- May 7, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Financial Situation of a 22-Year-Old Female
Hello Everyone!
I am a 22-year-old female, currently making $5,500 a month starting in July, with $20,000 in savings. I will be moving outside of Cincinnati next month, where I will be paying $1,420 in rent, which I know is on the pricier side. I have no debt or loans to worry about at the moment.
Transitioning into full adulthood outside of university, I come from a low-income family with limited financial literacy. However, I am determined to break the cycle. Recently, I opened a Roth IRA without much knowledge of how to invest in it, alongside a savings account. I am attempting to budget my expenses by prioritizing bills, rent, groceries, gas, and ensuring I contribute to savings and retirement accounts. Whatever remains after these obligations will be my “fun” money.
Despite my efforts, I am uncertain about the appropriate amount to save each month and how much to allocate to my Roth IRA and a potential 401k. My weakness is my desire to take an annual vacation. I strive to be a thrifty traveler, opting for hostels and inexpensive meals, but airfare tends to be my largest expense. Therefore, I would like to leave room in my budget for this yearly trip.
I would greatly appreciate any advice or pointers from those more experienced in financial planning. While I am willing to learn through trial and error, suggestions from experts in the field would be invaluable.
Thank you in advance for your help!
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Does your employer offer a 401k match? If so contribute up to that amount. I would do traditional 401k contributions since you appear to be in the 22% tax bracket ($66k), but that’s just my opinion on traditional vs Roth 401k.
Then figure out what 3-6 months of expenses are and keep that in a high yield savings account.
Anything after that can go to your Roth IRA. For investing I would just put in VOO or VTI. Once you contribute the money you then have the options to buy one of these ETFs. If you end your maxing out your Roth IRA before the end of the year ($7k) then you can up your 401k contributions.
It’s good to try to save 20-25% if you can towards retirement. But being young and early in your career aiming for 15% is a good start. If you have an HSA available then that is another great investing tool that lowers your taxable income
Kudos on thinking about this. I’m about the same age and have been saving religiously since I was 18; It’s worth it.
First, normal advice if you’re starting from nothing (or thereabouts) is to save up some amount of money into an emergency fund. This should be somewhere accessible, and interest bearing. If your savings account is not a High Yield Savings Account then you should find and open one. They’re paying about 4.5-5% right now and they’re as good as guaranteed gets in personal finance. You should ideally build this up before anything else and should cover between 3 and 6 months of expenses. The more the better.
Next, max out your Roth IRA if possible. The current contribution limit for 2024 on IRA’s is $7000. This is indexed to inflation and will increase over the years. In order to fully max it out, you’d need to contribute $583/month, or $150/week. Next, you need to choose an investment inside the IRA. Plenty of people assume that an IRA is an investment unto itself, but it is not. It is merely a special kind of account and you need to invest within it.
How you choose to invest is up to you, but since this isn’t your area of expertise, I’ll peddle my own opinion. For most people, a “3 fund portfolio” is about the best combo of simple and efficient you can get. Head on over to r/bogleheads and look in the sidebar for information related to this strategy. Essentially, you need to find index funds that are diversified across many different stocks and types of companies. Anyone telling you to invest into individual stocks, options, crypto, etc. is an idiot and their advice should be disregarded (ok it’s not that black-and-white but this is your retirement, you aren’t gambling and this isn’t a hobby)
Lastly; you need to ignore it. For decades. Don’t sell, don’t panic, just keep contributing and making sure you keep buying into your 3-fund portfolio, or whatever other investment strategy you choose. The largest killer of gains is fear of the market. It will tank every once in a while and you’ll lose 30-50% of your money. It’ll come back just don’t sell whatever you do. If the market becomes worthless we’re not gonna worry about how much money we have for retirement, we’ll be worried about finding food and water.
Congrats on starting so early! My biggest recommendation is to come join us over at r/personalfinance and r/TheMoneyGuy. Specifically, start by reading r/personalfinance’s [prime directive](https://www.reddit.com/r/personalfinance/wiki/commontopics/) to get good orientation. Then check out The Money Guy’s [“Financial Order of Operations”](https://moneyguy.com/article/foo/), which gives a really good baseline on the order in which you should allocate your money. Take a listen to their The Money Guy podcast, too. It’s not for everyone but they have some good advice and perspectives. Really, just listen and read as much as you can! Also, please be aware that this is the internet and we’re strangers, not financial advisers. Take everything you read on Reddit (and the internet as a whole) with a huge grain of salt (including what I say). There’s some gold but there’s also some fools’ gold in these here parts.
