newbie seeking financial advice

My take home is 5K per month and I have a B.S+M.S in Computer Science coupled with 2 years of work experience(including pro-rated parttime). I realize most people at my age(26) are in the high six figures, but as I work for the local goverment it is less.
I am presently saving most of my savings in a savings account/CD'S which are giving me about 5% as I want to purchase a home which in my area(Tallahasse, FL, U.S) are about 150-200K. Presently, I am single and my total savings are about 40K. My total expenses are about 700 per month(including everything and I don't have a vehicle) which I realize is quite high as I have heard college students in my area typically survive on 300-400 per month in my area by sharing an apartment and I am staying alone to avoid noisy roomates. 5% is pretty low considering 4% inflation and taxes.
I have one IRA account with just 2K and am participating in my agency's deferred compensation plan and have chosen the investment plan(instead of pension plan). I understand that people of my age will not be most likely not receiving any social security(40 years from now) so need to depend on only on their savings/investments for retirement.
It seems from the below links that most people today start their own business part/full time and generate side revenue and some are even teenagers.
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Some folks have advised me to work part time designing blogs, sell items on e-bay, work as a part time real estate agent, trade in stocks aggressively, buy/sell homes on interest only loans(particularly the way market is at present), drive buses/taxis on weekends or work for another agency part time on evenings/weekends. They mentioned two full time jobs or full time job plus full time college or one full time and part time job is pretty common for people at my age with no family responsibilities. Some have advised me to take part time MBA classes which could help in eventual promotion at my work place which I am considering. Few have told me to invest in international funds which are doing well at this time.
I am just puzzled how so many people from other countries achieve things like becoming governor of California, starting companies(founder of Intel) and many more bright migrants while I am struggling to even save for retirement.
I am trying to learn as much as I can about investment vehicles and talking to many bankers as possible while avoiding their investment services until I understand how it can assist me in the future.
It appears quite a lot of people achieve it in our country from
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but most have more qualifications/skills than me.
The links I mentioned are one of the many myriad such links and in the actual world there are lot more people who do well considering New York City alone has 45 billionaires(in addition to lot of people who still don't reach that level).
Can moving to a different place like New York City or California boost income after taxes, expenses etc of living in that area and working for the coprorate sector?
Some have told me being an independent consultant you can charge 100$ per hour assuming you can market and sell yoursel properly. For a 1 year contract(working 1950 hours per year) with 100$ per hour someone could bring 195K after Federal, state, self-employment tax, medicare, health/business insurance/vacation/annual leave,training leave etc. could still net about 100K which is better than my present take home of 60K per year but I would lose job security and have to be mobile which people have suggested me most people at my age without a family typically do to boost their income. Some have told me it is advisable to work for goverment in late thirties or forties and presently earn as much as possible by investing aggressively, working as a contractor starting a part time business/franchinse/real estate etc.
As I am a newbie I would appreciate the advice of experienced folks in this team on how to reduce outgo, increase income and invest properly for eventual retirement.
Thanks a lot.
Reply to
s
OK I have to stop reading right here. It sounds like you would benefit from just learning a bit about income and wealth in the US, so you see how well-off you are and how high your savings rate is!
It's not even remotely true that most 26 year olds make high six figures. Obama and Hillary sparred about this point in the debate recently, but here is an interesting figure: according to a GAO report from a couple years ago about the Social Security program, only 6% of individuals earned more than the Social Security tax cap (which is currently $97,500). So about 94% of people with earned income (salary, wages) make under $97,500 - this is individuals, not household income, which is a different figure. And most people who crack that $97,500 figure aren't 26, because peak earnings years come some 15-20 years later.
So if your take-home is $60k, your income is well ahead of most other 26 year olds. You would have to look up local data but it would not surprise me if you are above the 90th percentile in earnings, especially in a low-cost area like Tallahassee.
