.5K for 2011) and save a good amount of my take home pay in a bunch of different target accounts. I still don’t feel like I’m saving enough, and I sometimes change my mind about what I’m saving for (I keep putting off buying a house, but this year may finally be the year). But at least I feel like I am following some kind of plan and have some good ground rules (emergency fund, positive cash flow, conscious spending, healthy liquidity to spending ratio, etc.).
I also make a conscious effort to spend 5-10% of my take home pay on stuff that’s totally fun, even if other people suspect my conscious spending is “a waste” (vacations, concerts, sporting events, whatever). It gives me something to enjoy and look forward to in the short-term, rather than only looking at things in the long-term.
Whether or not people “actually” contribute the max is highly dependent on income. DH and I each contribute the max to our 401ks, but we each make $60k. When we made $30k, we just did our best.
Kailey is definitely on the right track at 25 years old. She’s way ahead of her peers.
Personally, I think that a 1 year emergency savings is too much for someone her age. Especially since she doesn’t own a house yet and I’m assuming she doesn’t have dependents.
I think in her case, a 6-8 month fund would be plenty.
I would max out that Roth IRA every year and continue building up the savings for the down payment on the house. Sounds like Kailey should go on a nice vacation to enjoy the fruits of her labor. :)
If I were her, I’d save LESS for retirement and MORE for the house. She already has a year’s worth of emergency fund. I wouldn’t do the Roth IRA at this time. If my employer matched less to the 401(k), then I might even back that off too. But since they are matching to 8%, I’d keep that up.
My reason: every dollar saved for the house is $1 less of a mortgage. That’s $1 less that she’ll have to pay interest on. That’s $1 less that she’ll have to obligate to paying back.
In general, my goal is not owe anyone anything – or to be obligated to as little each month as I can. Since her housing prices are so high, she’s already looking at a very large mortgage, even at 80%.
And who knows how much life will change for her in 5 years? Maybe she’ll want to have kids and stay home. Maybe she’ll go through a health crises. Maybe she’ll want to give a chunk of money to a dear relative. Having that cash in hand will open up more opportunities.
I think she’s saving adequately for retirement…now I’d work on reducing future expenses.
Kailey-great job at savings.
Take it from someone who was very healthy at your age and was recently dropped with the cancer bomb:
Don’t forget to “live”. The savings I did at your age (and I wasn’t even close to your awesomeness) is helping pay my high medical bills presently. So it is great that you are preparing for hard times. However, it does not guarantee hard times (like getting sick) will not come.
“Things” can be taken from you, but your “experiences” cannot be. Travel, have new adventures and live. You deserve it.
Best of luck to you.
I’m 28 and saved about $13K to my 401K last year, and hoping to max out this year. However, my husband saves $0. (This makes sense if you know our situation, which involves some cross-border tax complications that I won’t get into here. Suffice it to say, he’s not a *non-saver*, it’s just that we have to be careful about some tax issues, so for now we’re just consolidating all the retirement savings under my name.) Right now my contribution is 20% of my pretax income.
My thought: Put off buying a house. I think people place way too much priority on this. I don’t expect to buy before I’m 40. I feel I can get better value if I give myself the flexibility to buy in a down market at my leisure. (I know it’s down now, but I’m not ready now.) Plus I am hoping to have a 40 or 50% down payment saved before purchasing (risk-averse).
To me, nothing (nothing) is more important in savings than saving for retirement. Not even my kids’ college. They can pay their own way, just like I did. They should be more pissed at me if I make them responsible for my upkeep at age 80 than they are at me not funding their way through college.
Plus, this may be a little bit off-topic, but what happens if there’s an earthquake and your house gets destroyed or mangled? That’s a real possibility in SoCal (sorry), so just be sure that your eggs aren’t all in that basket when you do buy, as you don’t want it to wipe you out completely.
Also, what #44 Jacque said about a cushion to accommodate unexpected life changes. Nobody expects a diagnosis of MS, or an unplanned pregnancy, but it’s false to say you can’t plan for them. (Okay, okay, I’m REALLY risk averse…)
Yay for Kailey for being way ahead of the game on savings vs. where I was at that age!
