Moving: Making the Decision, Part 3

This is a continuation of Moving: Making the Decision, where I talked about the budget I made to help me decide if I could afford to live on my own for the year following college. The budget I made can be downloaded as a PDF, if it helps you to follow along. If you’re just joining us now, please go back and read part 1 first…

So what’s left, after subtracting all of those expenses from the money you’ll be bringing home? FUN! Yes, the money that’s left is yours to do with in whatever way will make you happy. And that, my friends, includes shopping, going out… and savings and retirement contributions. Wait… say what?!?

Retirement and Fun

Fun stands for “Future Ultimate eNjoyment,” or at least it does when I bend the rules of acronyms to my will! But seriously, think about it: when you go into a movie, why do you pay before you go in? Well, mostly because you can’t get in if you don’t, but also because you’re paying for future fun. You give them money, and after a short wait, you get roughly two hours of entertainment.

So… what does that have to do with retirement savings again? Well, the wait time between now and retirement and the wait time while watching trailers at the theater might be vastly different, but the concept is the same. You hand over money in the “now” so that your future self can enjoy themselves. Sadly, I hear the excuse “I probably won’t live long enough to retire!” far too often. Yeah, and you might trip over a discarded popcorn bucket and never get into the theater to see your movie, either. But if you want to have fun when you get old, your best bet is to buy your figurative “movie tickets” now.

But I do see the other side of the argument — not everyone plans to retire and live out their elderly lives with the Bridge Club. Baker summed up the arguments against obsessing over retirement nicely in his recent post over at Viralogy, Should Retirement Really Be The “End Goal” For Gen-Y? I can certainly see the benefit of spending your money as you go, and enjoying life in the here-and-now. But the simple fact is that you don’t know what the future will bring, but you can pretty much guarantee that if you’re alive in the future, you’ll want (and need) to do things that cost money.

Don’t go crazy-overboard about retirement investing right off the bat. Yes, compound interest works better the sooner you start, and you should save something while you’re young, if you have the means to do it. A good place to start? Maxing out a Roth IRA. You can currently contribute $5,000 per year to a Roth, and it’s an extremely flexible retirement vehicle. Your contributions can be taken out tax-and-penalty-free to be used for whatever you like, at any age. So if you decide to take mini-retirements as you go, the money you contributed to your Roth is fair game. In certain circumstances (such as paying for education expenses or your first home), you can even get your earnings out without penalty, as well. And, of course, once you hit age 59.5, you can take all the money out tax-and-penalty free. Oo la la!

One more thing about retirement savings — if the job you get offers a 401(k) (or a similar retirement account) with matching contributions, make sure you contribute to that as well, even if it means you don’t have enough left over to max out your Roth IRA. Those matching contributions are free money from your employer, and you should take them!

Major Goals and Fun

I’m going to go ahead and bet that you’ve got some goals you want to accomplish between now and retirement age. You might be able to get away with saving for some of these goals within your retirement accounts, but for most things you should have a separate account. A good savings account is one of the best vehicles for saving for short-to-medium range goals, such as a shiny new car, a wedding, a down payment for a house, a boat, big vacations (or small ones!)… I could go on and on, but you’re the one who has to figure out your goals and plan for them!

Goal planning is shockingly simple — how much will the goal cost you? How many months are there between now and when you want to achieve that goal? Divide cost by number of months… and you’ve got how much you need to save each month to get to that goal. The problem is that the amount we need to save each month is often more than we expect… and more than we think we can sacrifice.

During your first year out, you may not be able to save enough to put yourself on track for each and every goal you have (including retirement) and also keep some money to just have fun with, in the here-and-now. This is exactly where the hard decision lies. This is where you have to take all of the information from the three parts of this budget exercise, and decide… can you afford to do this?

Will you be able to pay all of your bills and make progress toward your goals, while still enjoying the present?

If “yes,” congratulations! Double-check everything, but if you’re sure, then get moving! Life is waiting!

If’ “no,” it’s time to make some hard choices. It might be best for you to live at home a while, and save up some money, if your family situation allows such a thing. Or you may have to make concessions that you’re less willing to make, such as living in a cheaper city, getting roommates, or postponing a certain goal or two.

Only you know how to tweak your situation to figure out how to make the best of the coming year. But here’s something that will help: because you’ve gone through all of the income, expenses, savings, and fun money… you now have all the information you need. You can play with the numbers, run through different scenarios, and figure it all out on your own. Ooo… I just got a tingly feeling… does this all mean we’re really adults now?