You said it's hard to save for retirement, but you seem to be having no problem doing that -- you already have $40k. Here's a figure that might surprise you...that's getting close to the average amount a near-retiree (age 55-64) has saved up in their IRAs and similar accounts. The figure depends on the report cited, but it's somewhere in the neighborhood of $55k. So not only are you way ahead of 26 year olds, your savings would be above-average for someone 26 years older than you.
And $700/mo, $8400/year, is a very low level of spending. Think how easy it would be to sustain that lifestyle.
So the first thing I'd suggest is a change of perspective...you're earning more, spending less, and saving more than most people your age - by a wide margin.
-Tad
Reply to
Tad Borek

**snip**
suggest 10%, some 15%, some 20%, some as much as possible. Bottom line is you need to set something aside. You are doing this already. Good job. What % do you contribute to your employer's plan? Do you get healthcare benefit in retirement?
increase income- assuming you make around 74k gross per year, 5k take home per month is a high income. I compare what you take home relative to what I make, and outside of fact I send 11% to my 401k, I see some similarities to my Engineering degree. Increasing income will come with time. Another way to increase income is to cut spending. Live on less than you earn, and you will find many financial issues become simpler. Avoiding debt is a good way to save more money.
Once you are setting aside something each paycheck, and spending less than you earn, you are well on your way. Next step would be to learn about IRAs, taxes and investment choices.
Reply to
jIM
I see that you have two financial goals: (1) buying a house; and (2) saving for retirement. A few questions:
1. Do you have health insurance? 2. Do you plan to marry and have kids someday? 3. At what age do you want to retire? 4. Do you have any debt (e.g. student loans; credit card loans)?
The answers to these questions can better help frame what your goals are, including whether you need to find more income (via a different job or taking on more work). Then much more concrete advice can be given here.
Reply to
Elle
Thanks for your reply.
Yes, but I am setting it in savings/CD's which give about 5% and after 4% inflation and taxes it is lot less.
I am doing some 5% which is a deferred comp. plan.
No, I don't think I will get health insurance in retirement, but I need to verify as I am weak in such things.
Thanks. I will do that.
Could you please suggest some good books/articles/blogs on them? I am trying to read as much as I can , but still am confused. Some say international funds are good, but bankers differ which leave me confused.
Thanks for your advice and time.
Reply to
s
First, let me congratulate you on your financial situation. You are WAY AHEAD of your peers, regardless of what you may have read. Basically, your instincts about finances seem to be right-on, and I glad that you are skeptical about all of the advice you have gotten because, quite frankly, some of it is quite dangerous and will set you up for financial ruin.
That being said, Elle is correct. You must create a financial plan, and your first step should be to clearly define your goals, both long- term and short-term. Once you do that, you should have a good picture of how much money you will need, and when you will need it.
Elle is right again, your next step is about protecting yourself and paying off debt. You must have health insurance, however, if you are single, you probably don't need life insurance (you need to understand the difference between wealth protection products and wealth creation products, so you don't get sold stuff you don't need.)
If you have debt, that should be paid off before you start investing.
When you are investing, remember that saving for a house is going to require different strategies than saving for you retirement.
Two things to remember when investing: 1 - Diversification. This is the most important concept. You need to really understand how to diversify before you even think about investing; and 2 - If you need your money within 5 years, it should not be invested in the stock market or any other risky venture.
you aren't saving enough, you just need to understand how to protect yourself and invest for your future.
Reply to
FinancialEssentialsLLC
Thanks for your reply.
Yes, my agency provides me with health insurance though I have to pay about 50 per month as a premium.
Not certain now, but if possible at 55, but considering my income it seems far fetched as today lot of people seem to work in late sixties or even in seventies also.
I don't have any loans, but my main disadvantage is I started earning quite late whereas most people start as teenagers. I have to support family and brother in a few years.
Thanks for your advice and time.
Reply to
s
Thanks for the reply.
