College student seeking advice on future budget

[opqpop]

Hey everyone, I was wondering if I could get some advice as to my budget plans for my future. I'd appreciate pretty much anything you can share with me, both negative and positive, as I'm still young and not as experienced. Just a heads up though, this turned out to be a much longer post than I expected. Sorry about that in advance.

I'm 21 and graduate next year with a bachelors, with plans to get a job. As a result, there's going to be a lot of estimates thrown in here. The more uncertainty in a category, the more I tried to overestimate the costs.

My financial starting point after I graduate:
- no debt, perfect credit
- roughly 10k saved up from working during college
- 5k in Roth IRA
- no girlfriend/children

Initial assumptions after graduation:
- job will pay $60k-$90k annually. For what it's worth, I go to a target school (Harvard, Yale, Princeton, MIT, Stanford) and I think this assumption is not too unrealistic.

Here's my budget (all numbers except retirement savings are monthly expenses):

Shelter (rent, utilities, internet, no tv, no home phone) - $600

• Will rent and share w/ roommates. Probably rent out living room as well if I can find roommates who don't use the living room.
• This summer, I was paying $550/month at Northern California Bay Area, which has really expensive housing, so I think $600 is a reasonable estimate given I don't know where I will be located.

Food - $200

• Will cook dinner and bring leftovers for lunch. I just eat a fruit for breakfast. Cooking is a hobby so I have no problem with the time I spend making food.
• My mom is quite frugal and she says she spends ~$20/week on groceries for her and my dad. I'm willing to spend more to buy higher quality foods if needed, but I'm also going to be focusing on buying foods that are on sale and avoiding overpriced foods. I can cook a variety of foods so this should be no problem. This is why I estimated ~$50/week.

Transportation - $300 for first year, $100 for remaining years

• Buying used car. Not really sure how much it will cost but I estimated $2400, so $200/month for first year.
• Car will be used for shopping and going to restaurants. Will be biking to work. I don't ever travel unless my closest friends want to. I estimated $30/month for gas.
• Had license since 16. No accidents. Not sure what my insurance will be, but I estimated $50/month.
• Extra $20/month to cover maintenance/license registration fees/other various costs.

Health - $140?

• No idea on this one. My parents rarely use their health insurance (Quite horrible I know, but they never listen to me), so I'm not too familiar with what I'll need. I guess dental, eye, and physical checkups are going to be the main ones?
• To calculate, I used cost of living calculator that had 30% housing, and 7% health for their calculation of "Overall cost of living," so did 7% / 30% * 600 (my estimated housing cost) = 140

Entertainment - $600

• Eating out 4-8 times/month and clothes. Very hard to estimate this, so just overestimated by a lot.
• Might also take cooking classes ($200/month?), piano classes ($200/month?), and buy good kitchenware.

Retirement Savings - ($5000 + 5% of total income) yearly

• 5k in roth ira, 5% of total income in matching 401k. I'm quite young so doubt I need to save more than this.

So the first thing that stands out to me from the budget is that I'm going to be able to save a lot more money than I expected, without really sacrificing anything in my living standards. Here's my attempt at calculating how much I'll be saving:

Assumptions
- 2011 federal income tax where first $8500 taxed 10%, next $26k taxed 15%, and next $49,100 taxed 25%.
- 2011 $5800 standard deduction
- 2011 5.65% FICA tax
- 9% state income tax (found website that says state income tax can be 6-12%, also going to assume I don't end up in state w/o state income tax)
- 5% of taxable income deducted by putting it into 401k

Let x be my gross annual income.

Annual federal tax: 0.1(8500) + 0.15(26000) + 0.25(0.95x - 5800 - 34500) = 0.2375x - 5325

Annual FICA and state income tax: (0.0565 + 0.09)0.95x = 0.139175x

Net income: 0.860825x - (0.2375x - 5325) = 0.623325x + 5325

Annual expenses from my budget: 12 * (600 + 200 + 100 + 140 + 600) + 5000 = 24680

Annual savings = 0.623325x + 5325 - 24680 = 0.623325x - 19355, or ~$18k/year with $60k income, ~$24k/year with $70k income, ~$30k/year with $80k income, and ~$37k/year with $90k income.

