Case Study: Help a young Mustachian with a new job!

[biotechgirl]

Hello fellow mustachians! I am in need of your help.

Life Situation: I live with my parents in Pennsylvania and they claim me as a dependent for tax purposes. This will be the last year they can claim me.

Gross Salary/Wages: State Temp Job: $10.15 an hour, 37.5 hours a week. Gross wages per year: $19,792.50.
Part Time retail job (might quit in a few months): $7.25 an hour, probably 15 to 20 hours a month. Gross wages per year:$1305 to $1740.

Pre-tax deductions: The state provides a pension plan which is mandatory, deductions are taken out at 6.25%.

Other Ordinary Income: I知 not sure if this is the correct spot, but I have been receiving $1400 a month as a gift. This will probably stop within the next few months.

Adjusted Gross Income: Retail plus state job equals $21,097.50 to $21,532.50 in gross income. If you add in that gift, it blooms to $37,897.50 but like I said earlier it will not continue for long. So we'll budget like the gift doesn't exist.

Taxes: Looks like I値l be in the 15% tax bracket for federal taxes, PA state tax is 3.07%, and local tax is 1%. Also there is a union fee due of 1%, but I知 not sure if it is pre tax or not.

Current expenses: I have a paid off car and I live rent free with my parents. I am starting my new job with the state next week. Expenses: Cellphone- $44.05, Car Insurance (goes by mile driven so this is an estimate)-$55, Gas (an estimate with a new commute to work)- $40, Fun money- $150 (I feel the face punches coming). Total expenses: $289.05.

Assets: I currently have $5,704 invested in VTSMX through Vanguard. I also own an old American car. I have 6.5k in my savings/emergency fund right now.

Liabilities: I currently have $11,250 in student loans @ 4.25%. Most of that money is not gaining any interest as I am still in college. I will be graduating in August and will focus on paying them at that time.

Specific Question(s):I am just starting a new job with the PA state government next week. I will be part of a pool of temporary workers. I am lucky to have gotten in because it will be easier for me to get a permanent position now. I will be working full time for the next three months. After that they can either keep me and I get a pay raise or I will move on to another full time position somewhere else. I have several questions so please bear with me!

What should I be doing with all of this new income? I have a few places in mind that I want to put it, but I知 not sure which places should take priority. I would like to: contribute the max to my Roth IRA this year, pay down my student loans, contribute to the state痴 457 plan (I知 not 100% sure if temp workers can do it, but they did give me the pension so I guess it痴 possible), continue to grow my emergency fund and save for a new car. My current car has cost me about 2k in the past year for repairs, I知 not sure how much longer it can go. I believe the state is going to send me a packet on retirement info including the 457 in a few weeks.
There is an option to increase my contribution to the pension from 6.25% to 9.3% and then they will pay you more in the end. I only have 45 days to decide which contribution I want and then it is permanent. I plan on staying with the state for at least 10 years which is how long it takes to vest. The issue I have with the pension is that I can only receive it once I turn 65, there is no way to withdraw it early. I知 only 20 now. I think I would do better keeping those few extra percent and investing it myself. Thoughts? Also here is a link to info on the pension.
http://sers.pa.gov/employers_contribution_rates.aspx
http://sers.pa.gov/members-pension-formula.aspx

Thank you in advance! I'm going to be checking on this thread later tonight and will respond to your comments. :)

[rubybeth]

One additional question: can you keep living with your parents? I say this because it could really help you keep your expenses low as your start out, and maybe allow you to tackle the student loans or save up for a newer car.

I would seriously look at the 457b options via your employer, if that is an option for you as a temp. The major advantage of a 457b vs. other savings options it that, once you leave the employer, there is no penalty for withdrawing money before age 59.5. You just pay regular income tax on what you withdraw. This is really good for state employees, teachers, etc. who have this option.

I probably wouldn't worry about the Roth IRA as long as you have a 457b. I am guessing your income will go up as you go throughout your career, so others may have different opinions on this.

I would also probably do the minimum to the pension.

As for your questions: I can't tell you exactly what to do, but since you have some competing priorities (car, student loans, savings), I will just tell you that I would probably kick the debt as soon as possible, which will make the other goals easier. You have a pretty hefty emergency fund for someone so young--is there a reason for this? Is it just parked in savings account? Maybe keep some of this (like $2-3k max.) but use the rest toward the student loans or replacement vehicle if that really is a big problem (if you need the car to get to work, and it's having major mechanical issues, for example).