Well, I thought that most people who start their own businesses or enter other fields(law/medicine/management) do lot better than me as evidenced by
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and
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Not most 26 year olds and not high 6 figures, but it seems they break six figures from
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and someone in business started since 16-17 even more. One of them there mentions crossing the 7 figures at 24. Agreed, very rare indeed, but we need to realize most people who are small business owners can reach that. A real estate agent earns about 15K per house sold which just requires a 3 month license after high school(if I was told correctly by someone pursuing that option). someone starting at 17 after high school and 9 years of experience can probably reach starting six figures if not more.
Yes, but averages vary as some are very well off and some are not so well off.
Yes, but houses here are pretty expensive and I neglected some major things in my post like I will have to support my elder parents and a brother who wants to attend medical college in another 3 years or so. They live in another area where my brother goes to college. I apologize for the lack of information in the first post. I am not supporting them at present so managed to save some amount.
Perhaps, but added expenses like new family(spouse/children etc.) and supporting parents/brother might make it difficult in the future.
Yes, at present, but when I need to support my parents/brother and have a family it would be lot more than that.
Thanks for your advice and time.
Reply to
s
have in the near future is figuring out how to support your "elder parents and a brother who wants to attend medical college in another 3 years or so." This is a "short term" and possibly large financial need, so this is why they are the first priority. You also want to buy a house and save for retirement. These goals are also important. First, the parents: How old? Are they U.S. citizens and eligible for Medicare or, if impoverished, Medicaid? Will they live in your house with you? Do your parents have any debt? What do you estimate the annual cost of supporting them will be? You should start a spreadsheet of their expected living expenses, subject to revision at any time, now.
Second, the brother: How old? Can he get medical school loans? Has he begun to research these loans? What do you estimate the cost of supporting him will be? Will he live with you? Start a spreadsheet of his expected living expenses too.
You have 40k in savings in CDs, and you are participating somewhat in your deferred compensation plan. The only other thing I might recommend is contributing $4k for this year (2007) to a Roth IRA immediately. Just put it in a money market fund within the Roth. Otherwise, I recommend continuing as you are for now. It's a safe course for the short run.
You have much planning to do, but with your educational background, I am optimistic you will have a good direction soon. Much, if not all, of what other folks are saying is also going to be useful. But I think you need to have a handle on the big picture of your financial goals first.
Lastly for now, stop putting yourself down about how much money you are making. You are wrong on some of your points about how you are doing. For example, people who started as teenagers overwhelmingly do not have anywhere near the income you have now, at age 26. Statistics show that generally, college grads make much more money over their lifetimes than non-college grads. Moreso for Masters degree holders.
Generally, one should not look back at what "could have been," except maybe as a quick lesson of how to do it better. One has to work with what one has now. You are asking excellent questions and are very open to looking on your own for answers as well. Keep doing so.
Thanks for your thanks. Seems to me people do take kindly to courtesy around here, and it promotes optimal exchanges of information. (Not that I am perfect.)
Reply to
Elle
A sound retirement plan should probably be built on saving more than 5% of income. A reasonable goal might be to have 25X income saved (4% starting withdraw rate).
Money will grow faster (PROBABLY) in equities. Equities could be expected to return 8-10% long term, well above the 3-5% long term return of CDs or cash based investments.
Many government jobs provide a pension and health coverage in retirement, if you get these things the 25X income and 4% withdraw rate assumptions change considerably in your favor.
I would read web sites like T Rowe Price, Vanguard, Smart Money and Morningstar. Look at retirement calculators in particular.
Elle had good points about short term vs long term goals. I would add that you need to pay attention to long term goals now, so in 5 or 10 years these goals don't look so daunting. I would also be careful of committing to take care of family for only short term, as my experience with doing that is once they move in, they never leave- or stay much longer than planned anyway. Yes I have kicked a family member (FIL) out of our house... so tread on this issue with discretion.
I would always ask for a second opinion if someone tries to sell you something.
Reply to
jIM
Thanks for your reply.
