Ask the grumpies: Financial advice starting out?

Norwegian Forest Cat asks:

I’m a late-stage Ph.D. student, and as a result of a lack of funds I haven’t been saving/investing at all beyond a small cushion in a plain old savings account during my early adulthood. I am about to hit the job market though, and I really want to get myself on track financially in the near future so I have my ducks in a row when I need to find health insurance, pay off loans, start investing/saving for retirement, prepare for the eventual death of my car, etc. My SO is a finance nut (as a hobby, not a job), so he has his own suggestions (which are USAA and Vanguard-heavy based on his own experience), but I think a visit to a financial planner would be a really wise one, especially when I have some indication of how said future job will compensate me. But, there are a million certified financial planners out there–how do you get started? And do I need to meet with one in the first place? I’m pretty overwhelmed with options and acronyms but am eager to learn and be involved with it, so just handing over the money to my SO or some bank is not going to cut it. :)

This is a great set of thoughts.  So… like we said in the last Ask the Grumpies, there are a lot of really bad financial planners out there whose incentives are aligned with separating you from  your money, not helping you to make more money.  The buzz words that your SO is throwing out are the right ones (does he also say things like, “low cost index funds” etc.?).  You definitely don’t want to just hand your money over to your SO, but it sounds like ze is making good decisions and would be a handy person around to help you take control of your own finances.

For you I’m going to recommend J.D. Roth’s book, Your Money: The Missing Manual.  He does a good job talking about the basics in a way that allows someone intelligent like you to understand what the different options are and what the pros and cons of these options are.   You can start talking about the things you read about with your SO, which will also help lead you to greater intimacy.  It is really good to be on the same page financially if you ever decide you want to combine finances or lives in a more permanent fashion.

I don’t think you need to meet with a financial planner, but if you do think you do, as with the last Ask the Grumpies post, I’m going to recommend Walter Updegrave’s suggestions on how to go about finding a good one.

If you find YMtMM helpful, then you can find some more personal finance book recommendation from this link here.  The post is about debt advice, but most of the books cover other things too.  In addition to the books in that link, you may find the Bogleheads Guide to Investing to be helpful for getting started with your investing.

What recommendations does the Grumpy Nation have for Norwegian Forest Cat?


33 Responses to “Ask the grumpies: Financial advice starting out?”

  1. bogart Says:

    I think my basic advice would be —
    Keep living like a graduate student until you have achieved the following goals:
    First priority: Contribute enough money to retirement savings @ employer to get any available match;
    Second priority: throw all available money at any loans whose interest rate exceeds 5%;
    Third priority: maximize contributions to tax-deferred or -sheltered accounts (so, you don’t get to stop living like a grad student until you are putting 17.5K in your 403B and 5.5K in your Roth, every year).

    Loans under 5% you can just pay off on schedule, as far as I’m concerned, until you’ve achieved priority 3 and possibly bought a house, if that’s a goal.

    If your grad student life has not included (a) a safe place to live or (b) adequate health or disability insurance ((c) balanced diet, etc. …) then you can (and should!) adjust your standard of living upward in those realms.

    Just dump all your retirement savings into a low-cost broad US stock market fund for now. Or put 75% in such a fund and 25% in something similar that’s global or international. At this stage, what you’re saving in is far, far less important than how much you can sock away. The Roth can double as an emergency fund, in that you could withdraw the contributions at any time, but don’t do that unless it’s — an emergency.

    You can also spend (reasonably) to advance your career, e.g. by attending conferences or buying time (get your humus @ Costco rather than growing free-range organic soy beans yourself, pay a grad student to do-inane-but-necessary-research-related-tasks). And you can adjust all this advice as needed to allow you to grow your family as you desire.

    And, its dictatorial tone notwithstanding, this is all advice, not a decree. So temper/adjust/ignore as you desire.

    • nicoleandmaggie Says:

      Great advice!

      Especially re: the “how” on retirement savings is nowhere near as important as the saving. Don’t get analysis paralysis– it would be better just to go to your local bank and get their help to put the money in a tax-deferred savings account or cd than to not put it away at all. (Though a broad-based index fund, like an S&P 500, would, of course, be better than savings, but you have all the time in the world to move the money after it’s been sheltered and only a limited amount of time to shelter it.)