Kailey, do you have any low-cost hobbies? You might want to develop one – could be crafts, or an outdoor activity, or almost anything not too capital intensive. Might offer you more satisfaction per dollar spent on fun :)
Any of us who have lived in high cost areas like Kailey may want to consider a broader idea of “house” when thinking about prices. SoCal is indeed very pricey compared to most other places, and even though incomes are higher it often doesn’t quite balance out (the regional ‘affordability’ indexes adjust for this – I haven’t looked lately, but SanFran used to be a perennial leader in least affordable housing list)
So, there are options out there…
-if you are willing to commute longer you can often find lower prices (but will likely take a hit on quality of life, and commuting expenses).
-If you or friends are handy, you can buy a fixer-upper (sweat equity could mean your fixed house’s worth is boosted much more than you spent to fix it).
-If you are willing to look at less fancy neighborhoods, you could buy a duplex and rent one unit to help boost your equity faster.
-If you have a friend that you are compatible with, look for a house with two ‘master’ bedrooms (or where it could be easy for 2 bedrooms to each have attached baths) and rent one bedroom to the friend.
-you could plan on renting for a while and then on moving to a lower cost area of the country once you have a down payment saved – you may end up taking a slight pay cut, but the lower cost of living & lower housing prices could more than make up for that [this is what me & the spouse ended up doing, but after we bought a house in a high cost area and got in over our heads when our income changed – all good now, very happy with our move]
First, great job on the savings!
Second, while you are most likely doing way better than most of your peers, over the years I’ve come to learn that peers are a really poor gauge. Even people who are way past you in age are often doing a very poor job of savings.
Third, even though retirement seems very far away you can get an incredible advantage of compounding your tax free or tax advantaged savings by starting early, which you have. So, if I had extra cash, which it sounds like you do, I would be working to add more to the IRA or to the 401k.
I think in part Kailey’s question is an existential or spiritual question. “Can I save enough to be secure and to make certain nothinig bad ever happens to me?” We know intellectually that we can have a million dollars in the bank & still get run over by a car. But at an emotional level we hope our money will prevent us from facing life’s unpleasantries. And money does help. I’m glad that when I was diagnosed with cancer, that I had good health insurance. I’m also glad I had great friends and a wonderful, loving husband. I still struggle with putting too much emphasis on thinking about retirement and saving money. I wish I could just put my savings on automatic pilot and then let my retirement plan unfold rather than thinking about it all the time. Its possible, given that Kailey has saved almost 50% of her salary, that she’s neglecting other aspects of her life. Or maybe not, she just may not have mentioned them. But I suspect that many GRS readers need to obtain balance in all areas of their lives.
Typically, saving 10-15% of your earnings is appropriate, but everyone is different. If you can aomfortably save more, you should. I would use your Roth IRA as a possibility to save your downpayment for your home. It will grow tax free and you can withdraw a portion tax free too for the downpayment.
Hi Kailey!
Not sure if this helps, but I was exactly where you were at when I first started working. I agree that it’s a mindset thing – which I think will get better for you as you get older (it has for me) for a few reasons:
1) Your bank accounts will have grown bigger.
2) You’ll likely be making more, if you’re also as assertive about growing your career, which means more to put away each month!
3) You’ll figure out what really works for you in terms of hobbies, going out, etc, and you’ll likely be much more focused on spending on just those (if at all).
4) As a result of 3), you’re also likely to be better at making big cost-saving decisions. [I moved in back home, for example – after sowing my wild oats, so to speak, I figured it wouldn’t hurt me to save a ton of cash for several years to really accelerate my down payment savings.]
5) Life experiences will adjust your expectations (or your goals will change). I’m still saving very diligently for a house, but after a friend died suddenly, I realized I wanted to shift my priorities to spend more time with friends and family, even if it slightly slowed down my goal – because if I were to go suddenly, I can’t take the cash with me.
