Clueless college new grad 22 yo, 200k income looking to start saving

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moonhalf
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Clueless college new grad 22 yo, 200k income looking to start saving

Post by moonhalf » Tue Feb 02, 2016 11:34 pm

Hi guys, I'm new to this community, and would appreciate some advice regarding personal finances
and investing.

I am 22 years old, one year out of college, and currently living in the SF Bay Area.
Right now, I make 180k+ with my primary employer and 20k+ consulting for a startup.

After tax, I take home about 10k a month, plus an additional 10k at the end of the year.

I have savings of around 15k, mostly in the form of stock units of my primary employer, and no debts.
My employer has been performing extraordinarily well for the past year, but I'd still like to diversify.

I'd like to accumulate some savings and hopefully
tackle the housing market in a few years or so (1 million+ for townhouse with no lot,
1.5+ million for any reasonable single family home, 2 million+ for good school districts
that keep long term value).

Right now I spend <3k a month on housing, utilities, and phone plan. I spend another 3k a month on living
expenses and <10k or so a year on gifts and trips. My living expenses are on the high partially due to the high
cost of living and partially because my fiancee had a rather privileged upbringing and has fairly high cost
habits. I love her very much so there's not much leeway in reducing cost of living. All in all, I can expect to
put away around 3.5k each month.

My goal within the year is to save up 40k or so for wedding costs (ring, gown, honeymoon) and I hope to save
150k+ for a down payment within the next three years or so. My fiancee will not be contributing anything to
this plan as she keeps her finances separate. Of course, I would also very much appreciate advice regarding
long term investments. I am grateful for having healthy income at a young age without the burden of debts
and I'd like to take full advantage of it.

Thanks!

Here's a follow up post that I made addressing some issues that got buried in the replies. I'm copying it here as I think it provides some important
information.

A couple things that I think should be cleared up:

I love my fiancee very much and we are absolutely committed to living a life together. She has her own income which is around the same as mine and a gift of around $1.2 million or so from her parents which she will be managing on her own. She actually doesn't plan to take advantage of her parents' gift to better her own life, but is merely managing it to generate some extra liquid income in anticipation of her parents' impending retirement. In short, she has absolutely no need of any support from either her parents or me.

I cover everyday expenses including rent not out of necessity but to show her that I am responsible and capable. I plan to do the same with wedding costs. I very much enjoy my life with her and do not plan on making any changes to our lifestyle. She is not some sort of ungrateful princess like some of the replies imply her to be. We've been together since we were students when I didn't any income. She buys nearly all of our clothes, pays for all of her recreation, and is planning to buy a car with her own income.

I don't think that my spending habits are excessive, just slightly high compared to single individuals with my income. I take home about 10k a month after tax and spend roughly 6k a month depending on the month. I think that I can reasonably manage something like 3.5k a month in cash savings without significant adjustments to my lifestyle. I'm not seeking any advice regarding changing my lifestyle, only advice regarding how to manage my money.

I understand that the mainstream opinion of this board is to focus on low risk long term savings with retirement as the intended goal and I respect that. I wish that you would do the same toward my lifestyle and my fiancee. Everyone has different spending habits and different lifestyles, I'm just looking for some sound financial advice for someone my age and my level of income.
Last edited by moonhalf on Wed Feb 03, 2016 6:40 pm, edited 3 times in total.

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Qtman
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Qtman » Wed Feb 03, 2016 8:56 am

Read "Enough" by Bogle to get some wisdom at 22. Don't learn all the lessons of life by experience, stand on the shoulders of those who have gone before and avoid many traps of cultural pressure. Congrats on your effort to get here at 22, best for your future. :beer
Don’t wear yourself out trying to get rich; be wise enough to control yourself. | Wealth can vanish in the wink of an eye. It can seem to grow wings and fly away | like an eagle. - King Solomon

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by BV3273 » Wed Feb 03, 2016 9:14 am

You're income is well above the norm for a college grad and I commend you for coming here for investing advice. I'm not as experienced as many of the others on here, but all I can tell you is to make sure that you are saving for any bumps you may experience on the road of life. I would shoot for at least 6-12 months of expenses in an emergency fund.

Stupendous
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Stupendous » Wed Feb 03, 2016 9:14 am

How much are you saving in your 401k and Roth IRA (backdoor method for you because of high income)? You should have those maxed out with your high income. And how big is your emergency fund?

Are you and your future spouse aligned on future financial goals? You 2 need to talk about that. I don't see how you 2 are aligned if she keeps her finances separate and you have to save for everything for the wedding costs. Red flag.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Cuzz35 » Wed Feb 03, 2016 9:17 am

Halfmoon,

Congratulations on a great salary at the age of 22. Your post has a lot of things that concern me and I am sure will concern others as well.

You are very young and I imagine being out on your own is a new thing. You are with someone that has very large spending habits and live in a HCOL area. Do you have an emergency fund? Are you planning to save anything on retirement in addition to the $40k wedding and $150k home down payment? What does your future salary expectations look like? How stable is your job? What does your girlfriend do for a living? Will you be supporting 100% of her expensive lifestyle? At that level of income I don't see you being able to afford a $1.5 million home.

I personally think you are rushing ahead way to quickly without really any knowledge of supporting two people out in the real world. Earning that much at such a young age, I really think you should learn to live a little below your means before adding a home, spouse, kids etc. because when those things come there will always be unexpected expenses. I would first shoot for an emergency fund of 6-12 months of expenses and maxing out retirement accounts. Doing this will require you to set a budget for yourself.
Last edited by Cuzz35 on Wed Feb 03, 2016 11:14 am, edited 1 time in total.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by pkcrafter » Wed Feb 03, 2016 9:35 am

Bogleheads Investment Philosophy

No. 1 Develop a workable plan--
Live below your means. Perhaps the most important idea underlying the Bogleheads approach to investing is recognizing you need to save a significant portion of income every month to have enough money for a comfortable retirement. There is no substitute for spending less than you earn. The Bogleheads approach to developing a workable financial plan is to have a sensible household budget - one that provides for needed expenditures, discretionary pleasures, savings for big ticket items, and savings for long term retirement planning. Avoid excess debt, such as credit cards and home equity loans. If you have such debt, pay off those balances first. Reduce expenses and unneeded debt so you can consistently set aside a portion of earnings for decades. If you don't save enough, no amount of financial trickery will provide the returns needed for a comfortable retirement.
https://www.bogleheads.org/wiki/Boglehe ... philosophy


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by dsmil » Wed Feb 03, 2016 9:48 am

Congrats on the great start to your career! This is one of the steps to creating wealth, but the next step is managing expenses. My wife also had a more privileged upbringing than I did and was used to spending money right out of college, even though I was at an entry-level job and she was a nanny. What really helped us out was being honest with each other and setting goals for ourselves. It's easier to spend less money on "things" when it's known by both of you that doing so will negatively affect future goals, such as buying a home and starting a family. We now spend less money on "things/entertainment" than we did when we were making half of what we do now.