My dad is 57 and mom 56. They are U.S citizens and eligible for Medicare and have their own house, but I prefer they sell it and live with me. They are not sure at this point, but I feel if I live closer to them I can aid them better in case of a medical emergency or issue. They don't have debt, but not a lot of savings also. They want to travel after my dad retires(my mom does not work) to different parts of world. I realize some amount must be set aside for medical expenses of elder parents as medicare cannot be fully relied on.
He is 19 at present and he can get loans. But, I am encouraging him to get as much as financial scholarships he can get through different sources. If he gets lot of scholarships I will have to spend less else about 30K per year which varies between campus/area he goes to college and many other factors.
Thanks for your advice and time.
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Reply to
s
You have three issues: 1) Are you saving enough enough and investing well enough? You are certainly saving enough. You are not investing wise enough. CDs barely keep up with inflation. Stock market does does much better, but you must commit to investing for at least ten years to get pass bad economic years. 2) You worry about choosing a good high-paying career. Well you have a good one now from what you say. Maybe you are reading too many stories about superstars in Silicon Valley, and very few are that lucky. Silicon Valley costs more than twice Tennessee, so their money isnt going as far. Do something you like to do rather than what other people tell to to do. That will help you in during bad economic times when motivation counts. When you have one, five, ten years or so of living expenses in the bank you have the freedon to try new things and move to new locations. 3) Its sounds like you may be spending too little money in your life. If you dont have your own living place and own car that limits finding a spouse or networking with potential partners.
Reply to
rick++
The ROTH IRA is one of the best accounts you can have for your retirement savings. You don't get any deductions for your contributions, but your money grows tax free. But remember, these are tax-advantaged plans, and you must play by the IRS' rules, which can be quite complicated insofar as contribution limits, etc. You need to make sure you are familiar with all of the rules because penalties can be quite steep. You can get more information on ROTH IRAs at
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Depending on where you open your ROTH, you can invest in almost any kind of investment including CDs, stocks, bonds, mutual funds, and sometimes you can even hold real estate in these accounts (but I caution against it).
As to a comment that someone wrote that you should be saving 25% of your income, that would be nice, and may be possible now because your expenses are so low, but usually a more realistic goal (especially once you get married and have a family, etc.) is 10%. 10% should be the minimum amount you save from every paycheck.
I would also like to reply to a comment written that stated that you can make between 8-10% in the stock market. Although the stock market, in general, has the best long-term averages, remember it is also very risky, and you can also lose 8-10% or more!!! You never start your investment plan with buying stocks. Think of your investment plan as a pyramid, you will want the bottom to be solid, with investments like CDs and/or government bonds, then you diversify into mutual funds, and then stocks. Don't put the cart before the horse.
For investing newbies, you will want start learning about Index Funds (which are mutual funds that follow the market indexes and should charge very low fees), and then Exchange Traded Funds (or ETFs), which are a stock version of Index Funds.
Reply to
Cheryl

I have found these two sites provide useful information in learning about them. It might come useful for others:
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hope it helps.
Reply to
pallav

"you never start your investing plan with buying stocks"- think that is a strong statement which is false.
Two reasons-
One-using "always" or "never" as a guideline can lead to taking statements out of context.
Second- if the plan is for long term saving (retirement), I would argue that starting in equities (stocks) is a good move, especially for a young investor.
Reply to
jIM

Elle and All others,
THANKS so much for the replies and useful comments.
It will take me some time to digest all the information given to me here(I wish I could be more faster in such matters), but I had one quick question. Since my major expenses(taking care of parents, brother, starting a family and buying a house) will start in about 3 years would taking on a part time job(designing blogs, sell items on e-bay, work as a part time real estate agent, drive buses/ taxis on weekends or work for another agency part time on evenings/weekends) or getting another degree like MBA part time which could help in moving up the ladder a bit faster to boost my income help while I am still single and have less responsibilities?
I am at present working around some 55-60hours/week in my present job and volunteering another 10-15hours at a local library as a computer tutor. Some have told me I could work another 20-25 hours to increase my revenue. As most people here are more experienced about dual jobs, their benefits after taxes and drawbacks I would appreciate some advice in that matter. I realize lot of people do two jobs in our country or go to college full time and work full time etc. as a teenager or in their early twenties which I have not done.