I don’t mean this as, “Suck it up and things will just get better” – but more as, the faster these things happen for you, the faster you’ll probably be more content with your situation. For me, the key difference was moving home – seeing that significant an increase in per-month savings really calmed me down. I’m not too much older than you (about six years), but those years do make a difference.
Hang in there, and don’t forget – you ARE doing an excellent job :)
It is very hard for people to not knee jerk to a raise as “new money” and up the lifestyle, or when a couple gets together, they upgrade because of their new “income”. People often mistake cautious advice on upgrading lifestyle as a condemnation. But when the 2000s were here and I saw couples with barely 100K in combined income getting into over the top “first” houses with five bedrooms and a three car garage. Really.
I would honestly tell you that it’s a great time to get into a house, but that doesn’t mean that you “should”. Prices are at their lowest, but IF you want to be a buyer and not a renter, you have to understand that taxes can and will go up on the property, especially during a rebound, and that there are lots of looming emergency costs with a house. A new roof doesn’t always happen because you had a nice and easy disaster event that requires you to fill out some insurance forms, and DIY projects can uncover jobs/disasters that should be left to a licensed pro.
Staying with the minimal lifestyle is fine, but if you want to move on, it’s a step by step walk, not a sprint, towards those goals.
Kailey;
Congrats! Any young woman who takes good care of her financial life is to be praised. Remember, it wasn’t so long ago, historically; when most of the planet’s women had no real assets, or resources for attaining a decent livlihood or freedom to live as they pleased.
Just continue to care for yourself in every area of your life.
Best wishes,
Paula
With the costs associated with a home, I think it would payoff to be certain to have the 20% down to avoid PMI and the additional interest and points. Borrrowing less means paying less for interest.
There’s a benefit to those targeted savings accounts. What about replace an auto? Furniture and appliances for a new home? Travel? Profession development?
Retirement savings is great within reason – but you don’t want to be “retirement rich, cash poor” in the future.
Hey Kailey,
I just wanted to point out that five years from noe your situation could be completely different. Maybe you meet a nice guy who owns a house where two can live, maybe you want kids and need to move to accommodate them, maybe you get an amazing job offer but you need to move for it… So: renting definitely has its advantages… Consider this when you are ready to buy…
I did not read every single comment but I want to point out one thing: Kailey is only 25 years old. Unless she chooses to retire sooner, she will probably continue to work for the next 50 fifty years.
Over a 50 year span, the stock market will obviously do well some years and do poorly in other years. Life also has a habit of springing surprises, ranging from the opportunity to work overseas to unexpected bundles of joy.
And as Mariam and others have suggested, this is more of a peace of mind question but I also want to emphasize that when it comes to saving for retirement at age 25, developing good habits is far far far more important than aiming for a nice round number.
If you’re asking “do I have enough money” then you’re asking the wrong question.
First, I think Kelly is doing a fantastic job with the savings. Major kudos are due. But I think she should really take a long hard think as to why owning a home is such an important goal, especially as she’s in one of the most expensive housing markets in the country and real estate prices seem a long way from settling down. I have done both, renting and owning. We own our home right now, and when we sell this one, we are very serious about never owning a home again! Even at our best, my husband and I were never the handiest of people, and as we age, we’re finding that keeping up with the house is getting to be a bigger and bigger problem, economically and emotionally. There is a certain charm when you come home to find termites swarming in your bedroom to being able to pick up the phone and tell the landlord he has a problem!
Also, a home is an anchor. While that can give you nice warm fuzzy feelings, in uncertain times a house can become a millstone, drastically decreasing your maneuverability. As dicey as jobs and job security are right now, I would be loathe to nail my feet down too firmly. Sometimes being able to load up the U-Haul and move on makes all the difference in the world. I’ve seen folks for whom having to sell the house before they could take up distant opportunities sunk their financial ships. It was ugly.
All my life I’ve been told the pinnacle of success is the “American Dream,” owning your own home. Now I’m really wondering if it is such a marvelous idea. Perhaps that would be a good column idea – why is it we are so devoted to this idea that to be a successful grownup, we have to own our own home? Does the arithmetic really support the premise?