The most common recommendation that you'll hear is to save for an emergency fund and to be able to put away 15% of your gross income towards retirement. Some people require more than 15% and some people require less than 15%, but it's a good benchmark to use. After those goals are met, you can then start looking towards your other goals such as the home down payment and wedding costs. It's good to get in the habit of paying yourself (retirement savings) before paying for other things.

warner25
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by warner25 » Wed Feb 03, 2016 10:18 am

My first thought/concern is to wonder how persistent this astonishingly high income can be for someone your age. By talking about a $40k wedding and a $1M+ home, you already seem to be cornering yourself into a high maintenance lifestyle, under pressure to keep earning this kind of money (and likely more) when that might not be sustainable. We are talking about software/tech industry here, right? Do you know the history of its booms and busts?

EnjoyIt
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by EnjoyIt » Wed Feb 03, 2016 10:23 am

Best advice you can get right now is to save a minimum of 15% of your income. Many would even recommend 20%. But if you plan on working till 60-65 saving 15% is plenty.

So, save $30K/yr for retirement. Then you can start saving for a wedding. At $200K/yr you will not be able to afford a $1.5 million house unless you have $900K as a down payment.

I believe you are a bit ahead of yourself thinking $200K will buy you a lot. In a HCOL area you need to be careful.

Again, save $30K a year and then see what you can afford.

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Raymond
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Raymond » Wed Feb 03, 2016 10:24 am

moonhalf, welcome to the Bogleheads and congratulations on your success so far :sharebeer

However, as mentioned earlier, this situation raises a warning flag:
moonhalf wrote:...My living expenses are on the high partially due to the high cost of living and partially because my fiancee had a rather privileged upbringing and has fairly high cost habits. I love her very much so there's not much leeway in reducing cost of living.

My goal within the year is to save up 40k or so for wedding costs (ring, gown, honeymoon) and I hope to save 150k+ for a down payment within the next three years or so. My fiancee will not be contributing anything to this plan as she keeps her finances separate...
So if she wants to keep her finances separate, is she also going to pay for her "high cost habits"?

Or will you be expected to maintain her in the lifestyle which she is accustomed to, entirely out of your income?

If you're OK with that, then carry on :happy

My apologies - you probably didn't come here for relationship advice, but I have seen friends' marriages break up messily in similar situations.
Last edited by Raymond on Wed Feb 03, 2016 10:31 am, edited 1 time in total.
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by cherijoh » Wed Feb 03, 2016 10:29 am

moonhalf wrote:My goal within the year is to save up 40k or so for wedding costs (ring, gown, honeymoon) and I hope to save
150k+ for a down payment within the next three years or so. My fiancee will not be contributing anything to
this plan as she keeps her finances separate.
Your fiancée keeps her finances separate, but apparently expects you to pick up the cost of ALL expenses including the wedding gown and the down payment on your future home? Oh boy! I see rocky shoals ahead.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by JW-Retired » Wed Feb 03, 2016 10:33 am

moonhalf wrote: My goal within the year is to save up 40k or so for wedding costs (ring, gown, honeymoon) and I hope to save
150k+ for a down payment within the next three years or so. My fiancée will not be contributing anything to
this plan as she keeps her finances separate.
Am I interpreting this correctly? You are paying $40k for a groom's share of the wedding costs and, following tradition, the rest of the wedding will be covered by the bride's parents?
JW
Last edited by JW-Retired on Wed Feb 03, 2016 10:42 am, edited 1 time in total.
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by JupiterJones » Wed Feb 03, 2016 10:34 am

moonhalf wrote:I have savings of around 15k, mostly in the form of stock units of my primary employer
I'll echo the importance of having an emergency fund of roughly 6 months or so of expenses. This money should be somewhere that is A) stable and B) liquid. Stable, because you don't want to find that it has lost value at the time you need to withdraw it, and liquid because if it's an emergency, you're not going to want to wait very long to get it! :D

So I would advise building up some emergency savings in a money market account, or something boring and safe like that. It won't earn much money, but that's not its job, so that's okay.

Now your stock investments are great, but the stock market is best for longer-term goals (5+ years). I would not rely on stocks as any sort of "savings" in the traditional sense of the word--certainly not an emergency fund.

Furthermore, you typically want your stock investing to be highly diversified. Having most of it in any single stock is typically a bad idea. Even worse when it's your employer's stock, because it's a double risk: A drop in stock value could coincide with a loss of your job there! So if it's possible for you to do so, you might want to sell a goodly portion of those shares in favor of, say, a broadly-diversified stock mutual fund.
Stay on target...

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by KyleAAA » Wed Feb 03, 2016 10:38 am

Given that you're in tech in San Francisco, I recommend you being a bit more conservative with both your investments and your expectations for the future. If another 2000 happens you could be out of a job for a looooooong time. I wouldn't buy a $1mm house on a $200k salary in tech in San Francisco, personally.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by stoptothink » Wed Feb 03, 2016 10:42 am

Congrats on the amazing success at such a young age. So many red flags, but addressing them would probably just anger the OP. The only advice I can give is to slow down. You literally just started. Save, save, save, and then save some more, and then rethink whether you want or even can buy a place in a few years. High income, single, and without any real responsibilities yet; if you are smart for just the next few years you can set up a solid foundation for the rest of your life.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by supersharpie » Wed Feb 03, 2016 10:43 am

moonhalf wrote:Hi guys, I'm new to this community, and would appreciate some advice regarding personal finances
and investing.

I am 22 years old, one year out of college, and currently living in the SF Bay Area.
Right now, I make 180k+ with my primary employer and 20k+ consulting for a startup.

After tax, I take home about 10k a month, plus an additional 10k at the end of the year.

I have savings of around 15k, mostly in the form of stock units of my primary employer, and no debts.
My employer has been performing extraordinarily well for the past year, but I'd still like to diversify.

I'd like to accumulate some savings and hopefully
tackle the housing market in a few years or so (1 million+ for townhouse with no lot,
1.5+ million for any reasonable single family home, 2 million+ for good school districts
that keep long term value).

Right now I spend <3k a month on housing, utilities, and phone plan. I spend another 3k a month on living
expenses and <10k or so on gifts and trips. My living expenses are on the high partially due to the high
cost of living and partially because my fiancee had a rather privileged upbringing and has fairly high cost
habits. I love her very much so there's not much leeway in reducing cost of living.

My goal within the year is to save up 40k or so for wedding costs (ring, gown, honeymoon) and I hope to save
150k+ for a down payment within the next three years or so. My fiancee will not be contributing anything to
this plan as she keeps her finances separate. Of course, I would also very much appreciate advice regarding
long term investments. I am grateful for having healthy income at a young age without the burden of debts
and I'd like to take full advantage of it.

Thanks!
Giving your fiancee a free ride is a big mistake. If there is "not much leeway" to rein in her spending of your hard earned money then I foresee four possible outcomes:

1. Your income grows fast enough to support her pampered lifestyle and still allow you to achieve financial independence at a relatively young age.

2. Your income stagnates or declines and you start racking up debt, requiring you to work until you are medically unable and perhaps even necessitate filing for bankruptcy.

3. You end up getting divorced from the princess and find someone more financially compatible with whom to spend your life.

