Case Study - How should I start distributing my income?

[vple]

Hi! I recently found out about MMM a few days ago as I started looking into how to better utilize my money. I'm 23 year old software engineer in NYC. I've been fortunate with earning money, but as a result I know next to nothing about utilizing it well.

I'm most interested in thoughts on where I should put my money as well as how much I should allocate towards saving and spending. I made estimates of my fixed costs (they can be rather variable per month), but regardless they're largely unnecessary and I plan to cut most of them out. I realized that some other case studies are more focused on reducing expense items, but I'd like to focus on establishing a reasonable estimate on how much I should be spending on living costs rather than how much I can reduce the cost of each item. I feel the low-hanging fruit here is to cut out the majority of the food/drink/clothe expenses; I can worry about further improvements after I make these changes and reevaluate how much I'm spending per month.


Income: 120000/yr; 10000/mo

Current Expenses:
- rent: $2650
- electric: $70
- internet: $60
- gym: $85
- phone: $0 (parent's plan)
- spotify/netflix: ~20
- healthcare/dental: $11

As mentioned, I haven't calculated fixed expenses as they can vary a lot for me. I have the following estimates on min/max ranges, but I don't know the actual average per month.
- restaurants: $150-400
- bars: $30-250
- alcohol: $0-250
- clothes: $0-500
- misc: $0-500
- groceries: $5-30

Assets:
- checking: $12000
- savings: $21000
- some options in my company, but we're still private

Debt:
- $0

Notes:
- I don't own a car or a bike. Everything I have been using on a day-to-day basis is within walking distance.
- My company provides lunch and dinner, so food largely just concerns weekend meals.
- Obviously, my main non-rent costs come from my spending habits. Fortunately, I had independently come to the conclusion to cook more / drink less, so I'm not anticipating very many issues with cutting back significantly here.
- Grocery costs will go up; the current cost is primarily just for breakfast.


As mentioned above, I'm primarily interested in how I should distribute my income amongst savings and living costs. I made the following estimate earlier today that quite doable.
~86k left after taxes
~54k left after rent
~36k left after putting 18k into a 401k
~30k left after putting 6k into an IRA
15k left after putting everything else into some form of investment
-> 1250/mo for all non-rent expenses; ~1050/mo after recurring expenses

This is slightly off since my understanding is that 401k is pretax; the extra money can go into long term investing.


Additional Notes / Questions:
- I'll want to own a place someday, but I don't know when/where that would be.
- I don't have any other future plans/goals in relation to money.
- "some form of investment" will probably be Betterment. I'm under the impression that it would be useful for me to learn to balance my own portfolio, but it's most important to me to start my money doing something. Is there a point where it's better to do things on my own than through Betterment?
- I'm still not very knowledgable about investing and don't know anything regarding how/where to invest my money other than surface level details. I'm reading and doing my research, but there's a lot of information to go through. Are there any errors or specific details / concerns that I overlooked?


Thank you in advance!

EDIT: Forgot to add internet.

[God or Mammon?]

Hi! I recently found out about MMM a few days ago as I started looking into how to better utilize my money. I'm 23 year old software engineer in NYC. I've been fortunate with earning money, but as a result I know next to nothing about utilizing it well.

I'm most interested in thoughts on where I should put my money as well as how much I should allocate towards saving and spending. I made estimates of my fixed costs (they can be rather variable per month), but regardless they're largely unnecessary and I plan to cut most of them out. I realized that some other case studies are more focused on reducing expense items, but I'd like to focus on establishing a reasonable estimate on how much I should be spending on living costs rather than how much I can reduce the cost of each item. I feel the low-hanging fruit here is to cut out the majority of the food/drink/clothe expenses; I can worry about further improvements after I make these changes and reevaluate how much I'm spending per month.


Income: 120000/yr; 10000/mo

Current Expenses:
- rent: $2650
- electric: $70
- gym: $85
- phone: $0 (parent's plan)
- spotify/netflix: ~20
- healthcare/dental: $11

As mentioned, I haven't calculated fixed expenses as they can vary a lot for me. I have the following estimates on min/max ranges, but I don't know the actual average per month.
- restaurants: $150-400
- bars: $30-250
- alcohol: $0-250
- clothes: $0-500
- misc: $0-500
- groceries: $5-30

Assets:
- checking: $12000
- savings: $21000
- some options in my company, but we're still private

Debt:
- $0

Notes:
- I don't own a car or a bike. Everything I have been using on a day-to-day basis is within walking distance.
- My company provides lunch and dinner, so food largely just concerns weekend meals.
- Obviously, my main non-rent costs come from my spending habits. Fortunately, I had independently come to the conclusion to cook more / drink less, so I'm not anticipating very many issues with cutting back significantly here.
- Grocery costs will go up; the current cost is primarily just for breakfast.


As mentioned above, I'm primarily interested in how I should distribute my income amongst savings and living costs. I made the following estimate earlier today that quite doable.
~86k left after taxes
~54k left after rent
~36k left after putting 18k into a 401k
~30k left after putting 6k into an IRA
15k left after putting everything else into some form of investment
-> 1250/mo for all non-rent expenses; ~1050/mo after recurring expenses

This is slightly off since my understanding is that 401k is pretax; the extra money can go into long term investing.


