If I had to come up with one nice thing to say about credit card debt, it would be this: at least it gave me focus. Paying off that high-interest debt as quickly as possible was a clear-cut Priority #1 goal. Now, I’m a little lost.
I can see right here why people my age have trouble with finances. What’s important? What should I do first? What do I need to focus on? Where do I go from here? It’s easy to shove it all aside and think “I’ll just deal with it later.”
But that’s the worst thing I could do. Even if I don’t pick the exact right thing(s) to focus on, pushing toward any financial goal is better than cooling my heels and blowing all of my extra cash. Even just “saving” without purpose is better than nothing.
If just “saving” is a flashlight in the darkness, then saving with a goal is a Super Trouper beam. So, it’s time to find my new goal. Or goals. So what’s on the table?
Debts
Down to just one… ish. My student loans. These are very complicated: some of them are accumulating interest while I’m in school, and some are not. Some of them I haven’t taken out yet! 6 more months of school and I’ll be at my final balance of around $40,000.
Savings
Emergency Fund: Growing. All of the money I get from ING referrals feeds into this. I’m not going to make it a huge priority just yet, since it’s growing and I have a credit line of $6,000 between my two cards to fall back on in a real emergency. I’m not ignoring it, but it’s not at the top of my list.
Textbook Fund: Going back to the question I asked earlier in the year — is it a better idea to pay off a bunch of my student loan interest, and getting a bigger new loan to cover the cost of textbooks, or should I get a smaller loan, pay for textbooks out of pocket, and possibly only be able to pay off part of the interest before it capitalizes?
I ran the math, and it’s better to pay for the textbooks out of pocket. I’m putting aside the money this month, and hopefully I can get good enough deals to not have to use it all! Any money that’s left in the fund will get rolled into a different savings goal.
Getting Established Fund: Just six months until I finish classes and hit the real world! I’m not sure exactly what I’ll be doing, but if it involves moving out of my parent’s house and paying for my own space, then a “getting established fund” will be hugely important. First month’s rent/last month’s rent/security deposit? Oh boy, I think this fund is the most important of all.
Future Car Fund: My car won’t last forever. The dreamy environmentalist in me wants to live someplace where I don’t need a car, but the small-town girl in me hates cities! Realistically, I’ve probably got at least one car purchase in my life, so I’d better get saving for it. I’d adore never having a car loan in my life!
Retirement Fund: Compound interest! It seems like time to think about starting a Roth IRA while my tax bracket is rock-bottom and my credit card debt is gone. But should this take a back seat to the things listed above? What good are retirement savings if I have to go into debt to get textbooks or pay a security deposit?
I could go crazy trying to decide between all of these things. But really, the only thing to do is rank them up and make a savings snowball! Basically, I’ve got to come up with a minimum I want to save for each goal each month. Then any extra savings I come up with beyond those amounts, I put toward the goal at the top of the list. Once I complete the first goal, it comes off the list, and everything below it moves up one. Goals are reevaluated, and the process continues…
Savings Snowball
| Priority | Name | Goal Total | Monthly Minimum |
| 1 | Textbooks | $400 | x |
| 2 | Student Loan Interest | $1,500 | $50 |
| 3 | Getting Established | $2,000 | $50 |
| 4 | Emergency Fund | $10,000 | $10 |
| 5 | Future Car Fund | $10,000 | $10 |
| 6 | Retirement | Infinite | $5 |
Ok, I know, this list looks really wonky right now…
No monthly minimum for textbooks? Because it’s on top — priority #1 doesn’t get a minimum, it just gets everything I can afford thrown at it, after the minimums are paid for the other goals.
Only $10 a month into the Emergency fund and the Car fund? Well, those are low priority compared to the student loan and the Getting Established fund — both of the latter goals have a deadline within a year, so they need some major focus.
Retirement as the last priority? Only because the goal total is infinite, so it will never snowball down into anything else. The $5 a month is really just to start a habit, right now. I’ll increase the monthly minimum as my circumstances change.