4. You both mature and commit yourselves to a budget that balances current wants and future financial goals.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by goodenyou » Wed Feb 03, 2016 11:43 am

There won't be a shortage of advice on this forum on how to manage your income and lifestyle. The cash burn rate in your area is incredible. You can easily blow through your income and not even feel like you are livin' even a bit large. I would try to save what is left after hefty taxes and living costs. Million dollar homes without hundreds of thousands in savings and significant retirement savings is foolish. You will need many multiples of your income and/or living in a LCOL area. The problem with good-paying high tech jobs is that they often require you to live in HCOL areas. Don't get into debt and don't make huge financial mistakes when you are young. You have the potential for a great future with that kind of income out of the gates. I wouldn't get married young, but that is an individual decision. I would have many (bad) mistakes in that department if I had.
Last edited by goodenyou on Wed Feb 03, 2016 11:47 am, edited 1 time in total.
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by nimo956 » Wed Feb 03, 2016 11:45 am

I clicked on this thread feeling excited for you and slightly envious, but now I just feel sorry because I get the sense from your post that you are already becoming trapped in a high cost lifestyle before you even start working. If you continue down this path, you'll be working forever. With that income at that age I'd strive to be financially independent by my mid-40s.

Here's what I see in your future:
$40k wedding
$1.5m house
$50k cars x 2
$50k/yr private school x 2 for 2 children
$200k/child college cost x 2
Expensive vacations
Maybe a second home, boat, country club, etc.

I feel trapped just reading it!

Immediately, you need to commit to saving for retirement. I'd shoot for at least $50k per year or 25% of your gross salary to start. That's $18k in a 401k, $5.5k in a backdoor Roth IRA, and $26.5k in taxable. After that, you budget for everything else, wedding, home, vacations, etc.

Edit: Also, it's important to have a spouse that shares your financial goals, so have this conversation before you get married! Frugal women do exist. Not to brag, but I couldn't convince my wife to spend any money on a wedding. No ring, no party and I couldn't be happier.
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by TomatoTomahto » Wed Feb 03, 2016 11:59 am

I expect my college sophomore will be graduating with an income similar to yours. I can't speak to his marital plans at that time, but some advice I would give him if his plans were like yours:
1. Don't rush to buy a house. Rent. When you're young, the ability to go where the intriguing job opportunities exist should not be discarded so easily. Don't ignore the high value of liquidity.
2. It's not for me to say, but I'm curious why the rush to get married? I'm a romantic and believe that love can conquer many things, but you two raise quite a few red flags, as others have mentioned.
3. Save while you can save without pain.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by rbaldini » Wed Feb 03, 2016 12:11 pm

Some unsolicited and perhaps unappreciated advice:

Don't spend a lot on your wedding. "A lot" depends on how much money you have. Of course, it's your money, and you can spend it any way you want. And weddings are, in theory, great things: you get friends and family together to celebrate a great thing. But often they turn into a big dog and pony show in which the goal is to show the world how happy and wealthy you are. You suddenly start to worry about trivialities that you normally couldn't care less about - like what if you get the cake isn't the "right" flavor, or people don't like the live band!? Getting caught up in all these showy trivialities means that you tend to get stressed out, presumably because you fear that you will not be able to impress your guests as much as you'd hoped. All of this stress is self-imposed, at the cost of many thousands of dollars. So cut the budget by 10k, and put that toward your down payment. Or invest it and pay for a kid's education in 20 years.

But, again, that's just my own (judgmental) opinion, and you can spend your money as you wish.

And I echo the sentiment that you shouldn't rush to buy a house so early out of college, especially in the extremely expensive bay area.

Okay, last edit. This is, IMO, a red flag:
"My living expenses are on the high partially due to the high cost of living and partially because my fiancee had a rather privileged upbringing and has fairly high cost habits. I love her very much so there's not much leeway in reducing cost of living."
This reads as "I personally would prefer to spend a bit less, but my fiancee insists that we continue to spend a lot. I let her have her way." Seems to me that partners should be able to compromise over such an important matter. Let me know if I am reading that the wrong way, and sorry to criticize what may in fact be a healthy relationship.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by rbaldini » Wed Feb 03, 2016 12:25 pm

Also: read this: https://www.google.com/url?sa=t&rct=j&q ... 9xCpivyMLQ

Explicitly aimed at young investors. It was the first investment advice I ever read.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Gill » Wed Feb 03, 2016 12:32 pm

Your itemized expenses total $16,000 a month. You are already spending more than you earn. You need to get realistic about what you can afford on your income. It is a nice income right out of the gate but it can't buy everything.
Gill

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by supersharpie » Wed Feb 03, 2016 12:34 pm

rbaldini wrote:Some unsolicited and perhaps unappreciated advice:

Don't spend a lot on your wedding. "A lot" depends on how much money you have. Of course, it's your money, and you can spend it any way you want. And weddings are, in theory, great things: you get friends and family together to celebrate a great thing. But often they turn into a big dog and pony show in which the goal is to show the world how happy and wealthy you are. You suddenly start to worry about trivialities that you normally couldn't care less about - like what if you get the cake isn't the "right" flavor, or people don't like the live band!? Getting caught up in all these showy trivialities means that you tend to get stressed out, presumably because you fear that you will not be able to impress your guests as much as you'd hoped. All of this stress is self-imposed, at the cost of many thousands of dollars. So cut the budget by 10k, and put that toward your down payment. Or invest it and pay for a kid's education in 20 years.

But, again, that's just my own (judgmental) opinion, and you can spend your money as you wish.

And I echo the sentiment that you shouldn't rush to buy a house so early out of college, especially in the extremely expensive bay area.

Okay, last edit. This is, IMO, a red flag:
"My living expenses are on the high partially due to the high cost of living and partially because my fiancee had a rather privileged upbringing and has fairly high cost habits. I love her very much so there's not much leeway in reducing cost of living."
This reads as "I personally would prefer to spend a bit less, but my fiancee insists that we continue to spend a lot. I let her have her way." Seems to me that partners should be able to compromise over such an important matter. Let me know if I am reading that the wrong way, and sorry to criticize what may in fact be a healthy relationship.
Yes, based solely on the limited info that OP provided you have to wonder whether her acceptance of his marriage proposal was contingent on him continuing to fund the lifestyle to which she has become accustomed.

OP, have you ever talked with her about certain "what ifs" such as "what if I become disabled?" and "what if I am unemployed for a significant period?"

