Roadmap for Financial Success

[Pithagoras]

To all Mustachios out there,

I was fairly recently introduced to MMM, and from the outset it feels right, and makes logical sense as an unbelievably smart thing to do. I find the story very inspiring, and something that I may one day be able to achieve myself. My parents are really bad with money, and the 2008 recession hit us pretty bad. I'm trying to learn from their mistakes. Right now, I'm 20 years old, two years into college (out of four, hopefully), and will be lucky enough to come out with zero student debt (thanks Grandma!). I'm currently working a part-time job about 20 hours/week at Chipotle (I commute to work by bike), which is about as much as I can handle with classes going on at the same time. Since it's a minimum wage job, taxes aren't be that high, but I have to cover a few expenses myself: apartment, food, notebooks for school. All in all, it comes out to about $7,000 per year that can go into savings. I've been following MMM advice on how to cut down on food costs, book costs, and other every day living expenses. Assume $500 in savings currently (in a checking account) (which is pretty much nothing), because that's about how much I have right now. There's no guarantee that after college I'll come out with a good job, but if I keep working hard now, the chances of that are likely to increase. I'll be getting a BS in Aerospace Engineering - entry salary is about $70k per year - if I get a nice job, that is.

My questions are: what should I do now to set myself up for success later? Can you lay out a roadmap for me of what to do financially to improve my chances of having a good outcome? Are there any common mistakes I should avoid?

Should the money I make from my part time job just go into an IRA, or should I try to invest it in an index fund or something similar?

Thanks in advance for your time and consideration,
~Pithagoras

[MDM]

My questions are: what should I do now to set myself up for success later? Can you lay out a roadmap for me of what to do financially to improve my chances of having a good outcome? Are there any common mistakes I should avoid?

You'll have $0 for many of the steps, but Investment Order still applies.

Should the money I make from my part time job just go into an IRA, or should I try to invest it in an index fund or something similar?

An index fund inside a Roth IRA may be your best bet.  VTTSX or VTSMX are a couple of defensible choices.

[martyconlonontherun]

Just don't let your focus on a few thousand here by working extra part time hours take away from studying. Key is to make sure your part-time job allows you enough time to Ace your tests to help solidify your future job. There are plenty of part time jobs on campus so make sure you have one that won't take away your focus.

[Laura33]

What Finances With Purpose said.  Don't put the cart before the horse -- long-term savings (e.g., Roth) is great, but you need to be able to cover your needs in 2-3 years first.  Moving costs, security deposits, a work-appropriate wardrobe, possibly a piece of furniture or two and some kitchen equipment (if you're currently in a dorm/on a food plan), maybe a car depending on the job/location, etc. etc. etc.  And what happens if you don't get a job right away?  You'll still have all those expenses, but no immediate income stream.  Figure out what amount would make you comfortable -- $5K?  $10K?  Then, if you can keep working and save more than that, by all means, put the rest in a Roth in VTSMX.

Beyond that, the most important step will be continuing your good habits when you get that first job.  Don't rush to inflate your lifestyle to match your new income; set yourself up for long-term financial success with an affordable apartment, as short a commute as you can manage (walking/biking if possible), getting exercise and outdoors as much as possible, cooking for yourself/avoiding the temptation to eat out/go out for drinks all the time, finding cheap/free hobbies, etc.  Figure out what balance is right for you -- you don't want to avoid all the happy hours and feel miserable, but you also don't want to get in the habit of eating out 3-4x/week as "entertainment," because that's a hard habit to break.

Good luck!  You sound like you are off to a great start.

[jo552006]

I agree not to let the part time job take away from your ability to ace tests.  I'll add to that.  Since you're asking what you can do now to ensure success later I will suggest the following.  Understand critical thinking.  Try to make sure you're in the top 10-20% of people who graduate with your degree.  Not necessarily in your college (honestly top 10% MIT is different than top 10% from local state school.)  If you are, then you can probably ignore the rest of what I'm going to say.

From my experiences, I've seen that critical thinking is a skill a lot of people don't develop fully.  When I met my wife, she was struggling with every class and I was screwing off and getting better grades.  In her third year, literally every class all of a sudden felt easy.  She had finally learned to think critically, and see how one thing relates to another on a more fundamental level which means she was now doing more than memorizing/regurgitating information.  If you feel like you're struggling to learn things while others seem to make it look easy, ask why.