What do you think? Am I doing it wrong? Am I doing it right? The beauty of a savings snowball (that you don’t get with a debt snowball) is that most of the money is just going into savings accounts, where it can be moved around if I change my mind about things. But I want to know what you guys think!
stephanie,
thanks so much for this blog. i found it a couple years ago when i was doing my best to be frugal in college. now that i’ve graduated and have to actually deal with all the debt i’ve accumulated, your blog is a great encouragement and is making me think more about my saving “techniques”. so thanks for being open with sharing what you’re doing. 🙂
Nice list — I agree with you that, if I were in your position, the “getting established” fund would be most important — even setting aside moving expenses, figuring out what you’re going to do next can cost money (interviewing, interview wardrobe, transportation, etc…). It seems like it can be a bit overwhelming at first.
Hopefully you can find a way to keep textbook expenses to a minimum — creativity plays off in this arena, at least in my experience.
One thing I don’t notice on your list — any kind of travel/recreation/fun savings account! I realize money can be tight, but from a motivational factor, having some sort of travel account can be a source of psychological encouragement.
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I don’t think you are doing it wrong, because you are saving.
But this is what I am doing. First I am saving for planned expenses I can’t get out of –text books would go here–, tuition, insurance, and homeowners tax. Everything I save after that goes into an emergency fund of two months expenses, and the assumption is that if I have to replace my car unexpectedly, that is an emergency! The emergency fund comes first before any other savings plans. Then comes retirement. I want to contribute my 5K maximum to my IRA this year, though I know it is unlikely to happen, I can hope right?
You ask what good retirement is if you are in debt over other things now? I will tell you what it is good for: compounding interest until you are old! There will always be debts, always new expenses. And you will pay those off as time passes. But money that goes into an IRA grows tax free for most of your life. I think it is even protected in case of bankruptcy. This money belongs to the future, old you. And you owe it to that future old you, to set aside rent, utilities, food and such for then.
You will pay off your current debts sometime. Best thing you can do is not incur them. They put your retirement account at risk. You don’t have to get a nice car, you can live in a city to start out where transportation is cheaper until you can afford further out.
You can make payment plans for your first and last months rent or get your mom to co-sign to avoid having to pay it. Or you can live with the parents a little longer until you have both your retirement money allocated and a move out fund.
Getting in the habit of saving for retirement will save you in the long run.
Pay yourself first! Well in this case, your old self.
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Hello! I recently subscribed to your blog and think your advice is great.
I will say, that your savings plans are ambitious which is wonderful. Mine are just as ambitious.
I recently graduated, have about 10k in student debt. I also just moved across the country, NY to CA for my job. I took into account the getting set up and started saving early like yourself, but I will say, I grossly under estimated costs for moving. You also have to remember that you might not see a paycheck for a few weeks, even a month, so not only security deposit, first month rent, i’d save for month 2 rent as well. Then on top of that, you should estimate your first month’s bills and have that saved too. I just got paid last week after being here a month and rent was due on the 1st. I just used my emergency fund to pay for it, and then paid myself back after getting paid, but if I hadn’t had that, I would have been in trouble.
The other thing to take into consideration is furniture, then again, you may have furniture currently. I having lived in furnished apartments, had to go out and at least buy a bed, which is a few hundred dollars. I might think about some of those things too.
Also higher cost of car insurance from one location to another, although you may not know where you are moving yet.
I hope that helps, you situation may be different of course, but just wanted to share what rent wrong for me in moving to my first job. 🙂
Take care.
Thank you everyone for your comments so far! I’m so glad that you guys are enjoying my blog – it makes me really happy to hear that!
A note about the retirement savings: I know that I’m foregoing some compound interest, but the problem is that compound interest works both ways. Money trapped in a retirement account isn’t very good for me if I have to tap into my credit card to pay for the basics. I want to start contributing, but there are some pressing expenses that will come in order for me to get off on my own, and to the point where I’m making enough to save for retirement. Sorry if that wasn’t clear!
Also, in terms of fun money, I’ll gonna sit on that for a little bit. I’ve done quite a bit of traveling in college, actually, some of which was reflected in my credit card balance! Nowadays, I’m enjoying traveling to interesting places close by – it’s cheaper and I get to see new sights in my home city. When I reevaluate in a few months, maybe a travel fund will sneak its way in there 😉
Student loan interest is $1500…. per what? Because at $50/month it is going to take about 30 months to get that total (i.e. you won’t snowball for 2.5 years).
Personally, it seems you are making this complex. For example, getting established is a one-time expense. Admittedly, you can anticipate it some, but in my mind it is just a kind of “mini-emergency”. You take a hit on your emergency fund to get started, and you go back to building your emergency fund.