    • Leah Says:

      Realistically, how many people put the full 17.5k in their 403(b)? For me, if I maxed out the Roth IRA AND my 403(b), that would be significantly over half my salary and honestly not leave me enough to live on, even if I maintained a grad student lifestyle.

      I’ve been shooting for the 20%ish to be saved — maxing out the Roth to take advantage of that lower tax bracket I’m in now and then putting in enough to the 403(b) to take advantage of my complete match and then some. I’m slowly increasing the 403(b) over time, but I wouldn’t have enough to live on with complete max-out.

      • nicoleandmaggie Says:

        That’s also a really good point.

        The more you do now, the better things will be in the future and the easier it will be later when there are important expenses or negative shocks, but, as Bogart was pointing out too, there’s some things that you should allow yourself some slack on even if it doesn’t mean maxing out your retirement. (And obviously, if you’re making 40K/year, it’s unlikely that putting away an additional 17.5K on top of what’s required is going to be a great idea or even feasible.)

      • bogart Says:

        Right, it’s a fair complaint (with my advice, that is). I did have that listed as a goal/priority and not the first one, even in the numbered list, with some cautionary (non-numeric) notes besides.

        I don’t know. My first job I was paid $35K gross, and while the limits were lower back then and Roths didn’t even (quite) yet exist, I did manage (heaven knows how) to put $10K per year (the max allowed) into my 403b and am inordinately grateful I did. That said, I am from a middle-class family background, the kind where you know your family will bail you out if you have a medical emergency and can’t cover your copayments (or whatever). So no, that wasn’t as extreme and yes, I did have various advantages others don’t, and so on, but — it’s still a good habit/practice to get into, or work toward. That doesn’t mean everyone will be able to do it, I certainly realize that.

      • Johanna Says:

        I’ve been maxing out my 403(b) and my Roth IRA ever since I got my first real job (after my PhD and a 2-year postdoc). The salary seemed impossibly high at the time, because I was still used to my grad-student lifestyle and had yet to be tempted by the luxuries of adulthood (vacations, restaurant meals, expensive toys, nice apartments that aren’t in the basement…)

        I agree with the general advice that before you let yourself get tempted by those things, get in the habit of putting some money away for retirement, whether it’s 17.5k or a lesser amount. I’d also recommend getting in the habit of giving to charity, but that’s obviously a more personal choice.

      • Liz Says:

        I don’t manage to max out my Roth IRA ($5.5K), but that hasn’t stopped me from socking away about $15K in just under four years, through the IRA and a work 401(K)/Roth 401(K). It’s not what the experts say I should be doing, but it’s still something. At 25, I’m comfortable with that amount. Also, in that period, I went from a salary of only $35Kish, added a year at half-price while using my earnings to pay off a MA degree mostly out of pocket, to just recently getting a bump to $65K. Don’t place all of your worry in the salary you get right out of graduation.

        I suppose theoretically I could shoot for maxing my retirement savings, now. The reason I don’t is: (1) student loans, which I’m double-paying, (2) a car loan at 0%APR which I’m still slightly over-paying each month, (3) you only live once/only young once travel opportunities (on the super-cheap!), and (4) I really want to own some land one day, so I’m trying to save for that. Priorities.

        Don’t let the perfect be the enemy of the good.

      • Rosa Says:

        my partner maxes his out, and nearly always has (when I met him he was going to school full time, working full time, literally eating out of the dumpster, and sleeping on scavenged couch cushions in a walk-in pantry when he wasn’t just couched out at the comp sci building) but I’ve always done 20% and I feel pretty good about my retirement savings.

        Of course the person who’s used to living on half a living wage won’t even need all that money when they retire, and they’re the one who will have it.

      • nicoleandmaggie Says:

        My dad has been enjoying setting up scholarships.

      • Rosa Says:

        building on what Bogart said – a Roth can double as an emergency fund, if you’re the kind of person who feels a need for a big emergency fund and can resist dipping into it for “emergencies”. The current recommendation is, what, 6 month’s expenses for an emergency unemployment fund? That’s serious money to have in something like a money market since they’re currently paying so little interest. It can work to stick it in stocks or something more conservative in your Roth and access if your feared emergency actually comes to pass. Most of the time you’ll get lucky and be able to leave it in there, growing.