I think Kelly needs to give herself huge credit for being such a saver. But how can you possibly ever have too much in savings?!! If you’re happy with the life you’re leading, a bit wad of money in the bank is just one more thing to smile about!
Kailey,
You are doing a terrific job! Good for you. I’m old enough to be your mom. Here’s my advice – you keep doing what you’re doing – within reason. You’re young and there’s a great, big world out there just waiting for you to explore it.
Set some $ aside to travel, have fun and try new things. With your innate sense of sensible living, you’ll be fine.
I was exactly you when I was your age. Thank God my husband was a free spirit ’cause we (and our children) did more fun things than I would have ever made room for. I don’t regret a single one. On the contrary, I am sooooooooooooooooo grateful we did. There are some times in your life you simply can’t get back. Do some of those things while you are still physically capable of doing them.
Best piece of advice I can give you – when you are ready to buy a house, don’t spend one cent more than 1/3 of what the “bank” tells you you are able to do. Pay that mortgage off as fast as you can and bank the rest.
Best of luck, darling. You are either brilliant or you had brilliant parents rasing you.
You go, Girl – have fun!!!!
I’m 30 and I have maxed out my 401(k) and Roth IRA for the last 3 years. That was mainly possible because of a large increase in income. For the past 6 years, I’ve saved about 45% of my gross income (including retirement and non-retirement savings) except for the year I made the down-payment on my house. It helps to live in an area with a fairly low cost of living.
I think Kailey is doing very well with savings. My suggestion is to max out the Roth IRA by decreasing the amount of non-retirement savings. Roth IRA contributions can be withdrawn at any time without penalty, so if she decides she wants to use some of that money for a house down payment, she can, but in the mean time, the money can grow with no taxes on the earnings. Maybe she will decide against buying a house (or at least delay it). Sometimes I wish I hadn’t rushed into that at 27. She is only 3 years into her career, so there is a chance that her income will eventually increase enough to allow her to max out her 401(k) contributions eventually.
I’m a fan of this post from Ramit at IWTYTBR (it’s an older one, before he turned into a full time snake oil salesman):
http://www.iwillteachyoutoberich.com/blog/already-handled-basics-save-money-get-ahead/
Basic gist is that he surveyed folks across demographics and plotted their savings goals by decade (20s, 30s, etc), with the idea that you should save for the things he fols in the cohort above you wished they’d saved for.
I think she’s doing great and that she should continue to save at the same rate. Saving during one’s twenties is far more important than doing so later, so now is the time to make the sacrifices necessary to set up a good financial base that will grow over the next 40 years. Whether the money goes to an IRA, 401(k), house, rental property, or the stock market is immaterial. It’s all the same pot–not spent. Congratulations on a great start, Kailey!
Congratulations on your plan, Kailey. You are doing/have done what millions of youths are unable to do. Live, and put away some for savings.
I agree with J.D. Spend on the things you love. What is the point of having money and not enjoying it. Cutting back in all phases of your spending would be like going on a Spartan diet…we long for a hot fudge sundae!
1. YOU SHOULD SAVE ENOUGH TO MAKE YOU FEEL STRONG WHEREVER YOU ARE
2. YOU SHOULD SAVE FOR THE THINGS YOU REALLY LOVE (LIFE, LIBERTY, THE PURSUIT OF HAPPINESS, YOUR FAMILY, ETC,)
Congratulations Kailey! You’ve done more than the majority of people your age and I am so proud to hear that. It sounds like you are embarking on additional life journeys that require choice and action. I agree with some of my preceding commentators that you need to put some focus and targets around your goals and track all the way through. Knowing what the target $ amount is for your house, your retirement, etc is necessary to plot out a plan that you can stick with and have some comfort that you are making the right decisions each day with those end goals in mind.