TLDR; **GET THE 401K MATCH** then prioritize whatever Roth option you have.
Now, to your actual question: without knowing more about your specific 401k you might actually be asking two questions: 1) should I prioritize Roth vs traditional contributions; and 2) should I prioritize my IRA or 401k? You’ll see a lot of people refer to a “Roth IRA” simply as a “Roth” but there are also 401k plans which allow you to make Roth contributions as well. Check with your HR department or your 401k plan advisor to determine if you are able to make Roth contributions (specifically “Roth contributions”, not “after-tax contributions”, which can be different). With that in mind:
1. Should I prioritize Roth vs traditional contributions?
Unfortunately, it depends on more than strangers on the internet could really know about you, your specific financial situation, and your goals. You’ll see a lot of back and forth on this topic. The common guidance I’ve seen is if you expect to make more in retirement than right now prioritize Roth contributions. If you expect to make less in retirement than right now then prioritize traditional contributions. Being in your 20s, it’s pretty safe to assume the former is the case and Roth is the way to go.
My (married 29M, expecting to have kids someday) perspective is that I won’t ever be upset about having _too_ much tax-free money and I will likely make quite a bit more later in my career and retirement, so I prioritize Roth. I don’t want to owe any money to anyone when I’m retired. That said, I expect this perspective to change as I make more money and/or want to pay less taxes in a given year.
2. Should I prioritize my IRA or 401k?
Again, it depends (sorry!). The biggest reason I’ve seen from people for prioritize funding an IRA is choice: you get to choose _where_ you have your IRA which means you can shop around based on fees and fund choice (Fidelity is what I use, btw, but I’ve heard Vanguard and Schwab are also good choices). That said, if your 401k has low fees and great fund options, there’s not too much of a difference between the two and you should go with whatever is easiest for you.
No matter what, if your employer offers a match to your 401k **GET THAT FIRST!** I’m lucky in that my 401k is _also_ at Fidelity and it offers a Roth contribution option. I just prioritize my 401k until I max it out, then I move to my IRA.
As for fund choice, while you’re getting going and learning your best bet is likely to pick a low-cost target retirement date fund and just roll with that. These funds are usually named something like “2050 target fund”. Just choose the year closest to when you think you’ll retire (if you don’t know that yet, just use 65 as your target). From there you might want to dig deeper and learn more about specific ETFs and index funds or decide to hire a financial advisor (which is okay, too, so long as you find a good and fair one!).
Go to the library and check out a beginners book on personal finance and retirement saving. They will have an entire shelf of these. Start with something simple like “Idiots guide to personal finance.” Do not read this like it is a novel. Study this book like you have a final exam on it in a week. Sit down at a desk or table with pen and paper. Read the book and take notes. Write down questions. Look up answers. Write down the answers. Spend at least 3 hours on this. After that, follow up with “Making the most of your money, now” by Jane Bryant Quinn. This one is intermediate level with more detail but you can skip the sections that don’t yet apply to you. Trust me, this will be the most profitable study you ever did.
With that said, I will also try to answer some of your questions. Your Roth IRA should be fully funded each year, which is $7000. It should be invested 100% in low cost stock index funds. Not bonds, not money markets, not bitcoins, none of that stuff. An example is Vanguard VTSAX. No matter what happens, you do not touch that money. If the stock market drops 40% and your balance looks terrible, do nothing. If the internet says there will definitely be a recession in 2023, do nothing. If your friend makes a lot on some Tesla stock options trade and says you can get rich, don’t do anything. Just let that money grows year after year. A 401k is offered by your employer. You can use both a Roth and a 401k. If the 401k has a match, this is free money and makes it better than a Roth. The answer to “how much should I save” depends on how rich you want to become. At your age, money saved and invested is worth a fortune over your lifetime. I would try to save and invest what seems like an absurd amount. That “fun money” could be called “millionaire by age 40 prep funds” if you are willing to save and invest 75% of it. At a minimum you should max out the Roth and put enough in the 401k to get the full match. Maxing out the 401k as well (or coming close) will generate so much money you might be stunned. If you manage to put 7000 in a Roth and 23000 in a 401k each year, invested in total stock index funds earning an average of 9% a year, you will have $1.35 million by age 40. And $9.24 million by age 60. You don’t have to save that much, but I like to demonstrate the awesome power of compounding. I also like to show this calculation: if you save this amount (30000) each year until age 40 then stop saving more and let it ride, you end up with $6.37 million at age 60. If you wait until age 30 to start and save that amount every year until age 60, you end up with $4.46 million. This is the critical importance of saving and investing at a young age.
