Financial management / advice for new graduates

[WeBuyAndSellJunk]

I haven't seen a sticky anywhere on this topic, so please feel free to simply re-direct me if there is a thread with this information already.

 

I am really wanting the best financial advice (or advice otherwise) you guys can offer for someone just entering the work force. It is daunting to go from exceptionally poor to making substantial money in the blink of an eye. Some topics I am hoping you can give advice about or direct me to more knowledge include:

 

Retirement

Investment (stocks, bonds, mortgages, property, etc...)

Life Insurance / Disability Insurance

Money Management (money markets, lifestyle, taxes, etc...)

Loan Repayment (managing, re-financing, etc...)

Saving

Hiring people to help manage (financial advisors, etc...)

Anything else you might stop right now and think "Wow, I wish I would had known more about that or I wish I would have started doing that 5-10-15 years ago"

 

I feel like this forum has a lot of tremendous advice and this would be great for a lot of us newbies here if someone wouldn't mind filling in what they might know about any of these topics. Thanks!

[Acebecker]

Retirement: Get hired by a company that has a 401(k) plan or similar with an employer match - this is a program where you contribute a portion of each paycheck to a retirement plan and the employer will pay in the same amount up to a certain percentage of your income (usually like 3-4%).  So if you make $3500 twice per month, then you contribute $105 from each paycheck and your employer puts in $105.  It's an instant 100% return on investment.  Even if the 401(k) does poorly, you still gain.  But only if there's an employer match.  The catch: watch out for vesting - you only get to keep your employer's contribution if you've been with the company for a certain amount of time.  If it's a shelf scheme, then there is 0% vesting up until the shelf at which point you're 100% vested.  This can bite you if you leave the company a day early because then you get a 0% or potentially a negative return on your investment.  But generally this is not a big deal. 
Investment (stocks, bonds, mortgages, property, etc...):  Don't worry about properties until you have so much money that you don't know what to do with it.  Getting out of debt shoud be your first step.  
Life Insurance / Disability Insurance: This is crucial especially if you have a spouse and one who doesn't work (stay at home mom or dad).  They need to have 5-6 years worth of your annual salary upon your death.  In the above example, your annual salary is $84,000.  So you could probably get by with about a $400,000 life insurance policy.  Maybe more if you have a lot of student loans, a big home mortgage, medical bills for your kids, etc.  Something to keep in mind is that if you're young, term life insurance works pretty well.  This means that you get a life insurance policy that will expire in 20 years (or 30 or 40).  You are locked in at a certain rate no matter what happens to your health or circumstances.  The kicker is that you don't get any of the money back - you're not investing your insurance premiums into anything except the insurance company's pocket.  There's another type of life insurance called whole life insurance whereby you get returns on the money that you put in.  But you get a whole lot less insurance for much much more money and the return is not generally worth it.  Thus, term life works the best.  When it expires, you are generally at a place where you can self-insure if you need to (kids are out of the house, home and student loans paid off, etc).  Disability insurance is a good idea, but generally takes second fiddle to life insurance.  If you can only afford one right now, get the life insurance.  After that's easily taken care of, then look into disability insurance through AFLAC or somesuch. 
Money Management (money markets, lifestyle, taxes, etc...): Make a budget and stick to it.  Excel works really well and there are a number of other budget oriented softwares out there.  One such budgeting aid is called "mint.com."  You plug in your savings account data (how much, etc), salary, credit card spending, and all of that and it helps you keep track of how much you have to spend, how much you've spent, and can send you alerts to avoid pitfalls.  The only major investment that I'd recommend right away is called a ROTH IRA.  This is a long term savings account that is tax deferred (IIRC) and you get a tax break for your contributions up to the maximum of $5000.  This is especially helpful if you're sitting on the edge of a high tax bracket and having a few thousand dollars less in taxable income would bring you down to a lower tax rate.  The down side is that when you take your money out after the age of 65, you get taxed on it.  But uncle sam's gotta get his, right?
Loan Repayment (managing, re-financing, etc...):  Do anything you can to get loan repayment if it's feasible.  It's a buttload of free money and a no brainer.  If you have extra money at the end of the month, make an extra payment on your highest interest rate loans.  The more you pay off, the more you save.  When the high interest ones are paid off, you'll have even more to put toward the lower interest ones.  The more you do this, the more your extra cash-flow will snowball and get bigger and the faster you'll be able to pay off your student loans and your home loans.  Remember: getting out of debt is financial priority #1.
Saving:  A good rule of thumb is to save 10% of each paycheck into an account that you don't access regularly.  I settle for saving whatever I can each month and sometimes it's only $50.  You need an emergency fund first.  $1000 is a good place to start.  Get this in the bank and tell yourself, "I'm not touching this."  Expand that emergency fund to at least 3 and up to 6 months of your expenses.  If you're making $7000/month, then you need to have somewhere between $21000 and $42000 in savings in case you lose your job, lose a limb, get in a back car wreck, etc (this is where disability insurance comes in and can be important). 
Hiring people to help manage (financial advisors, etc...):  Most of the above stuff is pretty easy to handle on your own.  It takes attention to details, but it's not too bad.  Once this is all taken care of, then you can start hiring people to manage your money for you.  In my case, I didn't start consulting with anyone until I had everything taken care of as above (and I'm still in a crapload of debt, don't get me wrong).  But it only happened because of a death in the family and inheritance and such.  So, it's not a priority generally.  But it's always nice to have someone whose brain you can pick if needed. 
 