I would advise only marrying someone who you are confident will continue to love you and stay by your side "for worse," "for poorer," and "in sickness." There are many reasons the divorce rate is so high and one of them is that so many couples get married without making sincere commitments to this level of fidelity.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by nimo956 » Wed Feb 03, 2016 12:35 pm

Gill wrote:Your itemized expenses total $16,000 a month. You are already spending more than you earn. You need to get realistic about what you can afford on your income. It is a nice income right out of the gate but it can't buy everything.
Gill
I read the $10k in gifts/trips as an annual expense, so maybe $7k per month in current expenses.
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quantAndHold
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by quantAndHold » Wed Feb 03, 2016 12:48 pm

"Been there, done that." I work (I assume) in the same field as you, and am in the same situation with RSU's driving most of my income (for now), except that I'm a little older and this isn't my first tech bubble. Everyone has a tendency to think that how things are now is how they always were and how they always will be, which is never true. One thing you really, truly need to understand is that the RSU gravy train will absolutely not last long term. Tech is cyclical, and we're at the (late) top of the current cycle right now. You cannot depend on the big starting bonuses, annual profit sharing, or RSU appreciation to always be there. The other thing is that housing prices in the Bay Area are driven by tech business cycles. You can't assume that your home value will increase (or even stay level) indefinitely. There will be times when you want to sell the damn thing, and it will not be worth what you need it to be worth.

So, what does that mean? You absolutely need to be able to cover your normal living expenses, including saving *at least* 10-15% for retirement, with your base salary. Unless you get incredibly lucky and hit the equivalent of the tech employment lottery, you will be living on just your base salary for most of your career. Use your RSU's and bonuses to create an emergency fund, save for a bigger house down payment, pay cash for a car, etc. When you're getting RSU and bonus money, take advantage and invest. Don't squander it on regular living expenses. I know this is contrarian advice for someone who is young and living in Silicon Valley, but like I said, this isn't my first rodeo. There have been times when I was very, very glad to have money in the bank and that the $450/week that I was getting in California unemployment could cover my house payment.

My suggestion would be to actually do a budget. You should definitely be putting the full $18k/year into your 401k, then the full $5500/year into a (backdoor Roth) IRA every year as a first step.

You also need to have a heart to heart talk with your fiance about finances, before you get married. She needs to understand that you aren't as rich as she thinks you are. This whole thing sounds really one sided. Her family is paying for half of that insane expensive wedding, right? Right?

And sell your RSU's as they vest. Invest the proceeds in a more diversified portfolio. You have plenty of future exposure to your company stock through the unvested RSU's. Keeping your vested RSU's just adds a bunch of risk to your future.

moonhalf
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by moonhalf » Wed Feb 03, 2016 1:38 pm

Thanks for all of the help guys. I'm just checking in and am really glad that so many people are willing to offer advice.

A couple things that I think should be cleared up:

I love my fiancee very much and we are absolutely committed to living a life together. She has her own income which is around the same as mine and a gift of around $1.2 million or so from her parents which she will be managing on her own. She actually doesn't plan to take advantage of her parents' gift to better her own life, but is merely managing it to generate some extra liquid income in anticipation of her parents' impending retirement. In short, she has absolutely no need of any support from either her parents or me.

I cover everyday expenses including rent not out of necessity but to show her that I am responsible and capable. I plan to do the same with wedding costs. I very much enjoy my life with her and do not plan on making any changes to our lifestyle. She is not some sort of ungrateful princess like some of the replies imply her to be. We've been together since we were students when I didn't any income. She buys nearly all of our clothes, pays for all of her recreation, and is planning to buy a car with her own income.

I don't think that my spending habits are excessive, just slightly high compared to single individuals with my income. I take home about 10k a month after tax and spend roughly 6k a month depending on the month. I think that I can reasonably manage something like 3.5k a month in cash savings without significant adjustments to my lifestyle. I'm not seeking any advice regarding changing my lifestyle, only advice regarding how to manage my money.

I understand that the mainstream opinion of this board is to focus on low risk long term savings with retirement as the intended goal and I respect that. I wish that you would do the same toward my lifestyle and my fiancee. Everyone has different spending habits and different lifestyles, I'm just looking for some sound financial advice for someone my age and my level of income.

surfstar
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by surfstar » Wed Feb 03, 2016 1:43 pm

I'd retire at 30 with those prospects. :oops:

Good luck with the expensive house and everything else.
Maybe read the Millionaire Next Door and Your Money or Your Life for some perspective.
You did come to the right place for investment advice. Another Boglehead tenant is living below your means. Meaning, b/c you can afford a 2MM home, doesn't mean you have to buy one and live that type of lifestyle.

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kelway
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by kelway » Wed Feb 03, 2016 1:51 pm

Honda Civic, a non-40k engagement ring, bring your lunch to work, and live like you make 40k...or else you're already trapped. I don't know how your life will turn out, but I'm reasonably confident that your salary at such a young age will forever cause you pressure and stress to keep earning it or better. That may well be easy for you, or you may age and lose your edge in an industry that favors the very young and nimble (and willing to sacrifice family etc.) I'd take a page out of the Google employee living in the back of his moving truck on premises. You're 22 and "clueless" and their prime customer, so maybe just siphon money into a Wealthfront account week after week.

[[And I apologize - I just read your followup comment, and fair enough... I hereby retract my unsolicited advice.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by gclancer » Wed Feb 03, 2016 1:58 pm

moonhalf wrote:I'm not seeking any advice regarding changing my lifestyle, only advice regarding how to manage my money.
1. Put $18k (the maximum allowed) into the traditional 401(k) offered by your work for 2016.

2. Research "backdoor Roth" and put $5.5k in a Roth for 2015 (before 4/15/16) and $5.5k in for 2016 (thus you will have $11k in a Roth IRA). Invest the 401(k) and Roth in target date funds until you learn more about investing on this forum.

3. Start putting all excess cash in an Ally Bank online savings account at 1% until you have at least a 6 month emergency fund.

4. Come back for more advice once 1-3 are done.
Last edited by gclancer on Wed Feb 03, 2016 3:29 pm, edited 1 time in total.

chicagoan23
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by chicagoan23 » Wed Feb 03, 2016 2:29 pm

Right now, I make 180k+ with my primary employer and 20k+ consulting for a startup.

After tax, I take home about 10k a month, plus an additional 10k at the end of the year.
First: You need to do everything you can to reduce your tax bill. The deferred accounts referenced above (401(k), Roth, HSA) are critical. Are you able to claim significant deductions for your consulting business, driving down your income from the 1099? I hate to see young high income earners spend too much money on taxes for absolutely zero marginal benefit.

Second: Once you have optimized your income and finances from a tax perspective, then set up a budget for your other expenses. Set it at whichever level you want, but knowing that less spent now means more flexibility later. I would not do a budget that gives you flexibility to reduce your tax-deferred savings; those should be non-negotiable.

Third: You should set a goal of having $1 million saved (in all of your accounts) in 10-12 years. It will be easier to get to that number using the tax-deferred accounts. And if you hit it big in tech and get 50x that number then you are already way ahead.

Fourth: That means you should consider buying your house when you are 35, not 25. Buying a house at 25 is risky for a lot of reasons, including: (i) not accumulating a large enough downpayment and creating a large monthly mortgage debt, (ii) not having any other savings to fall back on if something happens to your job but still having a huge mortgage payment, (iii) not being able to easily move for other opportunities, (iv) potentially buying at the top of a real estate cycle and then not being able to sell, (v) not knowing how much house you need with kids.....there really is no reason for a 25 year old to buy a $1 million house unless he or she already has $2 million liquid. The only exception would be if real estate prices crash sometime in the next 10 years, then you may want to take advantage of that sudden decline in housing prices.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Dulocracy » Wed Feb 03, 2016 2:35 pm

OP: You have received a lot of good advice, much of it cautionary. Realize that these people are speaking for your own good, not out of malice. This is a very supportive board, but your situation is a setup for failure.

