so pru, I recently got my first adult full time job. I'm in my mid-twenties and can afford to start saving. Right now I just put 10% in a savings account but my money could be doing more. But I don't know where to start. Any advice?
Congratulations! Welcome to…well, welcome to having money to buy food and pay rent but you know what, that’s pretty flipping good all things even.
Before reading further, keep in mind all of the below advice comes with a massive caveat of IF FEASIBLE, so any moron reading this who thinks being pragmatic about money is somehow privilege, you can go fuck yourself with a rusty chainsaw right now. May god have mercy on your financial future.
In terms of saving, it’s fantastic that you’re thinking about it! The earlier you start, the better off you are.
This is actually going to be kind of long, but hopefully useful!
Some basic info first:
401(k) is an employer-sponsored employee retirement savings plan. Usually how this works is that a percentage of each of your paychecks is taken out pre-tax (thereby reducing the taxable income remaining) and added to this savings account, which is then invested in vehicles with a longer-term horizon, such as mutual funds, municipal bonds, etc. The details here aren’t super important at the moment, just know this isn’t a simple savings account, the money is being put to work earning more per year than you would ever get just putting it in a bank savings account.
Roth 401(k) is also an employer-sponsored employee retirement savings plan some companies offer, and the “Roth” means that the money is taken out of your check and put into the savings plan post-tax. That means you are charged income tax by the state, local, and federal government first, and then of the remainder, it’s put into that savings account. This will have a more significant impact on your take-home every month, but the benefit in the long term is that later in life, when you start drawing on your retirement accounts, the funds that come out of this account will come to you tax free, as you already paid at the time of investment. Deciding whether or not to go this route is kind of a complicated thing, because you have to make the decision on whether you think your money is going to be worth more to you now or later. IE: How much is $20 going to be worth today, versus in 35 or 40 years, when you retire? It’s worth speaking to a financial advisor if this is a big consideration for you.
403b is another employer-sponsored employee retirement savings plan, and it functions essentially like the regular 401(k), the difference is that the fees associated with this from your investment manager are lower. That is because only nonprofits, religious organizations, schools and governments can use this type of savings vehicles, so it lets smaller, less affluent organizations still help their employees set up some kind of retirement nest egg.
That also raises a good point: all of these retirement savings vehicles will come with associated investment advisor fees. I won’t say it doesn’t matter what the fees are, but I will say that that investing in any one of them will still be more profitable than chucking your cash under a mattress or dumping it into a regular savings account to avoid said fees.
If your company offers any of the above, I strongly, strongly encourage you to take advantage of it.
Another component of this is, does your company provide an employer match? An employer match is when the company will match some amount of money you’ve invested. For example, my company may have a 5% match – that means if I set it up so that every month, I’m contributing 5% to my 401(k), my company will match that amount into my retirement account. Free money! Pretty sweet, huh? The takeaway? If your office offers an employee match, you should at minimum contribute that amount to your retirement vehicle per month, otherwise you’re leaving money on the table.
Now, if feasible? You should probably contribute more than the employee match, since that number is low because companies are bastards and cheapskates. It’s great that you’re socking away 10% of your paycheck into a savings account each month – but if you have the option of socking that 10% away into a retirement account, all the better.
Beyond that, my personal financial management also compels me to save up rainy day funds, and to do it in a way that my poor impulse management will not trip me up. It’s all well and good to think about the distant future via retirement, but it’s imperative to build in a cushion in case of emergencies, to bank in some extra cash for treats for yourself, too. Money’s only as valuable as what it can buy you, and I want vacations and to be able to splurge on something nice occasionally, too.
What I mean is: I have direct deposit set up, and two separate bank accounts – one of which is designed specifically so I never look at it, can’t spend money out of it, and it just keeps accruing for emergencies. So every month, after my retirement contributions and health care costs and fucking tax from New York State and City are sucked like marrow from my paycheck bones, of the remaining balance, 90% goes into my regular checking account so I can weep grateful tears, pay my rent and credit card bills and sundries, and the other 10% goes directly to a different bank and account altogether.
Then within the 90% that’s in my regular account, I pay my bills and cover my every day costs, and every month I try to – on the day I get paid – move some cash into a savings account I carry at the same institution.
I know that sounds insanely complicated, but here is the benefit of doing it this way: this way, I know that I’m saving for retirement, that I’m building an emergency account somewhere with money I never even see, so it doesn’t feel real and I won’t feel compelled to access it or blow it on something dumb, and all the while, I still have a functional savings account building regularly within my financial eyeline that I can use to build up funds for a vacation, for travel, or some big purchase – or hell, who knows, for some month say where I lame myself on the way to a wedding and then have to shell out fucking $500 for physical therapy because I’m limping around New York City like fucking Igor and my right hip’s gone weird. JUST AN EXAMPLE.
Look, money is very complicated, but as long as you work hard to avoid debt, you really can experiment. You can adjust your retirement contributions, you can change how much you want to put away into a savings account, you can look at your budget for a month and think, “yep, not saving anything this month” and it’s all fine. This is a long-term project and you have some room to screw up. Just be cognizant, be thoughtful, and don’t be afraid to ask an expert for help. I know early in my career I would look at my pathetic bank account and think, “Literally no one would ever give me financial advice for like $50,” and sure, nobody’s going to inviting you to the private client bank, but no matter how much cash flow you have, there are better and worse ways to handle it. That you’re actively interested in how to better manage money is already a great sign – all too many people like to bury their heads in the sand.
Anyway, best of luck! As I warned, super long response. Hope at least some of it was useful!