Personal Finance

by Samm Bennett

Last year was the first time I seriously took a look into how I was spending money. Considering I was 26 and working professionally for 3 years, it was a pretty sad state of affairs. Something so rudimentary should certainly be taught in high school, particularly since timing can be so crucial when planning for retirement, college, wedding, etc. Anyway, I wanted to take some time to distill what I learned in case someone else finds themselves in the position I was in.

Probably the most important thing to consider is retirement. It's easy to neglect retirement when you're young, but compound interest and the volatility of the stock market really favors long term growth. Saving for retirement might seem like a daunting task, but it doesn't have to be. 

If your employer offers a 401(k) plan with a match, at the very least make sure to meet that. Otherwise you are literally walking away from free money. Once you have that met (or if your employer doesn't offer such a plan), focus on maxing out a Roth IRA. You can open up a Roth through the same company that handles your 401(k), or you can shop around (I'm personally a fan of Vanguard). The key difference between a Roth IRA and a 401(k) is that a Roth grows interest free. In other words, the interest you earn in a 401(k) will be taxed when you withdraw it in retirement, whereas interest from a Roth is not. I should also mention that 401(k) contributions are made pre-tax, while Roth contributions occur after taxes are taken out. 

Once you have money in a retirement plan, you need to make sure to invest it! The easiest approach is to invest in a lifetime fund, which automatically adjusts asset distribution (percentage of stock, bonds, international stock, etc) over time. Lifetime funds are generally named after the year targeted for retirement (for example, I use the Vanguard 2050 since I expect to retire around 2050 at the age of 65). It might sound silly, but in college I let the money from an internship sit in a money market fund, which means it wasn't really making anything at all! You are free to come up with your own asset allocation you can tweak, but a lifetime fund is by far the easiest to setup and maintain.

Of course, retirement is only one of many expensive events in a persons life, and it's important to save for those too. I've always been far removed from the idea of marriage or purchasing a house, but once those events become real, it's already too late to save. Consider that the average wedding costs $28,000, or that a house generally requires 20% deposit. I've found it far better to save monthly for these events so that I'll be ready if and when they happen, rather than end up in a lot of debt. Worst case, I end up with a lot of extra money that I could use to retire early, start a business, tour the world, etc. 

The sort of funds to invest in for these sorts of goals is tricky though, since the timeline can vary wildly. If you're already in a long term relationship and marriage seems like a possibility in a year or two, stocks aren't really a viable option due to volatility. But if you're like me and don't have firm plans on when to buy a house, then you can be a bit risker and work around stock market fluctuations. The key thing is to make sure that you're saving monthly; what specifically you invest in can be determined later.

While the goals I've mentioned up until now have been fairly long term, you should still consider short term goals as well. My favorite savings goal is $5,000 a year for an international vacation. Since the event is such short time, I put all of those funds into a savings account dedicated toward that goal. This way I can easily see the progress I'm making, and those funds are separated from my emergency fund and checking account. 

Now for some closing notes. Make sure you have an emergency fund! This should be about three to six months of expenses that you can rely on in case something unpredictable happens, like losing a job or necessary car repairs. Don't use this for items that you're aware of ahead of time, those you should be saving for! 

Note that I mentioned that your emergency fund should consist of your expenses and not salary; this implies that you should have a budget and should be living within it. If you aren't already using Mint to track your spending habits, I highly suggest you start doing so now. It's a painless way to track spending, and it even allows you to construct a budget based on your historical spending habits. If the idea of saving so much money seems impossible, I really recommend using Mint to inspect your current spending habits and see if there are some easy wins. Perhaps you're spending more than you expected at the bar, or your car is a bigger percentage of your take home pay than you thought.

When it comes to investing, I advise against individual stocks, and highly recommend index funds. While individual stocks seem like the best way to make a lot of money, you really only should invest in them if you're very familiar with the company, its competition, and its future economic prospects. You should be investing long term; otherwise you'll need to spend a lot of time and effort staying abreast of new information and developments. Comparatively, an index fund requires little management from the individual investor since its tied to the stock market. Trying to beat the market is difficult and costly, while a solid index fund with low fees can still reap rewards. 

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