These numbers are probably too high, as I didn't include any fixed costs I will buy throughout the year, though to be fair, I tried to make my monthly entertainment costs cover it since I don't really spend much money buying stuff anyways. Off the top of my head, the only pricey things I would realistically buy while single are computer, bed, phone, and kitchen utensils (don't need couch, don't watch TV, don't need new car, don't like traveling).

So this leads me to two concerns I have:

1. The accuracy/effectiveness of my budget: What do you agree/disagree with everything I've said above? Are there any parts that are too naive? Do you have any suggestions that may reduce/increase certain parts of the budget? Pretty much anything you wish you had known when you were 21 that would also be applicable to this budget. I'm trying to keep an open-mind and definitely looking for any helpful comments you can share.

2. What to do with my savings: Given I don't have any debt, and I'm still able to save a decent amount after saving for retirement plans, what should I ultimately try to spend the savings on? My current idea is to leaving some emergency fund that's liquid in case of random accidents/job layoffs/etc, earn returns investing the rest, and ultimately save up for whatever becomes important to me once I get married, so I guess I'd be spending it 5-10 years down the road. Not really sure what these "important things" are going to be though, I suppose a house, wedding, college savings for kid, and car would count. Are there anymore I should be aware of? What would you save the money for if you were in my shoes?

Thanks a lot if you took the time to read all this, and more thanks if you could offer me any advice (They don't need to address my concerns if you don't want to. I'm really looking for anything I can get)

[Greebo]

I'm 21 and graduate next year with a bachelors, with plans to get a job.

My financial starting point after I graduate:
- no debt, perfect credit
- roughly 10k saved up from working during college
- 5k in Roth IRA
- no girlfriend/children

Right now I hate you a little bit...

- job will pay $60k-$90k annually. For what it's worth, I go to a target school (Harvard, Yale, Princeton, MIT, Stanford) and I think this assumption is not too unrealistic.

Degree in what?

Shelter (rent, utilities, internet, no tv, no home phone) - $600

If you don't have a job lined up before you graduate (job fairs, etc) then with 10k in the bank, this is a good number. Once you know what your income will be, you want to make sure your living expenses are <= 25% of your after tax pay.

Transportation - $300 for first year, $100 for remaining years

You sound like you're preparing yourself to buy a car with credit. Do yourself a favor don't. Take 2k of that 10k and just pay cash. When you're working, take 10% (or $400/month, whichever is more) of your after-tax income and simply set it aside in a "next car fund". Step-ladder up the car world for a few years - go from a $2k car to a $6k car to a $10k car to a $14k car by paying CASH each time with trade. NEVER pay interest on something that costs YOU money each month if you can avoid it.

Next set aside $150/mo for maintenance and repairs and figure out your gas costs once you know your commute if any. Add 15% for personal stuff.

Had license since 16. No accidents. Not sure what my insurance will be, but I estimated $50/month.

Better double that for now to be safe.

Extra $20/month to cover maintenance/license registration fees/other various costs.

Nowhere near enough - see above. You MUST TAKE CARE OF YOUR CARS or they will die way too soon and cost you way too much in the long run.

Health - $140?

This will depend entirely on your job's offering. If they offer an HDHP w/ an HSA, TAKE IT. They're dirt cheap but you MUST fund the HSA for your own protection. Figure your deductible (will be $2k to $3k), divide by 12, and set that aside for the HSA on top of you premium.

Entertainment - $600

Well that's a bit high in general but for a 21 yr old? Probably realistic.

Retirement Savings

- ($5000 + 5% of total income) yearly

0% at first.

Before you put more towards retirement, focus on a fully funded emergency fund - 3-6 months of expenses SET ASIDE in liquid cash. This is your "anti-murphy insurance"

AFTER that's funded, 15% - whatever your matching 401k amount is first, then max the Roth, then balance out the rest in the 401k. These are the years you want to put the most in you can because long term they'll compound the most and you ONLY defer this as long as it takes to get your FFEF in place and as long as you are debt free. If you go debt free, stop investing (working in two directions at that point) until you're debt free again (house excluded).

So the first thing that stands out to me from the budget is that I'm going to be able to save a lot more money than I expected,

Yeah, we all think that...