[mxt0133]

Will you be staying home with the new job?  Have you talked to your parents about pitching financially?  I would initiate the conversation with your parents so that no resentment start to build if there are any misunderstandings of expectations now that you have a grown up job.

I did the same thing you did when I graduated.  I did not feel the need to move out of my parents and my parents where happy to have me in the house.  Looking back I could have done better with contributing toward house hold chores.  I did offer to pay rent which my parents refused because I was continuing graduate studies part-time.  When I found out they had a credit card balance I told them I would pay it of as it was silly to pay interest on it.  Staying at home really help me accelerate my savings.  I wasn't into inflating my lifestyle after tripling my income after graduating college so I maxed out my 401k, Roth IRA contributions, and started investing in taxable accounts.

[dess1313]

Current expenses: I have a paid off car and I live rent free with my parents. I am starting my new job with the state next week. Expenses: Cellphone- $44.05, Car Insurance (goes by mile driven so this is an estimate)-$55, Gas (an estimate with a new commute to work)- $40, Fun money- $150 (I feel the face punches coming). Total expenses: $289.05.

Assets: I currently have $5,704 invested in VTSMX through Vanguard. I also own an old American car. I have 6.5k in my savings/emergency fund right now.

Liabilities: I currently have $11,250 in student loans @ 4.25%. Most of that money is not gaining any interest as I am still in college. I will be graduating in August and will focus on paying them at that time.

Specific Question(s):I am just starting a new job with the PA state government next week. I will be part of a pool of temporary workers. I am lucky to have gotten in because it will be easier for me to get a permanent position now. I will be working full time for the next three months. After that they can either keep me and I get a pay raise or I will move on to another full time position somewhere else. I have several questions so please bear with me!

What should I be doing with all of this new income? I have a few places in mind that I want to put it, but I知 not sure which places should take priority. I would like to: contribute the max to my Roth IRA this year, pay down my student loans, contribute to the state痴 457 plan (I知 not 100% sure if temp workers can do it, but they did give me the pension so I guess it痴 possible), continue to grow my emergency fund and save for a new car. My current car has cost me about 2k in the past year for repairs, I知 not sure how much longer it can go. I believe the state is going to send me a packet on retirement info including the 457 in a few weeks.
There is an option to increase my contribution to the pension from 6.25% to 9.3% and then they will pay you more in the end. I only have 45 days to decide which contribution I want and then it is permanent. I plan on staying with the state for at least 10 years which is how long it takes to vest. The issue I have with the pension is that I can only receive it once I turn 65, there is no way to withdraw it early. I知 only 20 now. I think I would do better keeping those few extra percent and investing it myself. Thoughts? Also here is a link to info on the pension.
http://sers.pa.gov/employers_contribution_rates.aspx
http://sers.pa.gov/members-pension-formula.aspx

Thank you in advance! I'm going to be checking on this thread later tonight and will respond to your comments. :)

-Hang on to your extra income because you will be only in a temporary job.
-Save as much as you can for the next 3 months
-if you get a permanent job, throw a majority of the extra money at your student loan
-But make sure you have a decent emerg fund. 
-you HAVE to consider your job ends in 3 months and prepare.  there is no guarantee that you will automatically get a permanent position.  If you do, great! if you don't, then you have some cash savings to fall back on.  having the money sit in a savings account for 3 months isn't the end of the world while you sort out what you will have for a job.
-and speak with the family and see if there is anything you can do chore wise, or $ wise to help out for your living there free.  Even if you bought groceries 2x a month or something
-As for your pension, is there a match in what they give you if you increase the amount from the 6.25 to 9.3%?  of course they would pay you more in the end if you contribute more, but if they don't match it, its all because of you contributing the extra amounts. 
-What are the details about your car? other than it just cost 2k in repairs? what is it?  how many miles?  what went wrong?  if its a reliable car, then some repairs are worth it.  i've thrown that much at my car which was a toyota corolla, because the thing was in mint condition otherwise and super reliable.  After 18 years it needed a few things done, no surprise there.  you won't ever have a car that won't need something fixed eventually.

[MDM]

There is an option to increase my contribution to the pension from 6.25% to 9.3% and then they will pay you more in the end. I only have 45 days to decide which contribution I want and then it is permanent. I plan on staying with the state for at least 10 years which is how long it takes to vest. The issue I have with the pension is that I can only receive it once I turn 65, there is no way to withdraw it early. I知 only 20 now. I think I would do better keeping those few extra percent and investing it myself. Thoughts? Also here is a link to info on the pension.
http://sers.pa.gov/employers_contribution_rates.aspx
http://sers.pa.gov/members-pension-formula.aspx

Does the increase apply to "purchasing service" (http://sers.pa.gov/members-purchase-service.aspx)?