In my mind, it’s almost all “emergency fund.” The difference is what balance you think you need for emergencies. If you know a car is in the future, then your goal is perhaps $20,000 instead of $10,000.
And don’t forget, you may be able to start your Roth a bit earlier than you think. You can take out your contributions without penalty. You shouldn’t unless you have an emergency of course, but you can. So you could reasonably build your emergency fund to $5000 and then move $1000 in your Roth IRA. Invest it in money market funds if your really feel conservative and then your principal will be safe for you.
@Don – Student loan interest is expected to be a total of $1500 in March, when I finish school. I know that $50 per month won’t get me there in time – $50 is only the minimum I will save for the interest while also saving for my textbooks. Once my textbook fund is full (should be in September), then the Student Loan Interest will be baring the full brunt of my savings.
I see what you’re saying about the getting established and the emergency fund. But since they’re both just savings accounts, the distinction is really just psychological. When the time comes to actually get established, I’ll use what’s in the fund for that, and if I need more, it will come out of the emergency fund.
About the Roth, isn’t there a rule that contributions may only be removed penalty free IF you wait five years before you take them out? I seem to remember that, but I gave away the book I read it in.
You might be right about the Roth. I’ve had my Roth so long that I don’t remember those details now. I sort of vaguely remember that things can be different for emergencies, like medical expenses, as well.
Hi. First off, love your blog. Second, I have a question for you. You have all of these different things you are saving for, but how do you distinguish what money is for what goal? Do you keep things in separate accounts, or just keep a document on your computer that tells you how much is dedicated to each goal?
I am starting a wedding fund, which I will put into its own high interest savings account with my fiance, but other than that I only have one savings and one checking account. Any recommendations?
@Lori –
A combination of the two, actually. I have several online savings accounts, because I’ve opened up a lot to get the bonuses they were offering at the time. So I’m just purposing each one for something different.
I say it’s a “combination” because I’m combining the textbooks fund and the getting established fund into one savings account, and keeping track of it on a spreadsheet.
For your situation, my suggestion would be to use ING’s online savings accounts. You can open multiple ones really fast (I timed it, each new one takes about 42 seconds!) and you can make some of them joint accounts with your finance, and keep others separate. If you’d like, I have referral links for ING, so you could get a $25 bonus for opening an account with them.
The list is really good, but I would like to contribute some more fund for retirement.
One thing you might want to do is think about what you will do with funds collected for purposes like future expense funds and retirement. Done any research?
The folks who sell professional investment advice are like mechanics, lawyers, and physicians — it’s hard to spot the good ones without an inside line, and the world is FULL of crummy operators who are just after your money.
Sites like the Motley Fool like to pitch a do-it-yourself view, and I do that myself. My blog has some discussion of investment ideas, mostly looking so far at the quality of the reporting on different companies.
If you plan to spend most of your time having fun and not reading about investments (this is the case for folks who don’t find reading investment research fun), you may want to find a few companies with a long track record of building shareholder value (either by aggressively reinvesting profit at a good return, or paying substantial dividends to shareholders who can participate in a dividend reinvestment plan). I have a few companies I like in this space, but you will want to balance your interests when you pick for yourself.
Leaving money in the bank is awful: interest doesn’t meet inflation, so it’s like withdrawing the money and every week burning some of the bills to amuse your parakeet. You need an inflation-beating return, and preferably a return that beats the major stock indexes.
Lots of interesting ideas are out there, and some of them are on my blog, but you should be thinking early about how to turn today’s spare money into a fortune in ten years. The power of compounding returns is great enough that you really don’t want to be on the sidelines.
@J – thanks for coming by the site and giving your insight! I’ll be checking out your blog, for sure!
Right now, the savings account is just to catch my money until I have enough to get a Roth IRA at Vanguard and fill it with their index funds! That’s the plan, anyway.
Great post and great tips for college students. It’s great to be able to get yourself out of debt but it is just as important to know what to do to keep yourself out of debt, especially during your college years – as it never gets any easier as an adult, especially one with a family.
There are so many options to save money and it’s really worth the effort to do a bit more homework while in school to find out the best options available. Check out the article we did about savings accounts online http://www.savingstoolbox.com/2008/08/13/how-to-compare-online-savings-accounts/.
Great post, Stephanie! Nice concept!
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