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?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.
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… Read more »
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… Read more »
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… Read more »
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,… Read more »
@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… Read more »
@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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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,… Read more »
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… Read more »
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… Read more »
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,… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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,… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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.… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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.