I am not going to try to talk you out of the girl of your dreams, whatever the red flags may be. I will recommend at least a one year engagement to test things. I will also suggest that you talk with her.

Let her know that she is important to you, so you want to build a future together. Explain to her that you want more than a flashy life, you want to build actual wealth together. In doing so, you may consider reminding her that her parents, when younger, likely did not have all the nice things right away (presuming that to be true). Let her know that a part of being with her is being responsible for her future as well as yours. Towards that end, you want to set a goal of building wealth, not just buying things. Over time, that wealth will produce more wealth, which will allow you to live much better lives. Discuss with her realistic goals and what you can afford. If she loves you, I think you will find that she is more understanding than some portray her as on here. The most difficult part about marriage (but the most important) is communication. By explaining to her that you simply do not make enough money to do more than rent at this time, you may be able to get her to talk about a plan going forward.

Under no circumstances should your savings for retirement be less than 15% of your income. It would be much better (and recommended by most on this site) to save 20% at a minimum. It is also important that you not later convert that money for use to purchase a house. That is your retirement money. It is separate. It has a purpose. Do not be tempted otherwise.

Have that important conversation. Save 20% (more if you are interested in early retirement; but under no circumstances less than 15%). By having the conversation and being on the same page, you will be able to work as a team, be secure, live within your means, but still spoil her within what you can afford.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

rbaldini
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by rbaldini » Wed Feb 03, 2016 2:35 pm

moonhalf wrote:Thanks for all of the help guys. I'm just checking in and am really glad that so many people are willing to offer advice.

A couple things that I think should be cleared up:

I love my fiancee very much and we are absolutely committed to living a life together. She has her own income which is around the same as mine and a gift of around $1.2 million or so from her parents which she will be managing on her own. She actually doesn't plan to take advantage of her parents' gift to better her own life, but is merely managing it to generate some extra liquid income in anticipation of her parents' impending retirement. In short, she has absolutely no need of any support from either her parents or me.

I cover everyday expenses including rent not out of necessity but to show her that I am responsible and capable. I plan to do the same with wedding costs. I very much enjoy my life with her and do not plan on making any changes to our lifestyle. She is not some sort of ungrateful princess like some of the replies imply her to be. We've been together since we were students when I didn't any income. She buys nearly all of our clothes, pays for all of her recreation, and is planning to buy a car with her own income.

I don't think that my spending habits are excessive, just slightly high compared to single individuals with my income. I take home about 10k a month after tax and spend roughly 6k a month depending on the month. I think that I can reasonably manage something like 3.5k a month in cash savings without significant adjustments to my lifestyle. I'm not seeking any advice regarding changing my lifestyle, only advice regarding how to manage my money.

I understand that the mainstream opinion of this board is to focus on low risk long term savings with retirement as the intended goal and I respect that. I wish that you would do the same toward my lifestyle and my fiancee. Everyone has different spending habits and different lifestyles, I'm just looking for some sound financial advice for someone my age and my level of income.
Sorry for being judgmental and presumptuous. Sounds like you are pretty set.

In addition to Bernstein's If You Can, check out the Elements of Investing by Malkiel and Ellis. It's a great short read. In short, save a good chunk of your income (15% is often suggested), make maximum use of tax-advantaged accounts (401k, IRA), and keep a simple investment portfolio with low-cost index funds. Investing should be really boring, most of the time. Also remember that one can lose one's job, but you sound smart enough to know that already.

surfstar
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by surfstar » Wed Feb 03, 2016 3:05 pm

Every 22 y/o thinks their relationship is the best.

First marriages have much higher success rates when the couple is older.


I'd recommend that the OP save like heck, wait to buy a home and have kids closer to 30 than 25.
If somehow things don't work out, you'll both be better off. If you get disillusioned, maybe you'll quit, run off to some tropical island and retire instead. Take up surfing or diving ;) Search for the meaning of life. Etc.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by AudoBell » Wed Feb 03, 2016 3:11 pm

rbaldini wrote:Also: read this: https://www.google.com/url?sa=t&rct=j&q ... 9xCpivyMLQ

Explicitly aimed at young investors. It was the first investment advice I ever read.
+1 Great article

moonhalf
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by moonhalf » Wed Feb 03, 2016 3:36 pm

Thanks for the advice everyone. I fully understand the importance of 401(k) and Roth IRA. My employer offers really good matching and my parents have been maxing out their 401(k) contributions ever since they started working. I understand the tax benefits as well.

I understand that my industry has ups and downs, but it is completely reasonable to expect that reasonably skilled people will continue to be well compensated for the foreseeable future. The biggest sufferers from the 2000 dot com bust were underskilled workers, new graduates at that time from mediocre schools, investors, and businesses with no clear revenue plan. Given how venture capital fundraising has been restructured over the past decade and a half, a bust of such a scale is unlikely to happen. Of course, I believe that we are in a bit of a bubble, but I do believe that venture capitalists are being reasonable frugal and a lot of the growth is generated by companies not only able to produce revenue, but also profit and good innovation. I am not blindly confident and reliant on my current position, of course I understand that it could change, but that is a question of career development and is not what I'm here to ask about. Of course bettering myself professionally and leveraging the right opportunities would be much reliable than saving.

I heed the advice to delay buying a home. I'm actually fine with renting and waiting, it's just I like my area and I predict a cool down in the market by the time I have the down payment ready. The Silicon Valley area is posed to being a fast growth area for at least the next twenty years given the vibrancy of its higher education, capital, and industry, so I figured a home, in addition to a place of residence, wouldn't be a bad investment.

Besides emergency liquid assets and retirement plans, what are some good considerations for investing? Would anyone happen to have any suggestions for services for P2P loans and automatically managed portfolios? Thanks!

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by TomatoTomahto » Wed Feb 03, 2016 3:53 pm

moonhalf wrote:I heed the advice to delay buying a home. I'm actually fine with renting and waiting, it's just I like my area and I predict a cool down in the market by the time I have the down payment ready. The Silicon Valley area is posed to being a fast growth area for at least the next twenty years given the vibrancy of its higher education, capital, and industry, so I figured a home, in addition to a place of residence, wouldn't be a bad investment.
You are an optimist, which is what young people are supposed to be. Who knows what will happen in 20 years; perhaps companies will determine that someplace other than Silicon Valley is the place to be. You might think you have this all figured out, but trust an old man who warns you about confusing a residence and an investment. You don't have kids and shouldn't squander the liquidity that affords you; rent a nice place and know that, for a predictable amount of money, you can leave that place in your rear view mirror if you decide that opportunity is knocking in Chicago, Bournemouth, Mumbai, etc. Don't let a good life, where you are, blind you to the possible alternatives. Your options will be reduced as you accumulate anchors in the normal course of events; don't do it prematurely.