Sounds like you have your contingency fund (otherwise known as emergency fund) in check. And it also sounds like you have a good rhythm going for your retirement plan however it sounds like it can be further tightened with a target number. I would recommend reaching out to a financial advisor to help with this calculation. Also I think putting money aside for your 20% down payment is an excellent goal. Figure out what the 20% number is though so that you have a target insight.
Alas, I’m one of those people who saves too much. I contribute the maximum to my 401(k) (mostly for the company’s full match) and Roth IRA (including the over 50 catch up amounts). I work a part time job for money to live on. It’ll be great when I’m 59 1/2, but I believe I’ve gone overboard now.
Help?
Kailey,
It’s great to see someone else my age who doesn’t waste a ton of money. :) I don’t have any suggestions, but I just thought I’d let you know what I do with my income, as we are of a similar age! I often wonder what others my age or with my same job do with their income, but I usually don’t get the chance to find out in great detail.
I’m 24 and just started my first job out of college a few months ago. I put approximately 60% of my income toward my school debt. I plan to pay this off in 10 months.
I am trying to get used to living off of only half of my income, which is doable, that way when the debt is paid off, I can start using half of the income for savings. And the first thing I’m going to save for will be a trip to another country because I am itching to get out of the United States for a while. :)
No house for me until I’m ready to get married and settle down…right now I just want to save enough money to be able to, first, take a vacation somewhere, and second, live in another country. I have $10,000 in an emergency fund thanks to my parents, who started saving for me when I just a baby. (There was more but I used a good chunk of it to study abroad! :p)
I’m not too worried about retirement right now…I think I save 3-5% pre-tax dollars…whatever the minimum is from my employer, but I also have $1,000 in a Roth IRA I opened up a while back. Maybe I should be saving more for retirement, but paying off the debt and traveling while I’m young are just too important to me right now!
I tend to disagree on the whole using a Roth for down payment situation. First of all, $5k a year is nothing when you’re saving for a SoCal down payment so you will end up saving outside of an IRA anyway. If you’re serious about a house, I would forgo the optional retirement savings for now. Still hit your employer match limit on your 401k though obviously; it’s free money.
Personally, I’m not big on the whole emotional side of owning real estate, but the fact is that the housing market is very soft right now and if you can forgo optional retirement savings and get into a new house in 5 years vs. 8, that could mean many thousands of dollars (or tens of) difference in price, or rather more value for the same money.
Additionally, a Roth IRA can only limit your tax liability by $5k, but the deduction for the mortgage interest will reduce it by many times that. That reduction in liability will help you save more than a Roth would have and will allow you to catch up on your retirement savings. Plus, you’ll also have a home to show for it.
I agree, she is doing awesome in the savings department, but if all you do is save for retirement which hinders your ability to improve your life as you are living it…such as buying a house, I think that is too stringent. She should consult her specific situation with a financial advisor that can review her options so that she is maximizing her retirement savings but also adjusting for buying a home.
She had better hope that the government doesn’t double the allowable deposits into those retirement plans. That would really throw her into a tizzy…
Why the rush to buy a house? (if you get a divorce, which is common, only 50% is yours. Make sure that your spouse contributed 50%.)
Do something that you like to do with some of the money you save, take a trip, buy a luxury. I worked for years with a lady who was saving for her first retirement luxury, a big cruise.
She came off the cruise in a wooden box. I booked my cruise about 4 months after that and I still talk about it and I still don’t care about the hit my savings took.
Don’t get too much of any one thing. Balance living with saving.
I am in a similar situation, I’m 26 and I was saving comparable amounts, (full $5,000 in the Roth but only 5% in 401k), but I just bought a house and moved in last week. It totally changes you saving mentality, for the past two years all my savings goals were focused on building up a down payment. Now most of my money is going to go toward furnishing the house. My system is to save $500 a month for generic savings (which includes emergency), $100 to the house maintenance fund, continue with the same retirement contributions, and then everything left over I will feel free to spend on furnishing the house. It will be a lot of money, but hey, home is where I spend most of my time so it’s money well spent if it makes me happier. Once the house is furnished, the savings rate will bump up and I will probably start another account to save for vacations.