Savings Recommendations?

[eyeq]

Not sure if this is the right place to ask, but looking for recommendations on how to set up my savings.

Freshly graduating 22M making $77k, living with parents for free so no rent. Have to pay my own insurances, gas, food, etc but that’s all so expenses are pretty minimal. I’m trying to save every cent I can so I can put a downpayment on a house and also just set myself up well for the future, but I’m not sure the best way to split it.

Employer offers a 4% match on 5% into 401(k), so I’m planning on maxing that match. Otherwise, I just have a 5% HYSA right now. How would y’all recommend I split what I save?

 

[christianfatherof4]

@eyeq Max out Roth IRA

 

[rrztop1]

@eyeq This is a great opportunity for you to save money and get off to a good financial start. Good on you for recognizing the opportunity and taking advantage of it.

The general guidance for retirement savings is that you should be putting about 15% of your income into retirement throughout your working life. Starting that now will give you a boost because the money will have a lot of time to grow. Plus, now that you are making more money than you ever have, if you save 15% off the top from the beginning, you'll never miss that money because you never had it to spend. It's like your retirement will happen for free.

With a $77K salary, you'll want to put $11-12K into retirement each year. To get the full employer match, you should contribute 5% of your salary to the 401K ($3850). That leaves about $8000 left to put somewhere. I'd max out a RothIRA ($7000), then bump up the 401K contribution to include that remaining $1000.

Whatever you have left that you can save, which should be a fair amount since you don't have much living expenses - put into a High Yield Savings Account (HYSA) so that it can earn some decent interest. You'll want some money as an emergency fund and then some money for a house purchase in the future. If the house purchase is more than 5 years away, once you have enough in savings for a decent emergency fund, I would start putting money in a brokerage account and invest in a broad index fund like VTI - that's the Vanguard total market ETF. If you anticipate buying a house sooner than 5 years, I'd leave the money in a HYSA or perhaps do a CD or Treasury ladder. A ladder is just a group of CDs or Treasuries that mature at different times and then you reinvest the money - it helps smooth out the ups and downs of interest rates.

 

[eyeq]

@rrztop1 Any particular reason for that 5 year figure on index funds? Thinking home buying is ~5 years away. To the best of my understanding, you hit long term capital gains at 1 year of holding an index fund, right? So would I be clear to invest in index funds even if I intended to cash out in ~3-4 years, or is there a reason I shouldn’t do that?

 

[rrztop1]

@eyeq The 5 year threshold is a general guide so that you don't have money that you need soon in the market. That way, if the market goes down, you aren't stuck having to sell in a down market or putting your plans on hold until the market goes back up. It's not about taxes, it is about risk. If you are comfortable with more risk, then you could shorten your threshold.

Here's an article that talks about the average returns for the S&P 500.

https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

Over time, the annual rate of return is like 10%, but if you had your money invested there and needed it any time between 2000 and 2002 or in 2008 (or a handful of other years) you would have been in a bad spot. But if you didn't need your money and could let it ride, or even better, invest more while the market was down, you'd have been in fine shape. Since we don't know when these downturns are coming, it's better to have near term money in less-risky places.

 

[eyeq]

@rrztop1 That makes sense! In that case I’ll probably stay out of index funds or at least pretty light in them, as ideally I’d like to buy a property in 3ish years when I move out, to avoid the money pit that renting tends to be

 

[rrztop1]

@eyeq With a 3 year timeline, I'd just put it all in a HYSA or perhaps CDs or US Treasuries. Something solid and safe.

 

[murderer]

@eyeq Sounds like you know how you want to split it (max your 401k benefits, pay necessary expenses, and save for a property, put everything into a HYSA). If you're asking what's the best place to put your savings, either putting the money into a HYSA or S&P 500 are your safest bets.

 

[eyeq]

@murderer Thank you! Also attempting to figure out if there’s merit to doing more than the max matching amount into 401k, whether I should max out a Roth or keep more in savings, etc

 

[murderer]

@eyeq If you want to max for retirement then yeah, max your yearly limit ($20k) for your 401k and max a Roth ($7k). If you're in a rush to buy property, it'd be better to go for savings. Do a couple calculations and see what aligns better with your goals.

 

[anzio]

@eyeq If your company offers it, go with high deductible insurance when your young to build up your hsa account

 

[lyllie]

@eyeq learn about the Foo from the money guy show.