My son will probably be you in a couple of years, income-wise. He has a girlfriend that he loves, and our family loves her also. If they were to be considering getting married, buying a house, etc. after graduation, I would advise them exactly as I'm advising you.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Meg77 » Wed Feb 03, 2016 3:59 pm

gclancer wrote:
moonhalf wrote:I'm not seeking any advice regarding changing my lifestyle, only advice regarding how to manage my money.
1. Put $18k (the maximum allowed) into the traditional 401(k) offered by your work for 2016.

2. Research "backdoor Roth" and put $5.5k in a Roth for 2015 (before 4/15/16) and $5.5k in for 2016 (thus you will have $11k in a Roth IRA). Invest the 401(k) and Roth in target date funds until you learn more about investing on this forum.

3. Start putting all excess cash in an Ally Bank online savings account at 1% until you have at least a 6 month emergency fund.

4. Come back for more advice once 1-3 are done.
Agreed 100%. I'll add you should max out a Health Savings Account if your employer plan gives you access to one.

Basically I'd hoard cash for the foreseeable future since you have lots of large expenses planned:
1. Wedding/honeymoon (if you really insist on paying for it, which I can't help but say seems very unfair and unnecessary to me given your fiancé's family's wealth and her high income and million dollar savings balance).
2. After that will come a house,
3. Then probably babies,
4. Then new cars to fit the babies
5. Then there's the possibility of wanting to start your own business or buy into some start up.

Basically you've got an endless list of cash needs on the horizon so you really can't save too much. It's boring, but it's what you need. Max out retirement then just hoard cash!

Unless your fiancé is going to contribute to some of those expenses as well as living expenses, I don't see you being able to or needing to invest in taxable investments any time soon. You say you can set aside $3500 a month which is $42K a year (hopefully that's on top of maxing out retirement). One year of saving = wedding costs. Another year of saving = a decent emergency fund. Then it'll take you 2-3 years to save enough for a 10% home down payment in your area...by then who knows what you'll want or what your family will look like or what business will be like. You can reevaluate then.

Good luck and congrats to a great financial start in life!
Last edited by Meg77 on Wed Feb 03, 2016 4:05 pm, edited 1 time in total.
"An investment in knowledge pays the best interest." - Benjamin Franklin

rbaldini
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by rbaldini » Wed Feb 03, 2016 4:01 pm

moonhalf wrote: Besides emergency liquid assets and retirement plans, what are some good considerations for investing? Would anyone happen to have any suggestions for services for P2P loans and automatically managed portfolios? Thanks!
I personally can't help you with any of that. What I can say is that "retirement plans" can/should really just be thought of as "tax-advantaged investment vehicles." E.g., all Roth contributions can be withdrawn at any time, if you choose. Can take money out of traditional IRAs for specific purchases, without penalty. 401ks are pretty restrictive, though, unless you want to take out a loan.

I basically invest all my money the same way, in tax-advantaged and taxable accounts; I don't explicitly have "a retirement account". I allocate them in a tax-efficient way (https://www.bogleheads.org/wiki/Princip ... _placement), but at the end of the day it's stock index funds, bond index funds, and some cash, in accordance with my ability to take risk. Simple. You'll find a lot of people here who feel the same way, I believe.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by sfchris » Wed Feb 03, 2016 4:13 pm

moonhalf wrote:The biggest sufferers from the 2000 dot com bust were underskilled workers, new graduates at that time from mediocre schools, investors, and businesses with no clear revenue plan.
As someone who lived thorough it in SF, this isn't really a true statement. I have friends from fantastic universities and employed at Google now who refer to 2001-2005 as a "Tech nuclear winter".

That said, you will have 1.2 million in the bank once you are married. That is HUGE if you invest it properly and don't end up burning it all to keep up with the Joneses. It will allow you to have tremendous flexibility with your career and lifestyle as long as you don't live extravagantly. You could VERY easily retire at 30 or otherwise do whatever you want.

What is your base salary, if you don't mind sharing? As someone else said, you should act as if that is ALL of your salary for stretches of a time.

remomnyc
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by remomnyc » Wed Feb 03, 2016 4:38 pm

Agree to advice to max out 401k and IRA to backdoor Roth, 6-12 mos emergency fund (12 if you are solely responsible for hh exps), then save for wedding, then save for house. Please do not take out a mortgage greater than 3x income, so if you make 200k, mortgage shouldn't exceed 600k, and you should save 400k for $1m home or wait until your income increases significantly to afford the pricier home. Minimum down payment should be 20% to avoid PMI.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by chicagoan23 » Wed Feb 03, 2016 4:45 pm

Besides emergency liquid assets and retirement plans, what are some good considerations for investing? Would anyone happen to have any suggestions for services for P2P loans and automatically managed portfolios? Thanks!
I still think you are getting ahead of yourself here. Get to $1 million in a basic and boring three-fund portfolio first, then play around with these other options. For now you need to stick with established markets and total liquidity. Do you really want to tie up a significant portion of your very minimal current net worth in a P2P loan, for at best a few more percentage points of potential return?

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by pkcrafter » Wed Feb 03, 2016 4:55 pm

moonhalf wrote
: I would also very much appreciate advice regarding long term investments.
In the OP, moonhalf provided a lot of information which every post responded to, but he also asked about long term investing, which no one addressed. It may now be time to respond to investing questions.

First thought - when you begin investing, saving rate is much more important than rate of return. Minimum of 10%/year.

Investing Start-Up Kit

https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by quantAndHold » Wed Feb 03, 2016 5:04 pm

moonhalf wrote:I understand that my industry has ups and downs, but it is completely reasonable to expect that reasonably skilled people will continue to be well compensated for the foreseeable future. The biggest sufferers from the 2000 dot com bust were underskilled workers, new graduates at that time from mediocre schools, investors, and businesses with no clear revenue plan.
Sigh. You really don't know what it was like, do you? Everyone I know was out of work at some point during that period. There were so many people out of work that you could drive the length of the 101 without slowing down. Real estate dropped by about 30%. The main difference between skilled and "underskilled" is that the people with skills eventually found jobs again, generally for less money at companies that were a step down from where they were before, and the "underskilled" just never came back. I don't know anyone who got through that period completely unscathed.

There were similar, but smaller meltdowns in the early 90's and in 2008. It seems to happen every 8-10 years, just like regular economic cycles.

VC's *have* gotten much better in recent years...at taking care of themselves. You, they don't give much of a crap about. The main difference between then and now is that back then, if there was any upside, the engineers would participate. Now, the VC's keep the upside for themselves. If you're at a startup and you're not a founder, you need to expect that you will never see much except your base.

William104
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by William104 » Wed Feb 03, 2016 5:14 pm

You may enjoy following www.financialsamurai.com for personal finance information as well as a lot of VC, SF area real estate, and other interesting topics from someone in your area. Lot's of good advice on there for millennials.