Tax stuff

Worry about your take home - use the calculators online to figure your proper withholding and then budget based on take home only.

1. The accuracy/effectiveness of my budget:

Completely inaccurate. This is a play budget. A GOOD EXERCISE but it's play right now.

You're 21 and just starting. You have no IDEA what your real expenses will be. This is a great practice session but don't get hung up on it until you actually HAVE an income.

2. What to do with my savings:

1) Fully funded Emergency Fund that you NEVER NEVER TOUCH except for emergencies.
2) Once FFEF in place, resume retirement investing as above.
3) Save up for your first house. Goal amount is 20% of the purchase price, liquid cash, plus 5% for closing costs, and your first house should be worth no more than 2x your gross income and the payment on a FIFTEEN YEAR fixed rate mortgage should be 25% or less of your after tax (not after retirement, not take home, AFTER TAX) income.

Given I don't have any debt, and I'm still able to save a decent amount after saving for retirement plans, what should I ultimately try to spend the savings on?

House, eventual marriage, eventual kids, fun stuff, travel, vacation, ... life.

College for kids? HAVE SOME FIRST. The tax vehicles require you to have actual kids for them and they're awesome. (I suggest marriage before kids though)

Make sure when you begin dating seriously that you discuss finances before engagement and are on the same page before marriage. The wrong woman (financially minded wise) will destroy your future.

[opqpop]

Hey thanks for the lots of good information in your post. Some of it reminds me of some stuff I read in a book called "The Total Money Makeover" by Dave Ramsey, which I really liked. Glad to see the same concepts show up again. Others are completely new to me, which is great

My degree is in finance, though I'm not so sure if that's what I want to be doing for a career...

Yep, I'm planning to pay the cash for the used car upfront, as well as for all my future car purchases (hopefully). Thanks for the check.

[Greebo]

Hey thanks for the lots of good information in your post. Some of it reminds me of some stuff I read in a book called "The Total Money Makeover" by Dave Ramsey, which I really liked. Glad to see the same concepts show up again. Others are completely new to me, which is great

Makes since - Ceashels and I have been TMMO followers since 2008 so my advice is usually pretty consistent with Dave's.

My degree is in finance, though I'm not so sure if that's what I want to be doing for a career...

I haven't read it myself, but Dave Ramsey recommends the book "48 Days to the Work You Love" as a good guide for figuring out what you DO want to do.

Personally if you don't particularly like finance and don't want to do it when you grow up, I wouldn't get a degree in it. Ok sure it's a "fall back" degree - but if you're doing work you don't like - or better - LOVE - you won't be people's top pick for hiring.

But that's pretty radical thinking today, I know - so tell us - what DO you like doing that might be income generating? With no debt and a willingness to live dirt cheap, you can do pretty much whatever you like starting out while you figure out what you want to be in the "real world".

[khaski]

Greebo's got great advice, as always...one category I don't see considered is gifts.....another is clothing. Agree with Greebo, though I would guess it will be 2-3xs the $50 you're allotting. You also should look into 'renter's' insurance, have no idea what that runs.

You have a REALLY bright future ahead of you if you keep up your financial habits as of of now! GOOD JOB!

[Greebo]

You also should look into 'renter's' insurance, have no idea what that runs.

Oh, ABSOLUTELY - but it's dirt cheap. About $100 a year or so.

Why do you need it?

When you rent, your landlord will (probably) have insurance on his building. That insurance protects HIM, not you. If there is a fire, and all of your possessions are destroyed, neither he nor his insurance are liable for your losses.

Renters insurance will cover you in the event of such losses. Additionally, should someone hurt themselves while in your apartment and issue a claim against you, the liability protection built into renters insurance will work in your favor, defending you in court from excess charges and paying the bill, should one come due.

EVERY tenant needs renters insurance!

[patriciakennedy76]

Wow. And you're only 21!

[Greebo]

Wow. And you're only 21!

Thus why I hate him a little bit right now...

[khaski]

I'm still green with envy about the $600 a month for entertainment....at over a decade older then the OP, we're lucky to get $50 a month sometimes...but we didn't have half the financial smarts at his age! Do this stuff right now, and once you have the house and family should you so desire, you'll already be set up to live comfortably and be downright wealthy some day!