    • OMDG Says:

      What’s a 403b?

  2. Debbie M Says:

    I am also opposed to financial planners. Most of the ones I’ve heard about give the exact opposite of the advice I would give. I also recommend learning from books and the SO.

    And don’t get excited about picking your own stocks (at least not for more than 5 or 10% of your portfolio)–research has show that this doesn’t work long-term (exception–dividend growth investing, where you pick a lot of big companies with growing dividend and then just withdraw the dividends when you retire) can probably also work. The important thing is to keep your money diversified (so if something bad happens to one company, you’re still okay) and keep your fees low (and your checking and savings accounts should have no fees at all for just putting your money in there). Keep some money liquid (for your next car) and some in stocks/bonds (for your goals that are ten years away or more).

    My biggest advice is to read everything you can about what your new company offers. Read everything that HR gives you and look up things on their web pages. Ask your new colleagues about things, but after a little reading, you might be more expert than them. Examples of things to learn about:

    * all the kinds of time off – holiday, vacation, sick leave, jury duty, unpaid leave, etc.
    * all the kinds of insurance – health, long- and short-term disability (you won’t need short-term disability once you have some sick leave banked), life insurance, etc. Don’t get life insurance if no one (besides you) is depending on your income.
    * retirement plans – sometimes you have access to more than one kind right at your job even if you have a pension. Definitely contribute to anything that gives you company matching. Note that 457b’s can be cashed out when you quit, no matter what your age. Note that with Roth vehicles, you never pay taxes on any of that money again–and I think taxes are going nowhere but up. But with other vehicles, the amount you can put in is more than the amount you will lose out of your paycheck–when in doubt, do some of each. Also note that you can open IRAs outside of work with any company you want, so you can get nice low fees there. If your company gives you a million choices on retirement companies, the best deals are usually index funds–check out the fees for all of those and make your decision that way.
    * stock options – if you’re with a publicly-owned for-profit company, find out about these
    * discounts – sometimes apartment complexes, car rental companies, and who knows what else will give you a discount for working at a certain kind of company. If you’ll be faculty, you may also qualify for educator discounts at various places.

    • nicoleandmaggie Says:

      Great advice on employer options!

      Also with discounts– as you’re setting up things like internet, insurance, etc., be sure to ask for discounts. Sometimes they give you discounts just for asking for them.

      I wouldn’t worry about dividend investing as a 20-to-30-something (unless you’re planning on early retirement extreme, of course). When you’re young, it’s more important to go for growth stocks or to diversify. Dividend stocks tend to be established companies that can’t reinvest. You don’t need the cash-flow now, you need the deferred earnings. So index funds! And if you have access to Vanguard, then target-date funds.

      Also, I’d say the heuristic for medium-term goals is that it’s ok to keep money in (taxable) stocks if your goal is 5 years from now, not 10. 10 is on the conservative side (though, given the recent recession…)

  3. nicoleandmaggie Says:

    Norwegian Forest Cats are cool cats.

  4. Johanna Says:

    I have no experience with financial planners myself (I’ve always managed my own investments through Vanguard, and found it fairly easy). But if you want to go that route, the magic word, as I understand it, is “fiduciary.” You can ask them straight out: “Do you have a fiduciary duty to your clients?” If they do, that means they’re obligated to recommend investments based on your best interests and only yours, and not try to sell you things that make more money for them but might not be good for you.

    The anti-magic word is “suitable.” Advisors who don’t have a fiduciary duty are merely obligated to recommend investments that are “suitable.” But that could be any one of a million things, and it usually happens that the “suitable” investments they’re pushing you toward are the ones that just so happen to earn the biggest commissions for them.

  5. Norwegian Forest Cat Says:

    You guys are just the best. I am job interviewing today (!!!) and can’t wait to read up on what you all say tomorrow! I don’t know who is more excited about it though–me or my SO… he thinks it’s awesome that I want to be in the know. :)

    • nicoleandmaggie Says:

      Good luck!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

      (And it was very exciting for us when our partners started getting interested in the money$.)