My definition of critical thinking is the ability to understand how various topics relate to one another, basically asking why every time you learn something.  I'll give an example, if you know how to add vectors using equations, and can spit out the equation that's great.  Can you also TEACH somebody who isn't equation oriented and explain why?  Put them tail to tail on a graph, make a right triangle and find the resultant, and using the formula are three slightly different ways of teaching vectors but are all the same thing.  (If you look at my example and say DUH, you may already have critical thinking)  Critical thinking is the ability to look at a problem in various ways and understand intuitively why they are all the same, and also the ability to see how new material builds on old work.

Also, if you can swing it, a double major, or picking up useful skills (machining?) while in college is great as well.  I graduated in 3 years, but in 4 I'd have picked up a masters, and maybe another major/minor.  I don't know if I made the right choice leaving early, but money was tight so I made the right choice at the time.

[Bicycle_B]

Build your savings the first year.  (Mostly in checking account/savings account/both).

Don't worry too much.  If you're a worrier, once you have $3000 in savings, seek to reduce worrying/self doubt/repetitive financial thoughts/planning for tertiary contingencies to one day per week.  (Seriously, you are driven and objectively doing well - a risk factor is overdoing it.  I assume there are reasons for that, hence it's not a character flaw, only a valid response that causes problems if overdone.  $3000 cushion and one day per week are concrete criteria offered as a suggestion to leave you balance, without expecting you to lessen your drive, and without leaving you blind from insufficient planning.  In the long term, the ability to disengage from Successful Effort 1 will allow you space to do Successful Effort 2, build in the rest time you'll need later, etc.)

Start your Roth IRA-that-invests-in-stocks in the second year, or at least after $5000 buffer is built. 

[mozar]

Can you get an internship in your field?  That will help you get a good job when you graduate.

[galliver]

Hiya, fellow aero here!

If you want to increase chances of landing a good job after graduation, look for ways to work in your field now...I did some undergrad research, some tutoring, and was a computer science TA for a semester...these things definitely drew recruiter attention. They also helped deepen some skills learned in class; I didn't *really* feel comfortable with MATLAB, or CAD, until I used it in the lab. Tutoring others helped me remember fundamental material and build on the kinds of connections FWP is talking about (^). Another thing to consider, if you can't find a way to get paid for a job closer to your major, is to join student groups. On some campuses, AIAA is very active, does competitions, goes to conferences. SAE and robotics--groups that actually *build things*--would also be good choices to get involved with. If there aren't any good "building" groups around, any professional organization would at least help with  (ugh) "networking"; I know a couple ladies who got jobs through SWE. A word of warning: a classmate of mine had a really hard time finding a job after doing none of these things (working menial work-study jobs) and a mediocre GPA; he ended up going back for a Masters, doing *great* and was snapped up with in a few weeks of graduating with his MS.

So, of course, do focus on doing well in your classes...and also pay attention to the classes you take. You want to build marketable skills. I deeply regret I didn't find time in my schedule for a CFD course (one may be required now for all I know, but if it isn't); however I was glad I took some extra programming and math and CAD. You can also keep an eye out for useful workshops; our IEEE did an intro to soldering one and it's a good skill to have.

Oh, and if your definition of "success" includes "making good money", probably don't do a PhD. ;)

[Nederstash]

Great to see your determination to do things right from the get go! The biggest pitfall is lifestyle inflation. Don't buy a house (rent!), a car (bike!) or a ridiculous wardrobe (you look fine!). You don't need a bigger tv or a faster computer. You don't need brand new instead of second hand - this includes furniture and everything! Basically, live like you're still in college until you're settled in a job you like and are ready for the next step. Meanwhile, get yourself a budget and an emergency fund.

Budgets are crucial, because you get to pay yourself first. Money can be a bitch: be the pimp. Realize that you're completely free right now: no mortgage, no debts etc. You get to decide which dollar goes where. An emergency fund of 3-6 months is a good start, don't start investing until you have that. If you want to have a big downpayment for a house some time in the future, you might not want to invest those savings. Market can be very volatile in short (~5yrs) term.

