What should a recent college grad spend money on?

Question

I (with my wife) will be making about $100k a year. I plan on tithing 10% and then taxes will take another 30%. But that still leaves $60k. What is a reasonable budget for a year's living expenses for a married couple with no kids in a townhouse? And witht the rest, should I pay off loans, start a savings account, buy a house, start an IRA, etc? And how much should I put in each one?

Answer 1

OK, you are going to be off to a great start. The best and most important thing to do is set your goals up front and then design your budget around meeting them. This is easiest to do BEFORE you move, set up fixed expenses, and get into spending patterns. Here are the goals that I suggest:

1. Each of you should contribute enough to your 401ks to get any company match each month.

2. Each of you should contribute the max to a Roth IRA ($4000 each in 2007) each year. Make this $333/mo investment automatic.

3. Save 5% of your income in a high yield savings/money market. Make this contribution automatic as well. This account can cover emergencies, vacations, Christmas spending, and other irregular expenses.

4. Then I would focus on puttin as much as you can afford each month toward paying off debt (this might come before #3 if you have high interest rates). Credit cards are first priority, then car loans and other loans. Student loans are last priority (unless they have high interest rates).

Now make an Excel worksheet. Start with your gross income; subtract 401k contributions. Take 30% off that number for taxes and other deductions (health ins, etc). What you have left is your net income. Subtract 10% for tithe, 5% for cash savings, and your Roth contributions.

What's left is what you have to play with each month. Make a line item for each fixed expense (loan payments, rent/mortgage, utilities, etc.). Subtract again: this number is what you have for food, gas, entertainment, extra loan payments, and other discretionary spending. Not enough? Go back and lower some fixed expenses. You can play with this sheet and use it to decide how much to spend on housing and other items.

Answer 2

I would recommend that you and your wife find a way to live as if you only made $90k per year, instead of $100k. Certainly there are couple that do it; you can choose to do so if you wish. Then plow that extra 10% into your 401k (assuming you have a company that matches that investment). It's *pre-tax*, which means putting $10k in the account will only cost you about $7k in take-home pay. If your employer matches that for another $5k, let's say, then your account will go up $15k for a $7k cost to you. Just do it, it's one of the best deals the US tax code give you!

It's difficult to say what a budget would be without knowing more details (where you live, how much debt you have, etc.). The typical townhouse in the US will cost you about $200k; that's a $1300 mortgage payment and probably with property taxes, condo fees, and subtracting your interest paid as a deduction from you taxes, you'll probably be around $18k per year. That's a big line item, but it's a worthwhile investment -- owning your home is a big key to growing your wealth (again, as a result of very favorable US tax rules for homeowners).

Beyond that, just pay off your high-interest loans (no big rush to pay off a student loan with 5% interest or deductable interest or something like that). NO CREDIT CARD DEBT -- that is the bane of American wealth (well, unless you're an exec at a C.C. company).

The savings account is a good idea too, but with two income earners, you're less susceptible to a sudden drop income.

The most important thing, though, is learning to live beneath your income.

Good luck,

Doug

Answer 3

Absolutely. I spent the last 4 years in college working very hard, and am now back home with my mother and desperately trying to find a job anywhere. I had a part-time work study job all throughout college, and attempted to find an additional job (unfortunately during the worst times of the recession). I graduated in December and therefore had to leave my job. I have been looking for another job ever since, even those "lowly" jobs no one else wants. I don't have a lot of work experience, entry level jobs are very much hard to come by where I live, and I don't have a car so I'm also limited by location. I have $50,000+ in loans that will begin repayment soon, and a degree that's basically useless in this current economy (psychology). I am a very hard worker, yet so far none of my efforts have resulted in a job. I've sent out countless applications and called anyone who didn't explicitly say "no phone calls." My previous job was part-time, so I can't claim unemployment or even defer my loan repayments! The recession hit my family very hard. My parents couldn't cosign any more of my student loans, and I needed 1 more to be able to finish my degree. I wasn't able to sign for a loan on my own, and my last co-signer (a parent's friend) is panicking about me not having a job yet. Repayment starts in August. And now my parents are trying to give me an ultimatum - I have a WEEK to GET a job. The last interview I had took weeks before they even made a decision (clearly they didn't pick me). I could really use those benefits right about now, if only to pay off some of my loans now, and pay for some sort of transportation to a place with jobs. It's not a lot of money, but as any unemployed or poor person knows, every little bit helps. I don't want to take money or jobs away from families or people with mortgages, but recent college grads need jobs and money too. Most of us are not trying to be lazy moochers for the rest of our lives. Even without benefits, if I could just QUALIFY for unemployment, I would at least be allowed to take classes and job training at a local community college with waived tuition. Maybe I'd be able to get a better job, or at least be more qualified. So if anyone has ANY advice, anything I could try or do differently, please...