 

There you go.  That's everything I know about personal finances.  Hope it helps. 

[Bodiggler]

There is a lot of free advice out there. I would suggest not getting a new car and living in a cheap apartment or house for a couple years. Pay down that student loan debt. At the very least put in enough money to get the full company match in your 401k. Most financial advisors say you need to put away 20% of your income each year in order to retire comfortably. Otherwise Acebecker gave you some great starter advice.

[GetMeOuttaThisMess]

^^^^

Resolve debt first

Match employer contribution toward retirement (pay attention to fund costs!!!) and select market index fund (80/20->70/30 stocks/bonds) at young age (check out Scott Burns from Dallas Morning News at his personal website for Q&A's).

Term life ("rental" life insurance) if others are dependent on your income

Disability at young age more likely needed as opposed to life insurance (my personal policy stipulates my being able to perform my trained profession versus new policies which don't pay if you're able to perform ANY job).

Set aside emergency fund equal to 6 or more mos..

Remainder of any left over toward college funds for kids/home mortgage, etc.. IF you have or intend to have a mortgage I would encourage making an extra P&I payment per year to increase equity faster.

[WeBuyAndSellJunk]

Awesome advice. Exactly what I was looking for. Thanks so much for the input!

[WeBuyAndSellJunk]

So i've been reading a little about the Roth vs. the Traditional IRAs. It seems like the Roth IRA is taxed immediately and then is not taxed on withdrawal. Some people are saying this is actually a good investment now because tax rates are at an historical low vs. what they may be in 40-50 years.

 

If you cannot find a company/practice that matches your retirement input (or simply provides a shabby percentage), are there other ways to investment intelligently in retirement? Are you just stuck with what your company offers? Is an IRA actually a good primary retirement account vs. a 401k or 403b?

[WeBuyAndSellJunk]

GetMeOuttaThisMess - do you typically get to choose how the retirement accounts money is invested? Or do I just want to find a retirement plan that uses a low cost market index fund?

[Acebecker]

S&P500 is supposed to be the most financially intelligent because it has a low overhead.  I can't recall what the number is, but this dictates how much it costs to manage the fund.  The lower, the better, because then more of your money ends up in your pocket. 

 

Thank you for the correction - the Roth is taxed immediately, but you get the tax deferment for every dollar you put in up to the $5000/yr max.  This, in addition to the potential changes in tax rates, makes it a wise investment.  Ideally, to balance the risk, you would have a roth and a traditional IRA.  Once you max out in the roth, then dump money into the traditional.  That way, when they mature, you have the best of both worlds. 

 

As far as retirement funds go, the 401(k) only makes sense if you get an employer match.  Otherwise, these funds have not historically done great.  The IRAs make a lot of sense for retirement funding because of their tax statuses and such.  The other option is to invest in stocks and bonds (play the stock-market).  There are great calculations about how to do this to maximize growth, minimize risk and balance what potential loss you could tolerate over the long term.  That's the point where I start talking to a financial manager.   

[GetMeOuttaThisMess]

GetMeOuttaThisMess - do you typically get to choose how the retirement accounts money is invested? Or do I just want to find a retirement plan that uses a low cost market index fund?

No.  You are typically provided a list by the employer, and typically they are front loaded with not insignificant fee costs (upwards of 2 percent).  Some will provide low cost index funds but you'll have to do your research at the fund source website to find these costs.  A traditional IRA in our situation typically doesn't benefit us since the income level exceeds that to allow for a tax deduction.