[patchyfacialhair]

If I could go back to age 20 and re-do the mistakes that I made...I'd:

• Not worry about investing, I'd just make sure my liquid savings were solid.
• Get an internship in my desired industry.
• Enjoy friends and family.
• Study incredibly hard, for the love of learning.

My opinion is that at your age, the best investment is in yourself. Don't let your grades slip. Intern at great places and network like crazy. First get the job making 70k, then start thinking about what you want to do on a larger scale. Buy a house? Max out 401k? Move to a new city? Buy a professional wardrobe? All that requires liquid cash. 2 years of not investing a ton won't break the rest of your life.

Source: late 20's guy with 20/20 hindsight.

[boarder42]

Awesome!  Kudos to you!

PM me to talk more - would love to chat.  It sounds like you already budget, but I would definitely recommend implementing that and sticking with it, especially after college. 

Quick advice: save up an emergency fund!  Save up 6 months' expenses.  Also, start saving for that first car/whatever if you'll need one eventually to commute to work.  Save for some job-hunting expenses.  (Hopefully minimal!) 

Many will suggest you invest here, but you need a buffer between yourself and the world.  Otherwise, you're going to have no option other than to ask for a personal loan or take on debt.  If you do that, you'll be behind before you even got started.  (See Dave Ramsey's baby steps, for instance.)  By saving up an emergency fund, you can move into the world in strength, and then invest what you save beyond that.  Once you have that buffer, you'll be much more effective. 

It'll also allow you to be way more risk-taking and adventurous, which will likely be good for your work, too. 

You want to leave college with some money in the bank for your first month (you may not get paid until a full month in at some places), and also some to rely upon in case the job market is shaky, or something crazy happens.  Once you have that much, you're good to go and can invest as others suggest. 

Just don't forget that part!  It'll give you tons of peace of mind and allow you to save lots of money in other ways - e.g., being able to use higher deductibles on things and self-insure (saving $).  Again, feel free to reach out if you want to discuss more.

there is a ton of bad risk averse advice in this post i would ignore a big chunk of it.  someone NOT in debt at MMM should not ever look in the direction of dave ramsey or any of his awful advice on investing or debt - money is cheap now and will likely be cheap when OP graduates there is no problem taking on good debt like a mortgage at a low inerest rate or if everything is considered properly for a car while leaving money invested in the market.   

[boarder42]

on the engineering side get internships it will help you with your job hunt immensely i had jobs thrown at me after my first internship as a freshman.  Companies would fight to get you as an intern the following summer and will do the same when you go full time.  Second biggest thing you can do after you make sure you keep at least a 3.0 is to network.  dont let your frugality get in the way of making friends going out to a few bars and meeting people who will be working in your industry later.  the engineering world isnt as big as you may think and one day you may be in a consulting role and you will have contacts to call on, or you may need a job and will have the same.

[dollabillz]

I agree with the internship advice.  Not only will your pay most likely be a lot higher than what you are making at chipotle, but you will be gaining valuable experience AND making potential connections for future opportunities.  I can't stress that enough.  The more you put yourself out there and foster relationships both in and out of your field, the more opportunities that will come your way.  So do your best to put some effort in now.  Best of luck! 

[dollabillz]

Boarder42 beat me to it!

[robartsd]

Lots of good responses here, but I'll counter the advice against filling your Roth right away. You can withdraw funds from a Roth tax and penalty free at any time as long as you are withdrawing contributions, not earings, so your emergency fund can be in a Roth. Some banks have Roth Savings accounts, so that's an option if you don't want your emergency fund in volitile investments. After 4/15/2018 you can never reclaim the opportunity to put $5500 into an IRA for 2017.

[MrThatsDifferent]

Congrats to you OP, I only wish I had this info and was mature enough to listen when I was your age. Everyone else will give you better finance advice than I will. I’ll just say, here’s what you shouldn’t do:
1. Don’t get credit cards, or if you do, pay them off monthly
2. Don’t try to live beyond your means, you can do all the fun stuff, cheaply and enjoyably by putting in a little extra effort to find out how.
3. Don’t let your less financially aware friends treat you like an ATM
4. Wear condoms, avoid cigarettes and look after your health

Best of luck to you!