OK, I am a young professional with a good job that I got in 2008 after graduating college. Since my hiring, I’ve managed to put away about $12,000 into a savings account, and a few months ago my parents gifted me another $20,000 because they gave up on me ever having a wedding.
So that leaves me with $32,000 in a savings account. I also have a checking account with a balance of $14,000 (more savings I’ve put away from my job) that I use to cover my monthly expenses so basically the $32,000 is just sitting there. It makes like $2 in interest every statement or something.
But here’s the deal, I have NO plan for this money. I already have a 401(k) with a match that I contribute the max to. My car is old and I should probably get a new one, I don’t have a Roth IRA, I don’t want or have a house, and I like my job but would be open to taking another awesome job if one opened up. I have no debt at all.
What would you do with that money and those circumstances?
P.S.: It might help to know that by nature I’m frugal and prefer to live beneath my means. — Anonymous
Mike: So Logan, I am totally proud of this person
Logan: I’m totally shocked and awed by this person. Like: way to save. But also: Maybe you should live a little? Like, what has she been doing with herself (or himself)?
Mike: Okay, I think I need to say it again. I am so proud of this person! Person! I want to give you a hug!
Logan: Okay, high five person. Well done.
Mike: Also, Logan, remember just because this person is saving, doesn’t mean this person is not living a full life. I think I’ve explained that pretty well this week. But! I will agree that after this person does things like open a Roth IRA (I think I’ve been a broken record on that one), or a traditional IRA if this person earns more than $105,000, which is really possible considering all the savings, I do want this person to do a little nice thing for themselves. Go on vacation! You deserve it!
Logan: Yes. I just want to make sure this person is living in the Now as much as in the Future. Also: I want to know how s/he saved that much money. We don’t know how much s/he makes. It might be tons. Also: I’m very interested in “preferring to live below my means.” How does that work? And why would someone prefer that?
Does Not Compute.
Mike: Well, it means this person isn’t living paycheck to paycheck, which is the trap a lot of people fall into. It means choosing to live in a normal size apartment instead of one with a swimming pool, and a gym, and a doorman who can accept your packages for you. I think what happens to a lot of people when they go from earning a little bit of money to a lot of money is this thing called “lifestyle creep.” Which means, they upgrade everything in their life. Goodbye, old car! Hello, BMW! See ya, apartment with no amenities! I am guessing you would be the sort of person who would totally upgrade everything in your life if you started earning a lot more money. The problem with that is that although you are earning more, you’re really not saving any more, you’re just spending more.
Logan: You’re right. You’re right. This person is great. I’m not sure I have anything to say to him or her though. Like, I think we live on different planets.
Mike: Oh, I think we can bet on that. But I think we’re all living on our own respective planets when it comes to our money. Like “Le Petit Prince.” I’m certainly not on that same planet, because I don’t think I’m as frugal.
Logan: Let’s talk about that, because I’m not sure that’s something that your Internet Fan Base knows about. Like, Internet: Did you know Mike Dang once spent $200 on cheese for a dinner party?
Mike: Haha. It was $150, yes, and it was for my one big party of the year where I invite my friends over and tell them I love them and give them cheeeeeeeeese to eat. I could afford that though! And I am happy to splurge every now and then because you have to remind yourself that life doesn’t always mean being a miser and watching the dollars in your account grow. You have to remind yourself to live a little. And I want this person to live a little if they are up for it.
Logan: Me, too! I think this person should go live a little in some other country. Maybe Paraguay?
Mike: I mean, if they really wanted to go all out, they could contribute $5,000 into an IRA, and then contribute the $17,000 max into a 401(k), but I don’t think that’s necessary—unless it’s something this person wants to do. They’d still have money leftover to live a little.
Also, before this person goes to Paraguay, I definitely think they deserve a new car
Logan: Well, if they want. Cars are a boring thing to spend all your money on. Get like, a 2000 Honda Civic and call it a day. I bought a new car once, not so fun!
Mike: Yes, cars are depreciating assets, meaning they go down in value significantly every day you drive it. I’m guessing this frugal person will get a used car anyway! Also, I think it’s pretty insane that this person has $14,000 in his or her checking account. You should have enough to pay the bills, and the rest should go into savings so it can accrue the interest! Get some of that money into a CD (certificate of deposit) or a high yield savings account.
Logan: Okay. So like, dream scenario, this person should take a couple thousand and trade in his or her crappy car for something reliable. And maybe put like, IDK, $10,000 in one of those fancy retirement accounts you were talking about. And then spend the rest on Paraguay.
Really anywhere that starts with a P.
Papua New Guinea.
Mike: I just want this person to be happy, really. I mean, not everyone likes to travel. If going to the ice cream parlor and getting a sundae is what makes this person happy, then that’s what this person should do. I mean, I am proud of this person, and I want him or her to do the thing that he or she loves.
Logan: Me, too. And if that thing involves taking us both on a trip to Paraguay, or buying us ice cream, well, all the better. Sharing is caring. As they say.
Mike: Haha. Yeah, the good thing about having money is that you can be generous with it if you want. Or you can be a Scrooge if that makes you happy! It’s your money. Hey. Can we talk about this person’s parents giving him or her $20,000 because they were like, “Well, guess you won’t ever be getting married!” I mean!
Logan: Ha, yeah that’s crazy. And also like “giving up” when s/he is like what … 25? 26? But I mean, good for them for saving all that money. That was really nice. Even if it was for something stupid like a wedding.
Mike: I know! So I just Googled it. The average cost of a wedding in 2011 grew to $27,000, according to TheKnot. I mean go for it, if you have the means, but come on.
Logan: The Wedding Industrial Complex is totally ridiculous. I mean, super fun. But ridiculous. I’d rather go to Paraguay.
Mike: Me too. Let’s get fake married in Paraguay.
Logan: On this person’s dime. Sold. Person! We solved your problem! Okay bye!
Mike: Person, one last time: High five!