Reader Mail: Starting Out as an Adult
I recently procured my first real job (score!), and have come up with a basic budget and blah blah blah. Beyond that though, I do not know what I should be doing to get started at Being A Real Adult Who Makes Good Money Decisions. I have a basic Wells Fargo checking account and a small savings account that was created for me by my parents or something at some point. I also have two credit cards with no rewards to speak of but also no debt. Thats it. That’s what I’m working with.
Should I take the money from my Wells Fargo savings and put it into a high yield savings account like Ally? Should I cancel my credit cards and get a new one with better rewards? Should I start an IRA, or do something else that sounds overwhelmingly confusing? Where should I put the money that I manage to save from my paycheck each month (hopefully about $300-400)? Also, I suppose it should be mentioned that in my particular case, my employer has a retirement option and will start matching (5% I think) after a year. Any advice would be a godsend. I just want to make sure that I make the best choices possible for my future! — S.C.
I’m always really glad when I hear someone who is coming out of college and getting their first job say they want to make the best choices for their future. I mean, you’re not getting grades anymore, but: A+ work! A thing that happens when people get their first jobs sometimes is that they’re suddenly earning income, and that income immediately goes to buying “things”. We all want things, of course, but it’s just so much more important to get a grip on your money before you start spending it.
Starting out with no debt will give you a great head start. Keep it that way. The first two things you should be doing is paying off your debt, and starting an emergency fund, which it sounds like you’re doing with your Wells Fargo savings account. Set a savings goal of $1,000 at first, and then once you hit that number, just keep saving to have a nice amount of cash to fall back on in case you ever lose your job, or experience any other kind of emergency. Don’t worry about the rules of thumb you hear about from financial advisors saying you need 3 months, or 6 months, or a year’s worth of savings to get you through hard times. That’s just a broad way of saying you need to have an emergency plan set in place. Everyone has a unique set of circumstances. If you have parents or siblings or really close friends who would let you crash with them during a long period of unemployment, that’s a significant amount of living expenses you won’t have to worry about paying while you’re looking for a way to earn money, and that’s really great. So: Have an emergency fund, but have an emergency plan too.
Once you have a plan in place, you can now figure out ways to make your money work for you. I just looked up the interest rate for Wells Fargo and it’s just terrible: 0.01 percent. Yes! Move that money to a higher yield savings account like Ally or ING Direct.
Don’t get too caught up on getting rewards credit cards. Although there are people out there who really know how to make them work for them (and you might be one of them!), it’s really easy to rack up a ton of debt on credit cards, so I only use them rarely. And remember that your credit score will get slightly affected if you cancel your cards, so if you’re doing that to get rewards cards, keep the one you’ve had the longest because it’s the one showing the longest period of time that you’ve been able to make regular payments and be a responsible adult, and that’s a great thing to be able to show to creditors if you’re going to be doing things like renting an apartment, buying a car or a home one day. I was one of six people who put in an application to rent my current apartment, and I’m sure my high credit score was one of the reasons my landlord chose me as the tenant he wanted to have.
Lastly, get started in your company’s retirement plan. You don’t have to contribute too much until your company starts matching your contributions, but it’s important to simply get started. Remember that the money you put into a 401(k) is tax deferred, so even if you don’t get a match this year, you’ll still benefit next year when you’re filing your taxes. And, yes, open an IRA—a Roth IRA if your income allows you to do that because you want to start making compound interest work some magic for you. It’s really easy to do, I promise. You can start one with one of the big three: Vanguard, Fidelity, and T. Rowe Price (I chose Vanguard). Call the one that sounds the best to you, and tell them you want to start a Roth IRA. They will take care of the rest for you and make the process as painless as possible. You are giving them your money to safeguard, so they are willing to do whatever it takes to make this as stress-free as possible. Welcome to adulthood.