      • Leigh Says:

        It is so exciting!!! Especially as you start to share your financial goals with someone who also has an interest in you succeeding at them and when you have similar goals :)

  6. chacha1 Says:

    Best of luck to Norwegian Forest Cat. This grump adds:
    being the child of a certified financial planner who managed to invest in Enron AND to get to age 76 without an estate plan …
    unless there is something inherently complex about your finances, something like income from multiple sources including capital gains and foreign investments and inheritances, doing it yourself is easily within the capacity of an averagely-intelligent person with the interest and the time. So a smart person like NFC should have no problem with it. :-)

    I am far from a good example of financial prudence in years 20-40, but have always contributed to my 401(k) plans, have never taken a loan from a retirement account, now at age 48 have over 200K in said plan thanks to stock gains and employer profit-sharing, and am buying land which should be paid off by age 51.

    The one thing I’ve done consistently that I think could be characterized as Smart is, buy an efficient vehicle and drive it forever. I am repeatedly stunned by the amount of money many friends pay, every month, for a leased or recent-model car. I drive a 1995 Honda Accord. My husband drives a 1999 Honda Accord. Some things are important (good quality food; health insurance). An Audi or BMW isn’t.

    • nicoleandmaggie Says:

      YES. If you read the Millionaire Next Door, it becomes abundantly clear how important your housing and car choices are in terms of your bottom line. Lattes make a small dent, car payments make a huge dent.

      And gas efficiency continues to be more and more important to your weekly expenses. My little 2005 Hyundai Accent costs me about $30 every two weeks (and that’s when I’m doing drop off and pick up at the out-of-the way private school). DH’s Honda Civic hybrid is even more efficient (though it doesn’t break even probably with the additional cost of the hybrid now that there’s no tax credit for buying a hybrid). It’s nice not having that additional drain on our finances.

      If you can go down to one car and walk, bike, or use public transportation, that can also take a big bite out of your costs early on and allow for more savings and a better financial footing, which leads to more freedom. (We only became a one car family when we had enough saved up for insurance etc. and we only became a two car family after we had a child and needed to be available for emergencies.) When you do need to get a new car, see if you can buy it with cash rather than financing it, and then drive it for as long as you can. I am also repeatedly stunned by the amount that some people pay every month for their cars. (Just because you are having a second kid doesn’t mean you need a brand new top of the line SUV! My Accent really does fit two big top-of-the-line carseats in the back.)

      • chacha1 Says:

        Housing – that’s another thing. If we had caved in to peer pressure in the early 2000s and bought a house in L.A. we would be f*cked. Sticking to a rental has enabled us to stay in the neighborhood we wanted, and saved us thousands in property taxes and insurance, never mind lost equity (see: underwater).

        I like to tell people about the condo we looked at in 2006. Right across the street from our apartment. Almost identical floor plan (all they had that we don’t is in-unit laundry), identical lack of amenities. That condo was listed for over $900,000. Do the math on the down-payment and run the 30-yr mortgage and weep.

        Obviously this is not an everyday illustration. But this demonstrates why my philosophy is, if you are not 100% positive that you are where you want to stay … keep renting.

      • Leah Says:

        We went one car, and I’ve been so happy. Even though both were paid off, we still save money now. My husband wants to get a new car, and I keep telling him to save his pennies. I’m trying to eke out as much time from my car as possible. It’s 10 years old, but it only has 131k miles. Of course, not having to commute to work helps ;-)

      • Rosa Says:

        fixed expenses in general are the big building blocks. That adds debt to housing, transportation, and utilities.

  7. Leah Says:

    My most useful tips:
    – Save as much as possible. If necessary, work your way up and increase your savings amount over time.
    – Work on paying down any debt.

    In my mind, money isn’t happiness. Money is freedom. Save what you can, and use your money judiciously. You’ll have to make the decisions you need based on your values/interests, but make them thoughtfully.

  8. Norwegian Forest Cat Says:

    Such awesome thoughts! I have to admit, many of them seem pretty common sense to me, but I was raised by a couple of generally frugal people who didn’t have money to spend on fancy cars or too much house. :) The general idea of “don’t spend too much of your money on stuff you don’t REALLY need” has been a standard one for me (especially throughout grad school), and it was really the need to pay off student loans and save for retirement and plan for other “grown-up stuff” that had me worried that I didn’t know what I was doing. I think there is still a lot of thinking to do down the road, but it’s nice to have some general suggestions about where to get good information from. Grumpies to the rescue!!! :)

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