 

You can take advantage of both your employer sponsored program as well as an individual retirement account.  Check on any potential vesting schedule.

[rev ronin]

Resolve debt first

Everything else is secondary to this.  Unless you are guaranteed (and you won't be) to make more money from an investment (tax adjusted) than the cost of interest you would avoid if you paid down your student loan with that money (again, tax adjusted), it doesn't make sense to invest in ANYTHING until you have your debt paid off.

 

Don't worry about your credit rating.  If you pay off all your debt as soon as you can, it will become good enough for everything you actually need.

 

Or, as my high school economics teacher said--"There are two kinds of people in the world: those who pay interest, and those who ARE PAID interest. Be in the latter group."

[PAtoB]

Whenever you marry, never, ever consolidate your debts or add each other's names to debt thinking you are helping credit-wise, security-wise, etc.

 

Have heard two horror stories of this occurring with student loan debt. 

[tunafish]

Whenever you marry, never, ever consolidate your debts or add each other's names to debt thinking you are helping credit-wise, security-wise, etc.

 

Have heard two horror stories of this occurring with student loan debt. 

Amen!!!! Ask me how I know this!

[Bodiggler]

S&P500 is supposed to be the most financially intelligent because it has a low overhead.  I can't recall what the number is, but this dictates how much it costs to manage the fund.  The lower, the better, because then more of your money ends up in your pocket. 

 

Thank you for the correction - the Roth is taxed immediately, but you get the tax deferment for every dollar you put in up to the $5000/yr max.  This, in addition to the potential changes in tax rates, makes it a wise investment.  Ideally, to balance the risk, you would have a roth and a traditional IRA.  Once you max out in the roth, then dump money into the traditional.  That way, when they mature, you have the best of both worlds. 

 

As far as retirement funds go, the 401(k) only makes sense if you get an employer match.  Otherwise, these funds have not historically done great.  The IRAs make a lot of sense for retirement funding because of their tax statuses and such.  The other option is to invest in stocks and bonds (play the stock-market).  There are great calculations about how to do this to maximize growth, minimize risk and balance what potential loss you could tolerate over the long term.  That's the point where I start talking to a financial manager.   

 

The max you can contribute is $5500 (they upped it this year). Another correction, if you put the full $5500 into a Roth IRA you CAN'T put any money into the traditional IRA. You can't exceed the $5500 limit. You can put $3000 in the Roth IRA and 2500 in the Traditional IRA if you chose to. Also the ROTH IRA has many advantages over the traditional IRA. You are not required to take minimum distributions at age 70. Basically it is a tax free growth. The entire amount in the ROTH (lets say 1.5 million) is tax free. If you were to pull the entire amount out you wouldn't pay a dime of taxes on it. Assuming it is after you turn 59.5 yrs old. Otherwise you will lose 30% of it to taxes. There are also income limits for the ROTH IRA. Some people make too much money to use them. There is a lot of free information out there. Happy hunting.

[Guest Paula]

Do not be tempted to keep up with the Jones and get on the hamster wheel of buying stuff you don't need.  It is so tempting and will put you in a load of more debt.   If you use credit cards only charge what you can pay off each month and do not carry a balance from month to month.

 

 Excellent advice given by the above posters.  

 

Allow yourself to take a vacation...it doesn't have to be elaborate...but enjoy your time off....don't get into debt for a vacation...save for it.

[GetMeOuttaThisMess]

The max you can contribute is $5500 (they upped it this year).

 

This is correct, dependent on age.  Older individuals are allowed to play "catch up" and can contribute up to $6500 annually.  I wish that I enjoyed medicine as much as I do keeping up with financial minutia ( :-( ).  The actual early withdrawal penalty (before age 59 1/2) is 10% of the amount withdrawn early, plus your normal taxation rate based upon your taxable income.

 

With regard to personal investment information I cannot recommend highly enough the Scott Burns website, specifically his information on the "Couch Potato" portfolio.  Investment made easy, even for "couch potatoes", thus the name.

 

Index funds traditional score in the upper echelon of fund returns in comparison to actively managed funds, without the associated cost.  Speaking for Vanguard specifically, they typically are in the top quarter of ROI (return on investment) and have low costs.

[Corpsman2PA]

Just watch a few episodes of Suze Orman and you'll be set!