I never had renter's insurance, only have heard of it and agree it's important, ice to hear it's so darn cheap, it really is a 'must have'.

[mndtrp]

Consider this post an affirmative to what Greebo said.

Don't get a DUI.

[Lindsey]

Renters is waaaay cheap. We were just paying $12 a month for 100K in coverage. Army gear is expensive! Never used it, but I like to think of it as murphy repellant!

[opqpop]

Hey thanks for the replies everyone. I really appreciate it!

I haven't read it myself, but Dave Ramsey recommends the book "48 Days to the Work You Love" as a good guide for figuring out what you DO want to do.

Thanks, that's one of the books I'll hopefully be getting around to soon.

Personally if you don't particularly like finance and don't want to do it when you grow up, I wouldn't get a degree in it. Ok sure it's a "fall back" degree - but if you're doing work you don't like - or better - LOVE - you won't be people's top pick for hiring.

Yeah, I regret majoring in finance but now it's too late to switch. I was actually in computer science before, didn't like it, switched to finance, and ended up not liking it either. Recently, I've been taking an interest in psychology and philosophy, so I'm trying to take a few courses in those areas before I graduate.

But that's pretty radical thinking today, I know - so tell us - what DO you like doing that might be income generating? With no debt and a willingness to live dirt cheap, you can do pretty much whatever you like starting out while you figure out what you want to be in the "real world".

At the moment, I really enjoy cooking, though it's a recent hobby so I don't know if it's going to stick with me. Can't really think of anything else that can be income generating unfortunately. Figuring out what job to take after graduation is another tough decision I've been spending a lot of time thinking about.

Greebo's got great advice, as always...one category I don't see considered is gifts.....

Hmm that's an interesting one. I'm embarrassed to say this, but I've never really spent much on gifts. How much do you usually spend on gifts? Seems like it's something I'll be doing more and more of as I get older and form more relationships with others.

You also should look into 'renter's' insurance, have no idea what that runs.

Thanks for bringing it up, never heard of this until now and with Greebo's + Lindsay's excellent information, I'll definitely be looking into this.

Don't get a DUI.

Thanks, definitely sounds important! I'll try to be responsible enough to avoid this.

[miss_cas]

I would just caution you to keep your spending in check so that you can have an adequate emergency fund yet party enough to feel satisfied.

Now would be a good time to get a credit card. Paying this on time is the ONLY thing you have to do to build up a great credit score. To avoid trouble, only charge as much as you can afford to pay in full that month. You can even charge just gasoline or a small purchase here and there and get the improved credit score effect.

For big purchases, such as vacations or electronics, make sure you have saved up enough cash to cover the purchase before buying.

Now is the time to start the 401k. Suze Ormann had a great observation that I have found to be so true. The 401k accounts offered by almost every employer are piss poor performers. The only reason to use this option is if you get a company match - or - you have a company stock purchase option with a very good discount. Only put as much into the 401k as your company will match. Try to fully fund a Roth IRA too (this can be a goal). You have thousands of investment options for choosing your own IRA which will perform much better than a 401k.

A very good read I came across is "It's your money or your life" by Joe Dominguez. Check that out for inspiration.

Read up on lifestyle inflation too.

[Libby]

The only thing I can think of is don't count your eggs before they hatch. You mentioned your future job should yield $60K-$90K/year - until you get that job - keep an eye on your spending and costs.

Congrats on being *that* much further ahead Keep up the great work!

[shoiji]

Think it is great that you might be able to spend $600 a month on entertainment. This was really the only amount that I thought was a little bit high. I realize you are only 21, however I would suggest you try to lower that amount once you have everything you need for the apartment.

The reason being is that it can be really hard to lower that amount once you are used to it. Eating out with friends can be lots of fun. Why not cook a meal for them and have them bring something. It will save lots of money in the long run and your friends will probably appreciate it. Look for free entertainment that you and your friends can go to. Just think it is better to get used to spending money wisely especially in the beginning. Trying to keep up with the joneses is not a good practice to start out with. Not saying this is you now but it can be a slippery slope.