Answer 4

Do you want to narrow down your question a bit? You basically asked, "what should I do with my life" in your question.

DEFINATELY, start your IRA and try to contribute the maximum amount. Because of power of compounding, earlier you start the better.

What is the interest rate that you are paying for your loans? Is it tax deductable type loans? While paying off loan first is a good option, if the interest rate is so low that you can make more money from money market account (5%), you have an option of holding on to it.

I suggest you (two) don't expand your life quickly. You can pool the left over money into investment or saving. There is no reason to spend as much as you make.

Buying a house with 100K might be a bit tight, depending on market. Be sure to have enough money saved for down payment AND about the equal amount for reserve (for the house)

Answer 5

I don't know what the cost of living is where you are - so I'm not sure how much "funny money" you have to work with. But all the choices you presented are good.

Student loans are the lowest, gentlest rate loans you can get, so if you're going to pay off debts, knock out any other ones you have first.

My husband and I started Roth IRA's and purchased our first home in our early 20's. The IRA's you only need like $50 to start, and then you can set up monthly contributions as you want, we still just contribute $50 a month, but it's better that we have it started early than put it off just because we couldn't contribute as much as we'd like every month.

Our first home is an old, small, house in a good neighborhood. It was a good price, and honestly, not that much more of a stretch than rent was - and it's been a good investment as all the homes in our neighborhood have increased in value by 19% in the last year.

So I guess I'm saying - do all these things - in moderation. You don't need a stellar IRA right now, but you do need to start something right now. You don't need that big house on the hill, but it will be worth your money to get a simple, small home that will increase in value.

Hope my 2 cents helps.

Answer 6

You need a financial planner.

You have a lot of variables here. Recent college grad probably means a lot of school loans. How much makes a difference. It also probably means early twenties, but might not. "Wife" probably means "kids someday", that's something to plan for. Buying a house doesn't happen by accident, either.

You should get a professional and make a plan based on where you are now, and where you want to be. You're just not going to get expert advice here because nobody here knows your full situation.

Do it before you get used to having a new suit every week.

Answer 7

This is what we have done regardless of how much $ you make... its based on percentages and should make for a comfortable and secure future.
10% Tithe (on gross)
The rest is on Net:
10% Debts (until they are paid then filter 5% down to the next two categories)
5% Savings
5% Investments (find something you like to invest in and go with it)
70% Living
Living gets broken into housing, utilities, food, auto, insurance, entertainment, shopping which we put clothing and decorations into, discretionary and miscellaneous. we have a children category too which wouldnt be a bad idea to start one and just save for it if you plan to have kids.
Ideally your housing costs should be somewhere around 25%
The rest of the percentages you can split up as needed.
Discretionary works well... you each get the same amount and its for all the "extras" you might want on an individual basis.. say your wife likes starbucks everyday, but you like to go out with the guys once a week... those would be discretionary expenses that you each have to budget out according to what you have.
On buying a house, wait until you can figure out your percentages, what works and what doesnt. then definitely buy one, just make sure it is in the correct price range NOT based on what the lenders think you can afford but based on your housing percent.
If you have any questions you are welcome to contact me!
Good luck and congratulations on the start of your new life.
God Bless!

Answer 8

always pay your loans off first
budget and save the rest.

avoid spending money you don't have to
pay off the credit cards fast

get that home
so you have the place for the baby