Savings Plans?

Question

I'm 21 and I just started saving. Aside from the basic things I need I next to never spend. I try to save at least $1000 a month. i currently have all my savings in a savings account where I'm getting some pretty good interest but the thing that is on my mind is taxes. So far the only thing I've heard of that can help me is an IRA and a Roth IRA. I heard that I don't have to pay taxes on the money I put in or I have to pay taxes on the money but not the interest. Are there any other plans that have similar qualities to this? I plan on going to grad school in the future so preferably plans where if you start school you can take the money out without penalty. My job does not offer any 401Ks

Answer 1

Go with the ROTH first... The Roth is AFTER TAX... so you are paying income taxes on the wages that you are depositing into the account, BUT, the capital gains are tax free when you take them out.

A traditional IRA is PRETAX.. and you pay income tax on the capital gains when you draw the $$ out.

At your age..... seeing that there is no matching contribution 401k in play.. the ROTH is the wisest path to take, and once fully funded, THEN fund a traditional IRA.

My 1st choice would have been a matching 401k, because that is an INSTANT ROI on your contribution..

Below is a helpful site too.. you can see this lady on CNBC

Answer 2

The rule of 78 means that your money will double every seven to eight years while saving at about CD rate. Since you are so young and off to a great saving pattern, just keep putting it in a saving plan. I would do Roth first, then IRA/401k, and let it ride for about eight years and see where you are. You then can make adjustments and make some other investments that yield more, but also have some risk. Just remember at $2.00 per day, depositing it every day into a savings account will make you a million in forty years; so be sure to save each day or so, and not wait on getting the whole thousand together before saving it. Interest compounded daily adds up much faster than just depositing once or twice a month, or even weekly. You are off to a great start and will have a wonderful financial net worth before you are forty. Congratulations!!

Answer 3

Wow you are doing a great job! Savings are for short term needs e.g. going to grad school in a few years. Savings are safe and really don't pay much when you consider inflation and taxes. The reason you use savings for short term goals in that you don't want to invest (take some risk for a chance at a better return) and find out just when you need the money for grad school - the market drops and your investment is down 20% or more.
Since you are employed you may not need all of the $1000 per month to put toward savings.

For any money that you don't need to save then
you need to invest for the future especially since your employer doesn't offer a 401k plan. (you might consider changing employers). Investing, over the long term, gives you a much better return that savings. You probably should have about 60 - 70% in stocks and the rest in bonds at your age. Look into the Vanguard Star Fund (you can start with as little as $1000. It is very diversified and relatively low cost. This is money you want to save for retirement so I suggest putting into a Roth IRA. It will grow tax free and if you leave it in until you retire you will not owe taxes on the money you take out.

Answer 4

You may be able to invest in CDs or start a 401K with your bank. A credit union is a great place to join (especially if you are a student) because they offer you better interest rates than banks and generally have staff that can help you with financial planning. I believe a Roth IRA lets you take out money for school and toward the purchase of a new home.

My best friend also loves the book Rich Dad, Poor Dad. It has great investment advice in plain english. :)

Good luck! It's great you are starting now.

Answer 5

Roth IRA is your best bet. You can put after tax money in there, and withdraw tax free @ 59.5. As long as your account has been open for 5 years, you can withdraw your contributions (not your gains) penalty free. So, if you have 5 years before you need the money, a roth is great. Otherwise, there are 529 plans, tax defferred savings plans for education, but they can only be used for education. Maybe you put some in both? Your other option is a taxable account with Vanguard. Good luck getting started.

Answer 6

Roth sounds like the one for you. Or CDs

Answer 7

follow the baby steps.

if you are saving $1000/month, that is good. most people your age are not saving... and they have debt.