I understand it is not required if one does not have lot of financial expenses, but for one like me(who would be in 3 years) would that be a proper way? I recognize I need to invest properly the extra funds as advised here for future.
Thanks again for your time and advice. Now I have a much clearer idea of where to begin and how to proceed.
Reply to
s

Issue 1- the people which make lots of money are usually good at what they do. It isn't so much tied to education level as it is being good and skilled at what you do.
You will probably find that professional certfications will go a longer way to increasing income than higher degrees. I think you will find that spending the same amount of time working each week (40-60 hours) beats working a second job which does not care about the other.
In your case, if you did any of the following certifications, I think your short term earning power would skyrocket:
1) Certified programmer (Java or other) 2) Certified DBA (Oracle or other) 3) Certified MCSE (or similar)
Oracle DBAs will probably start at 120k. Not sure about salaries for the other two. If you need me to explain those to you, please ask.
My wife debated the MBA-vs professional certification route. She spent 6 months preparing for a test (PHR) and got a 10k per year raise when she passed the test. This same certification can help her become a consultant if she wants. Her current clients do not need her to have an MBA.
PHR would be similar to a CPA for an accountant, Bar for a Lawyer, or PE license for an Engineer. Not needed in each case, but extremely helpful. MCSE or Oracle Certified would do same for a computer science major.
I think the professional certifications will help you short term and they are much cheaper than Masters degrees. This issue has been discussed here many times ad nauseum, make sure comments relate to financial planning.
Reply to
jIM
"s" wrote
I agree taking on more work now when you obviously have the inclination and energy is a good idea. This is particularly so in view of how much more income (IMO) you'll need to support your parents and brother in some three years.
If Jim is saying, among other things, try to get the extra work at your current job, then I agree. I also think he's right in proposing you seek further work hours (at your current job or elsewhere) in your current field such that those hours specifically go towards boosting your qualifications.
In the short term, you lose hours and money doing an MBA. Socking away dough early makes a huge difference compared to socking it away later, due to the effects of compounding. Maybe the MBA would pay for itself. Or maybe you have more passion for business per se than computer science. It's a tough call. You seem better armed with the stats on this (MBA vs. continued experience in computing) than most folks. I personally have more faith these days that your computer science and practical expertise is more valuable for the long run, as long as you stay current. I know at least as many folks with MBAs who are not using them (that is, the MBA was not needed for their job) vs. those who are.
I find the young do not understand the concept of "burnout." I sure did not when I was in my 20s and early 30s. I will suggest that you consider that there is truth to the maxim, "All work and no play makes Jack a dull boy." If you're, say, grinding your teeth (per your dentist), you are stressed, and root canals will happen sooner rather than later. In this vein note for example what John Weeks said. I hope all gov jobs are not like what he described. Government needs good people, but I think many good ones are driven away by various bad aspects of the government culture.
Rick is right you need to attend to your love life. Take it as seriously as your finances. In this vein, continuing to volunteer might lead to some good social connections and, as importantly, people who think like you do with regards to "service." Find a woman who prioritizes her finances just as you do.
Reply to
Elle

Consultants have to charge a large amount to compensate for the lack of benefits they receive in addition to not working a full work year.
Your pay isn't low, but if you can pick up an extra $10,000 per year by getting a different job, go for it. Government jobs are a little more secure, but you are likely to be stuck working with obsolete technologies with no way out. If you are in an affirmative action category, you might try to work up a promotion to mid level management.
If you want to go into business for yourself, work on developing software products since hardware development requires far more capital. You can start in your spare time and once your revenue is adequate, go full time on your business.
You have an opportunity to become a good investor with your background. You will need to learn a little about financial statements and track technological developments that can result in investment opportunities. Stock options can give you the opportunity to enhance your returns and reduce your risk.
-- Ron
Reply to
Ron Peterson

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