How much you should be saving is really dependent on what you’re trying to save for. Are you trying to retire early? Do you want to own a home? What do you envision your retirement to look like?
Since you’re young, your answer will probably change many times over the course of your life. However, now is a good time to build good habits. If you’re eligible and have a high deductible health plan, I would open an HSA and max that out. I would also contribute to the the 401k up to the company’s match, otherwise, prioritize maxing your Roth IRA, and then contributing to your 401k.
$20k looks like that’s sufficient as an emergency so you probably don’t need to put more into your savings unless you’re trying to save up for something within the next 3-6 months like a vacation. Otherwise, try to max out your 401k and once you’ve down that, you can also open up a taxable brokerage account and fund that as well rather than just increasing your savings as you’ll get higher returns.
You’re young, you have no debt, good savings. As your salary naturally increases, try to avoid lifestyle creep which is much easier if you’re accustomed to seeing smaller paychecks due to retirement contributions. Try and max out your retirement accounts as soon as you can, without it affecting the quality of your life too much of course, and you should be good as your goals will become more concrete as you go through life.
Read Total Money Makeover and follow the baby steps.
That 20,000$ sounds like it’s your new emergency fund. Might be too high for your current situation. Just keep it at 3-6 months of expenses, but atleast 10,000$. And this is your emergency fund – not a vacation fund.
After that is complete start contributing at least 15% of your gross income toward retirement. If your job offers a 401K with a Roth option then you can do all 15% there.
You are off to a good start. Generally, contribute to a 401k as much as needed to get the match. then contribute to your Roth IRA. In both tax advantaged accounts, contribute to a stock market index fund that tracks the S&P 500 or the total stock market. Don’t worry about bonds yet (and bonds do not belong in a Roth). All you need to know if nothing else, contribute to the index fund and do not sell. Buy more if you can when things look horrible, and you are “losing” money. Until you retire, it’s all about the number of shares. Do not sell and you will be more than fine. How much you safe depends on your budget and circumstances. Budget and plan. Have emergencies funds on a short leash – but at least in a HYSA or money market fund (e.g. in a brokerage). Your vacation is important and more valuable than the money you spend on it. That’s an investment too. Fancy clothes, “stuff”, maybe not so much. Drive a cheaper but reliable car, keep up the basic maintenance (oil changes, filters, fluids). If you want to learn about money and investing, check out Rob Berger (youtube) and Bogle “Little Book about Common Sense Investing”. While you have your money in a stock market index fund, you have plenty of time to learn. Also learn how to do your taxes! It’s easy right now and probably will remain easy through life. Understanding this will empower you. Take your 2023 tax return if you have one and figure out how this came together. What is your AGI, how does your 401k money factor in, what about the Roth IRA? It’s more interesting than you may think – because it’s your money.
Hey! Welcome to the Cincinnati area! I’m 26 and have been here for about a year now.
Lots of great information on this sub and other subreddits. You’re like me coming out of college with no debt which puts you in a phenomenal situation. What’s even better is that you have a 6 month emergency fund already in place!
First order for you is to a minimum contribute to your 401k the amount needed for the max from your company.
After that if you have an HSA to contribute to max that out. (Since your 22 you might be able to stay in parents insurance if they let you that can vary).
Next max out Roth IRA. 7k a year, I consider this a fixed expense, it comes out with every paycheck.
After that I would keep an eagle eye on expenses over the next few months to truly see what you spend and make a budget that aligns to being able to save 20% of your gross income at minimum.
A good way to think of it. Is for every $10 you make invest $1
Here is what I would do, first put that 20k into not HYSA next do the 401k match so 4% then I would max out my Roth and it never hurts to meet with a FA to see what’s the best fit for you. Cincinnati is a great city make sure to save for graeters a gold star