Dear financially clueless new grad,
Welcome to Part 2 of this guide. Read Part 1 (Budgeting) here.
This segment focuses on
Determine how much you want or need to save, and invest the rest.
They say it’s good to accumulate your savings in 3 areas:
- Emergency funds: in the event of yours or a loved ones’ sudden alteration in health
- Contingency plans: A stash that can let you live for the next 6 months (in the event that you lose your steady income and need to find a job in 6 months).
- Retirement savings (more on this later)
*Optional: For something you’re saving up for (house, car, travels, that long-coveted date you’ve been meaning to ask your crush on)
After the above, you may want to save for other things, but I suggest pouring a chunk to investments.
Save stagnant funds in an online savings account.
APY, or annual percentage yield, is a percentage rate showing the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period. You want higher APY rates to basically earn “free money” by nature of the money just existing in that account.
Bank of America’s Regular Savings Account has an APY of 0.03%. High-yield online savings accounts, however have APY rates of > 1%, because they do not have brick and mortar (and associated employee) costs. I use CIT Bank, but Ally Bank is a good option, too.
Save for retirement.
It is not AT ALL too early to start accumulating wealth for retirement. In fact, I wish I had started saving my Christmas money sooner. Why? Compounding. Compounding. Compounding. The ability to generating earnings from past earnings.
Given a 2% interest rate, who will be the richest by the time they are 30 years old if all 3 Reyes siblings invest their 2017 Christmas money (let’s say equally $100, though not realistic) at the same time.
A = P x (1 + r/n) ^nt
Mika will be 30 in 2024 (6 years): 100 x (1 + 0.02/1) ^(1*6) = 112.61
Kyle will be 30 in 2026 (8 years): 100 x (1 + 0.02/1) ^(1*8) = 117.16
Misha will be 30 in 2032 (14 years): 100 x (1 + 0.02/1) ^(1*14) = 131.94
Imagine that logic, applied to much more than just Christmas money PLUS adding to the already compounded pool every year! That’s a shit ton of money to spend on grandchildren when you get old…
Save for retirement now! Reap the long-term benefits (instead of buying that unnecessary extra pastry that you’re probably not gonna like anyway). I know you can.
Some options for retirement accounts.
- Highly highly recommend putting it in a 401(k), if your employer matches (meaning they will match a certain percentage of money you put in). Free money. Can’t complain.
- Roth IRA – this is what I have since my employer doesn’t yet match 401(k)s. I put in my retirement money from my income less taxes. There are no initial tax benefits but there is also no income tax upon withdrawing in retirement.
- Traditional IRA – tax is paid when you withdraw from the account in retirement.