Rainy
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Rainy » Wed Feb 03, 2016 5:22 pm

quantAndHold wrote:
moonhalf wrote:I understand that my industry has ups and downs, but it is completely reasonable to expect that reasonably skilled people will continue to be well compensated for the foreseeable future. The biggest sufferers from the 2000 dot com bust were underskilled workers, new graduates at that time from mediocre schools, investors, and businesses with no clear revenue plan.
Sigh. You really don't know what it was like, do you? Everyone I know was out of work at some point during that period. There were so many people out of work that you could drive the length of the 101 without slowing down. Real estate dropped by about 30%. The main difference between skilled and "underskilled" is that the people with skills eventually found jobs again, generally for less money at companies that were a step down from where they were before, and the "underskilled" just never came back. I don't know anyone who got through that period completely unscathed.

There were similar, but smaller meltdowns in the early 90's and in 2008. It seems to happen every 8-10 years, just like regular economic cycles.

VC's *have* gotten much better in recent years...at taking care of themselves. You, they don't give much of a crap about. The main difference between then and now is that back then, if there was any upside, the engineers would participate. Now, the VC's keep the upside for themselves. If you're at a startup and you're not a founder, you need to expect that you will never see much except your base.
I heard a lot of stories like this about the 2000 dot com bust, much worse than 2008, that almost everyone lose their job and their stock become worthless.

I'm so scared that I have a 2-year expense emergency fund in almost cash...I know boglehead is against of having too much cash at hand but this makes me feel a little bit more secure in the bay area.

mac808
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by mac808 » Wed Feb 03, 2016 5:23 pm

Hey moonhalf, are you two signing a pre-nup or not?

If not, then it doesn't matter much who pays for what since it'll all be co-mingled soon anyway.
Last edited by mac808 on Wed Feb 03, 2016 5:45 pm, edited 1 time in total.

moonhalf
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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by moonhalf » Wed Feb 03, 2016 5:27 pm

quantAndHold wrote:
moonhalf wrote:I understand that my industry has ups and downs, but it is completely reasonable to expect that reasonably skilled people will continue to be well compensated for the foreseeable future. The biggest sufferers from the 2000 dot com bust were underskilled workers, new graduates at that time from mediocre schools, investors, and businesses with no clear revenue plan.
Sigh. You really don't know what it was like, do you? Everyone I know was out of work at some point during that period. There were so many people out of work that you could drive the length of the 101 without slowing down. Real estate dropped by about 30%. The main difference between skilled and "underskilled" is that the people with skills eventually found jobs again, generally for less money at companies that were a step down from where they were before, and the "underskilled" just never came back. I don't know anyone who got through that period completely unscathed.

There were similar, but smaller meltdowns in the early 90's and in 2008. It seems to happen every 8-10 years, just like regular economic cycles.

VC's *have* gotten much better in recent years...at taking care of themselves. You, they don't give much of a crap about. The main difference between then and now is that back then, if there was any upside, the engineers would participate. Now, the VC's keep the upside for themselves. If you're at a startup and you're not a founder, you need to expect that you will never see much except your base.
I respect your experience and I'm grateful for your advice. I've already said that I don't take my position for granted.

VCs getting better in recent years at taking care of themselves means that funds raised by startups are a better reflection of their real value, which implies that a market-wide meltdown is less likely to happen. I'm not sure what your experience has been like, but I personally know new grads getting 500k+ or so in equity compensation, not options, measured in current evaluation at billion dollar plus evaluation companies. I know that that does not translate to 500k in cash, but even in late stage "startups", it seems that the market values engineers enough to give them proper compensation. I also personally know people who cashed out on ipos, both high profile ones and low profile ones. Nevertheless, I don't find it appropriate to label myself as an "engineer". I'm still young and will have many career and educational opportunities. VC's are humans too and many of them have engineering backgrounds, albeit with MBAs and executive experience.

I understand that a residence shouldn't be confused with an investment. Of course I won't rush into buying a home if everyone advises that it's not the right move, especially considering my age and my low net worth.

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Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by forevernaive » Wed Feb 03, 2016 6:02 pm

gclancer wrote:
1. Put $18k (the maximum allowed) into the traditional 401(k) offered by your work for 2016.

2. Research "backdoor Roth" and put $5.5k in a Roth for 2015 (before 4/15/16) and $5.5k in for 2016 (thus you will have $11k in a Roth IRA). Invest the 401(k) and Roth in target date funds until you learn more about investing on this forum.

3. Start putting all excess cash in an Ally Bank online savings account at 1% until you have at least a 6 month emergency fund.

4. Come back for more advice once 1-3 are done.
+1. This is a good simple plan. You should make a savings plan like this, write it down and act on it for a year at a time. Make sure to keep a budget and understand how you are spending your money. You are simply trying to develop a habit of saving and learning how to save in tax-efficient ways.

My only minor quibbles with and thoughts about this simple plan follow. They mostly concern trying to be more tax-efficient.

(1) At age 22 I'd put #2 (the backdoor Roth) ahead of any amount into the 401k that doesn't increase your employer contribution match in #1. Of course, at your income level minus your living expenses you should be contributing the max tax-advantaged in both #1 and #2.

But you haven't stated whether you already max out your 18K salary deferral into the 401k or just put in the dollar amount needed to in order to to get your max employer contribution match (if it is limited, such as the employer matches at 5% but only on the first 10K, or the employer will only contribute a max of $X dollars).

Note that this part of the plan may alter the $3.5K/mo ($42K/yr) after-tax dollars available you said were available to save--figure that into your savings plan and budget.

(2) Since you have self-employment consulting income, and particularly if there is a limit on the employer match, you might want to also consider a solo 401k for your business. See: https://www.bogleheads.org/wiki/Solo_401(k)_plan

One advantage of a solo 401k is that you get to decide the employer match percentage (up to 20%) on what goes into the solo 410k. You can have and contribute to both your employer and your own plan in the same year, but you cannot contribute more than the limit of $18K in employer contributions in both plans combined. (And your combined employee and employer contributions to the solo 401k is of course limited to the profit you show in your business.)

There are other solo 401K advantages. With a solo 401k at Fidelity you could make a designated Roth contribution to it, which at age 22 is probably a good deal even if you are in a high tax bracket (note that Vanguard doesn't offer a Roth option in a solo 401k).

But the really big bonus by establishing a solo 401k now is that when you change employers, you will be able to roll your employer's 401k into your solo 401k and that will give you much more control over the funds you can invest in (and the fees!) of the 401k plan. This helps you avoid sucky high-fee funds in employer 401ks, and my opinion is one of the best reasons to start one while you have the side income.

You can keep your solo 401k even if you don't contribute to it every year (e.g. you have no self-employment income from your business for a year).

(3) Now if your employer doesn't limit their match to your 401k and so a solo 401k isn't as interesting (or just seems too complicated to start), I'd still try to find ways to leverage those self-employment dollars to reduce your taxes/life expenses. Try to take as many legal business expenses as possible, deduct your home office, computer equipment, mileage on car, travel/eating at 50%, pctg of cell phone bill, internet, etc.

(4) You asked about investment options for your after tax excess dollars. For short-term cash savings toward your 6 month expenses emergency fund and toward your big upcoming expenses (wedding, down payment, etc.) you should save at an online savings bank, possibly also using a CD ladder. This is just your cash reserve, you shouldn't expect to make--or lose--any money on it.