Additional Notes / Questions:
- I'll want to own a place someday, but I don't know when/where that would be.
- I don't have any other future plans/goals in relation to money.
- "some form of investment" will probably be Betterment. I'm under the impression that it would be useful for me to learn to balance my own portfolio, but it's most important to me to start my money doing something. Is there a point where it's better to do things on my own than through Betterment?
- I'm still not very knowledgable about investing and don't know anything regarding how/where to invest my money other than surface level details. I'm reading and doing my research, but there's a lot of information to go through. Are there any errors or specific details / concerns that I overlooked?


Thank you in advance!

I'm sure people will mention getting a roommate to chip away at that large rent expense ($2650)

Do you have other utilities as an expense as well (e.g. internet?)

Clothes and misc are obviously easy targets, but it really depends as there are a lot of 'startup' costs when you are young and living in NYC

If you are prioritizing owning a home I would set aside some money in CDs or some type of high yield savings regularly to build up the necessary down payment

[Future Lazy]

Clothes and misc are obviously easy targets, but it really depends as there are a lot of 'startup' costs when you are young and living in NYC

If you are prioritizing owning a home I would set aside some money in CDs or some type of high yield savings regularly to build up the necessary down payment

I second these sentiments. If you don't really know what you want out of a house in the future, I would save 50-100k towards it at the most, and just let it hang out till you decide.

How much to save vs. how much to spend depends on how soon you want to become financially independent. If you go 50/50, you'll end up FI in 17-20 years.. If you go more than that, such as 75/25, it can cut that down to as little as 7-10 years. What do you think your FI goals are?

Right now, you're beginning your career, so early retirement (RE) might not be so much on your mind, but working toward financial independence (FI) would put you in an excellent place to RE if you ever changed your mind.

Investing: If you want to do your own picking, you're going to want to use Vanguard directly. Betterment automates all those little tweaks for you. However, the general consensus around here is that diversification is good, but "picking" is bad, and that going with an Index fund or having Betterment automatically diversify for you is a better long term course. Treat your investments like a crock pot - dump it in, forget it, and come back when you're hungry.

Try putting 3k into Betterment, and 3k into a simple index fund or some choice ETFs at Vanguard to get a feeling for it. Then decide.

[MDM]

...putting 18k into a 401
...putting 6k into an IRA

vple, welcome to the forums.

You appear to have a good plan.  Why not give yourself a New Year's Eve treat and implement the two items quoted here today?

To clarify, by "putting 18k into a 401" I mean "sign up with your company's payroll department to do so in 2015."

And for "putting 6k into an IRA" I mean "establish an IRA account at _________ (the brokerage of your choosing) and schedule a $5,500 transfer from your checking account in the fund(s) of your choice for 2014."  Followed on Friday by "schedule a $5,500 transfer from your checking account in the fund(s) of your choice for 2015."

Good luck!

[vple]

Thanks for all of the replies. They've given me some useful points to consider / look into as I move forward.

To clarify, by "putting 18k into a 401" I mean "sign up with your company's payroll department to do so in 2015."

And for "putting 6k into an IRA" I mean "establish an IRA account at _________ (the brokerage of your choosing) and schedule a $5,500 transfer from your checking account in the fund(s) of your choice for 2014."  Followed on Friday by "schedule a $5,500 transfer from your checking account in the fund(s) of your choice for 2015."

Thank you for the specific advice!

[Gone Fishing]

Be aware of income limits for deducting Traditional IRA contributions on your taxes.  A Roth IRA may suit you better given your income.  Others please check me on this...

[MDM]

Be aware of income limits for deducting Traditional IRA contributions on your taxes.  A Roth IRA may suit you better given your income.  Others please check me on this...

Yes  The specific flavor of IRA is subject to IRS rules.  See http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits and links therein.

If your income is too high even for a Roth, all is not lost.  In that case see http://www.bogleheads.org/wiki/Backdoor_Roth_IRA.  As you have no existing traditional IRA, this should work well for you if needed.

[vple]

Okay, great; these were the things I've been looking into today when trying to figure out how to set up an IRA. If I'm understanding what I've read correctly:

- Unless my job situation changes, any traditional IRA contributions I make will always be nondeductible (single limit is $70k for 2014).
- I'm unable to make a full Roth contribution this year (reduced contribution from 114k - 129k for 2014).
- In future years, I should be able to make a full Roth contribution as my income will be considered to be less due to 401k contributions.
- For this year and any future years where my income has increased, I can still make full backdoor Roth contributions with no additional costs as long as I keep my traditional IRA at 0% deductible contributions.

And additionally, if one day I find that I have deductible contributions in my traditional IRA (my understanding is that this would occur if I changed jobs and transferred my 401k to my IRA), I'll need to reevaluate how I should make IRA contributions.

Is this correct?

Also, what are popular recommendations for brokerages / what factors are important when picking one?

[MDM]

Is this correct?

Looks perfect.

Also, what are popular recommendations for brokerages / what factors are important when picking one?

Low fees.  Vanguard, Fidelity, and Schwab are three of the "usual suspects."

[vple]

Awesome. Thanks again for the help!

[Spondulix]

I'm curious why your parents are paying for your phone when you are making more than enough to cover yourself. Is it free for them to add you on, or are they just trying to help? I get how parents want to contribute, but they do have to watch to for their own retirement, too!

Personally, I like Vanguard much more than Betterment (I have IRAs with both). I started with Betterment to get my feet wet, and about a month later I found enough info/read enough books to feel confident in doing it myself (it's hard to go wrong with index funds).