You should sit down and (find someone to help you) run the numbers so you make an informed guess.  It isn't obvious from glancing at it.

Once you get specific numbers you could post those for more feedback.  Good luck!

[asiljoy]

If you graduate in August, you have 6 months of deferment beyond that correct where your loans won't be accruing interest? While stressful, I'd hold onto as much cash as possible until you have a stable longer term outlook. This gives you the flexibility to replace the car if needed, help out the family, or handle :: insert issue here ::.

My plan if I was in your shoes
1) Figure out how the retirement accounts work; max benefits where available
2) Save
3) Earmark X dollars for emergency fund
4) Continue to save
5) Wait until know if got job or what long term employment looks like, what long term housing looks like, what car situation looks like... then pay bills where makes the most sense leaving emergency fund and retirement contributions untouched. Generally, I'd rather have a student loan than a car loan because student loans have certain protections built into them.
*Continuously thank parents and contribute to household where able because that's a pretty sweet situation if you all get along.

[biotechgirl]

As for my living situation I will continue to live with my parents, possibly for several years. My parents approve of me living at home so I can pay off my student loans quickly and save up money. I do almost all of the chores in exchange.

I have come to the conclusion that I will only be contributing the minimum to the pension so I can contribute more to the 457. I suppose my main question still remains: which items should I make my priority? Student loans? Roth IRA? 457? Savings?

Part of the reason for my largeish emergency fund is because I expect to replace my car soon or have to pay a few more thousand dollars for repairs. I bought it from a family member for 3k, but did not have it inspected. The car turned out to be in bad shape and that痴 how I ended up putting in about 2k in repairs. I致e only had it for a year, I知 not sure how much longer it will last. It likes to act up in the summer/ winter. This past winter it would not start 3 times and I had to jump it or have it towed. In the summer it likes to overheat. If I have to replace it I plan on taking a loan from my credit union at 2.25% and using a few thousand as a down payment for a used Toyota corolla.

Also I will continue to be employed by the state after this three month assignment. They will just send me somewhere else. I will not be out of work for any length of time, just to clear that up.

[MDM]

I have come to the conclusion that I will only be contributing the minimum to the pension so I can contribute more to the 457. I suppose my main question still remains: which items should I make my priority? Student loans? Roth IRA? 457? Savings?

See the 'Investment Order' tab in the case study spreadsheet for some thoughts on prioritization.

I have no first hand experience with "buying time" in pensions.  Many teachers I know have decided it is a good idea.  That is probably a different plan, and they may or may not have made a good decision.  It is unfortunate the state is so draconian in its insistence that you choose immediately....

[rubybeth]

As for my living situation I will continue to live with my parents, possibly for several years. My parents approve of me living at home so I can pay off my student loans quickly and save up money. I do almost all of the chores in exchange.

I have come to the conclusion that I will only be contributing the minimum to the pension so I can contribute more to the 457. I suppose my main question still remains: which items should I make my priority? Student loans? Roth IRA? 457? Savings?

That's great about the living with parents--and great that you're helping out with chores! As for what exactly to do with the new income, I'd suggest this:

1) I really doubt that you'll be paying much in taxes with this income and your deductions (student loan interest is deductible up to $2,500 per year--you won't have that much since you don't have a huge debt load, but I'm sure it feels like a lot of debt at your age). Adjust your withholding so you aren't paying too much in taxes out of your checks: https://www.irs.gov/Individuals/IRS-Withholding-Calculator And you'll probably qualify for the Earned Income Tax credit, so I really don't think you'll be paying 15% taxes.

2) If the car really is in such need of repair, I think I would prioritize saving more in that emergency fund for a more reliable vehicle. So maybe take a few months pay and just beef up that savings account so you've got $8,000-$10,000 or whatever to replace the vehicle when it comes time. Do a cost-benefit analysis of fixing this car vs. buying a better one, though. Do some research on cars in your price range using the Consumer Reports subscription from your local public library.

3) Put something into that 457b each paycheck, even if it's just $10 to start. You should be able to increase that at any time, but you definitely won't miss $10 from your paycheck.

4) The interest rate on the student loans at 4.25% isn't terrible, but I think you probably feel better if you pay them off sooner. Maybe commit to paying an extra $50 or something toward them each month, and see how that goes. You can always increase it. You've got time before you need to make that first payment--between now and then, focus on the saving into the car/emergency fund and the 457b.