Right now, I think the online savings bank account is probably better as the CD rates are only marginally better and your money is a little less accessible. You might want to set up automatic withdrawals with every paycheck to encourage you to live within your plan.

(5) For advice on retirement investment options, you'd need to list the funds (and their loads) that are available to you in your employer 401k. Target Retirement Date funds are a good place to start, but what's available will depend on your 401k plan. If there are per-fund fees, start with one index fund at a time. A equity-only index fund is ok at your age--it will go down and up--just leave it alone. You have tons of time to retirement.

(6) I don't think you are ready to consider real estate for a few years and you have saved the emergency fund, down payment, wedding fund, etc. But depending you and your fiancee's timing and desire for kids you could consider buying a home earlier and renting out extra rooms and/or using them for your side business. This part of the plan is far off and will almost certainly change.

I have friends in Silicon Valley who rented to coworkers for 10 years (approx from ages 24-34) before they started their family in the same house. It definitely was a smart plan for them, and can be a good way to build equity in a HCOL area. And of course owning your own home is one of the more efficient ways to lower your federal taxes when you are a high-income earner.

Chadnudj
Posts: 711
Joined: Tue Oct 29, 2013 11:22 am

Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by Chadnudj » Wed Feb 03, 2016 6:29 pm

Max out your 401k. If you're sure your fiancee is the one, have them max out their 401k too (even if you have to float them the difference). The tax savings alone at your income level will make this completely worth it.

Max out HSAs, backdoor Roth IRAs, etc.

Cut down your expenses. I know your fiancee has expensive tastes -- talk to them about how living a little lower now will mean you can have an AWESOME life/early retirement in the future. I mean, you just got out of college -- I'm pretty sure neither one of you was blowing through $7k a month when you were seniors at your universities.

Replace international travel with domestic for a couple years or at least every other year(Oregon is gorgeous and nearby, for instance, and offers wine tasting/hiking/awesome food, all without having to pay for an international flight. Hell, California has enough beauty/national parks to fill a year's worth of vacation time). Cook more at home/eat out less. You may find yourself in the near future making less than $200k (believe me, it happens) -- if you're already living low, it won't take any big sacrifice to make ends meet if you get laid off and have to take a job at half the pay.

In short, fight the good fight against lifestyle inflation. You'll be happy you did.

moonhalf
Posts: 30
Joined: Tue Feb 02, 2016 2:46 pm

Re: Clueless college new grad 22 yo, 200k income looking to start saving

Post by moonhalf » Wed Feb 03, 2016 6:45 pm

forevernaive wrote:
gclancer wrote:
1. Put $18k (the maximum allowed) into the traditional 401(k) offered by your work for 2016.

2. Research "backdoor Roth" and put $5.5k in a Roth for 2015 (before 4/15/16) and $5.5k in for 2016 (thus you will have $11k in a Roth IRA). Invest the 401(k) and Roth in target date funds until you learn more about investing on this forum.

3. Start putting all excess cash in an Ally Bank online savings account at 1% until you have at least a 6 month emergency fund.

4. Come back for more advice once 1-3 are done.
+1. This is a good simple plan. You should make a savings plan like this, write it down and act on it for a year at a time. Make sure to keep a budget and understand how you are spending your money. You are simply trying to develop a habit of saving and learning how to save in tax-efficient ways.

My only minor quibbles with and thoughts about this simple plan follow. They mostly concern trying to be more tax-efficient.

(1) At age 22 I'd put #2 (the backdoor Roth) ahead of any amount into the 401k that doesn't increase your employer contribution match in #1. Of course, at your income level minus your living expenses you should be contributing the max tax-advantaged in both #1 and #2.

But you haven't stated whether you already max out your 18K salary deferral into the 401k or just put in the dollar amount needed to in order to to get your max employer contribution match (if it is limited, such as the employer matches at 5% but only on the first 10K, or the employer will only contribute a max of $X dollars).

Note that this part of the plan may alter the $3.5K/mo ($42K/yr) after-tax dollars available you said were available to save--figure that into your savings plan and budget.

(2) Since you have self-employment consulting income, and particularly if there is a limit on the employer match, you might want to also consider a solo 401k for your business. See: https://www.bogleheads.org/wiki/Solo_401(k)_plan

One advantage of a solo 401k is that you get to decide the employer match percentage (up to 20%) on what goes into the solo 410k. You can have and contribute to both your employer and your own plan in the same year, but you cannot contribute more than the limit of $18K in employer contributions in both plans combined. (And your combined employee and employer contributions to the solo 401k is of course limited to the profit you show in your business.)

There are other solo 401K advantages. With a solo 401k at Fidelity you could make a designated Roth contribution to it, which at age 22 is probably a good deal even if you are in a high tax bracket (note that Vanguard doesn't offer a Roth option in a solo 401k).

But the really big bonus by establishing a solo 401k now is that when you change employers, you will be able to roll your employer's 401k into your solo 401k and that will give you much more control over the funds you can invest in (and the fees!) of the 401k plan. This helps you avoid sucky high-fee funds in employer 401ks, and my opinion is one of the best reasons to start one while you have the side income.

You can keep your solo 401k even if you don't contribute to it every year (e.g. you have no self-employment income from your business for a year).

(3) Now if your employer doesn't limit their match to your 401k and so a solo 401k isn't as interesting (or just seems too complicated to start), I'd still try to find ways to leverage those self-employment dollars to reduce your taxes/life expenses. Try to take as many legal business expenses as possible, deduct your home office, computer equipment, mileage on car, travel/eating at 50%, pctg of cell phone bill, internet, etc.

(4) You asked about investment options for your after tax excess dollars. For short-term cash savings toward your 6 month expenses emergency fund and toward your big upcoming expenses (wedding, down payment, etc.) you should save at an online savings bank, possibly also using a CD ladder. This is just your cash reserve, you shouldn't expect to make--or lose--any money on it.

Right now, I think the online savings bank account is probably better as the CD rates are only marginally better and your money is a little less accessible. You might want to set up automatic withdrawals with every paycheck to encourage you to live within your plan.

(5) For advice on retirement investment options, you'd need to list the funds (and their loads) that are available to you in your employer 401k. Target Retirement Date funds are a good place to start, but what's available will depend on your 401k plan. If there are per-fund fees, start with one index fund at a time. A equity-only index fund is ok at your age--it will go down and up--just leave it alone. You have tons of time to retirement.

(6) I don't think you are ready to consider real estate for a few years and you have saved the emergency fund, down payment, wedding fund, etc. But depending you and your fiancee's timing and desire for kids you could consider buying a home earlier and renting out extra rooms and/or using them for your side business. This part of the plan is far off and will almost certainly change.

I have friends in Silicon Valley who rented to coworkers for 10 years (approx from ages 24-34) before they started their family in the same house. It definitely was a smart plan for them, and can be a good way to build equity in a HCOL area. And of course owning your own home is one of the more efficient ways to lower your federal taxes when you are a high-income earner.
Thanks for your advice. I feel that you have the best understanding of my situation and have provided the most appropriate advice out of all of the replies. In addition, thank you for being neither presumptuous nor judgmental.

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