Dissent! Canceling a card to take another will only ding your score a tiny bit for a little while (and it’s completely unfair and ought to be against the law, like punishing you for transferring a balance, it’s just behavior hey don’t like, not irresponsible) and reward cards can be very cool if well-played. You have to use them like your debit card, and never be surprised at the balance. Even prepay. I put everything I can on Discover, pay it off every month, and get a couple of hundred dollars a year of totally free money, and sometimes discounts on big stuff. Most of my utilities and all of my groceries. Plane tickets. Free money!
@NoReally But isn’t some of your credit history erased with that particular card when you cancel it? I think that’s what he’s saying.
Switch to Ally for savings AND checking. I never knew I could love a bank…
What are the pros and cons of a traditional IRA and a roth IRA? why are you always promoting a roth?
@kira fisher@twitter
Roths are post tax and traditional are pre-tax. When you retire, money taken out of your traditional IRA will be taxed at the income tax rates in effect at that time. Money taken out of a Roth at retirement will be taken out tax free.
Two points.
1. If you are poor now, you are probably paying a low tax rate (e.g. 15%) and will get a smaller benefit from deducting a traditional IRA from your taxes now but you will likely be paying a higher rate at retirement (rates now top at 35%).
2. Rates are at a historical low, so the chances are that 40 years from now the top rate will be much, much higher than 35% so you are better off paying taxes now. Rates have been as high as 90% (and 50% in the not-to-distant past) so the good gamble is that they are going up.
@kira fisher@twitter Yes! What Tuna says. A Roth IRA is also what every financial advisor says a young person should have, and I agree. Also, you get a hefty penalty for withdrawing money from a traditional IRA before you are 59.5 years old. With a Roth, you are allowed to withdraw any amount of money you contribute to it without a penalty. After it has been open for five years, you’re also allowed to withdraw up to $10,000, including the earnings on top of your contributions, to buy your first home.
@kira fisher@twitter Roth = pay tax now; traditional IRA, 401(k) = pay tax later. It’s good to have both so that you lower your overall tax burden, but when you’re young its really smart to have the Roth, since you’ll hopefully be making a lot more money when you retire, so you’ll have some tax-free income available to you.
Fidelity is great. I’ve had retirement funds with Vanguard, Merrill Lynch and American Funds and recently moved everything to Fidelity. For someone who doesn’t understand what they are doing with their retirement funds, they have BY FAR the most helpful customer service and they don’t charge any fees for their IRAs (not sure if Vanguard does, just throwing it in there).
@down the rabbit hole I believe with Vanguard, you only pay based on the transactions you make – so each time I buy or sell, I pay a small fee. I like Vanguard because their philosophy is, historically money managers have done no better than the markets themselves. So they are very low cost because they aren’t actively managing it and charging management fees.
So great, I love this website. Follow-up on this point: “The first two things you should be doing is paying off your debt, and starting an emergency fund[.]” Let’s say I have $800 extra at the end of every month (haha!). And let’s say I have, oh, about a condo’s worth of debt, and just burned through my emergency fund during a long spell of unemployment. What proportion of my extra cash should I be throwing at my (~7.6% interest rate) student loans, and what should I be stocking away in my ING/Ally savings account? Thoughts, smart people?
@candybeans I once asked a financial advisor about this (because I too have tons of student loans) and he said, “It is more important to develop an emergency fund than to pay off debt ahead of time.” So I would pay the minimum payments on your student loans, and sock as much as you can into a savings account. Remember that with student loans, you are allowed to write off up to $2,500 worth of qualified student loan interest during tax time (qualified student loans are loans that were taken out to pay qualified education expenses, which include tuition, fees, room and board, and books.)
I love these advice posts. I have always been good about saving, so I haven’t had any big problems (so far!!! knock on wood!!!), but I’ve fallen into the trap of, “Oh, I’m decent with money, so I’m ok.” Whereas I know that now that I’m getting further into my 20s, I really need to be doing more grown-up things with my money. I have one tiny mutual fund that doesn’t really earn that much (to be fair, I haven’t put enough into it for it to be earning tons of interest), but I want to look into other options and keep putting it off. This is motivating me to stop putting it off any more.
When I started my first job, I used to loove checking the amount of $ that I had put in the 401(k) each pay period, such a dork.