how to prioritize your savings when you’re fresh out of college (and later)

Now the real education begins.You’ve got a shiny diploma, thousands of dollars in student loan debt, and a dozen friends and relatives who each have their own idea about where your money should go. Buy a house! Pay off that student loan! Save for an emergency fund! Invest in your 401(k)! And, somehow, have money left over for, you know, food and stuff!

Fear not: I’ve got a system that can help.

Start off by putting a minimal amount towards every savings goal you have. You heard me: all of them. And when I say “minimal”, I mean it — even if it’s only 0.5% of your  paycheck into your 401(k), the minimum payment on your credit cards, and $20/month for your emergency savings fund, put something away towards each of your goals. The idea here is that you start saving right now, thus taking advantage of the mysterious force of compound interest that makes for interesting graphs like this (from this post). (And yes, compound interest has the same effect whether you’re talking about debt or saving.)

Of course, even compound interest isn’t magic enough to fund your retirement on 0.5% of your paycheck. Which is why the next steps are critical:

Every six months, increase the amount you’re putting away by a set amount. It doesn’t have to be a lot, but by periodically increasing the amount  you put away, you can slowly ramp up to your goal in small, painless increments. The money that would normally go to “lifestyle inflation” will instead go quietly, steadily towards your savings goals.

For instance, you might add 0.5% to the amount of your paycheck going towards your 401(k) every six months. In ten years, you’ll be putting an extra 10% away towards retirement, something a lot of people in their 50’s can’t say!

Meanwhile, choose your Most Important Goal and focus on that. All your savings goals are getting some attention; pick the most important one and give it some extra love. Allocate more of your budget to it; put a high percentage of all “found money” there (the rest you can spend on whatever you want, as an incentive to “find” more); in general, make it a high priority. Once that goal is taken care of, move on to another, and so on. This way, while you’re slowly building momentum on your other goals, you’re always focusing on the most important one. A suggested priority list for a new grad:

  1. One-month buffer
  2. High-interest debt, in order of size (snowball) or interest rate, whichever motivates you more
  3. Emergency fund (3-6 months’ basic living expenses or more, depending on your situation)
  4. Mid-sized savings goals, like your next car or the down payment on a house
  5. Low-interest debt
  6. Retirement

By the time you’ve worked your way down to “low-interest debt”, you should be in really good shape. Will it take a while? You bet. That’s the beauty of long-term goals, though — you have a long time to get them right!

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debt workshop

A Public Service Announcement to folks who’ve made a New Year’s resolution to get out of debt (or who just want some pointers on lowering their interest rate): I’ll be giving a presentation on “Debt (And How To Get Out Of It)” next Sunday, 1/15/2012, 4PM-5:30PM, at St. David’s Episcopal Church in downtown Austin. Spread the word to anyone you know who might be interested — the cost is 0$, so the return on your investment stands to be huge. We’ll be doing a whirlwind tour of everyone’s favorite financial beastie, from credit ratings to negotiating your interest rate to peer to peer lending to debt settlement v. debt management — and everything in between!

To sign up, send an e-mail to britton@financialgeekery.com with “debt workshop” in the title. (I recommend signing up now, so we don’t end up crammed into a room too small for us!)

See you then!

the other edge of credit cards

Hey, I’ve got a secret to share. It’s just between you, me, and the Internet. You ready?

I use credit cards.

I know, right? What about Dave Ramsey’s vaunted “plastic surgery”? Aren’t personal finance geeks supposed to be all about cutting up the CC’s and living off of cash? And aren’t I using the Envelope Method, myself?

Yes, I am, and cash is great — there’s nothing quite like it for knowing exactly how much you have left to spend in your budget. But the fact is, not using the credit cards at all would be leaving cash on the table — to the tune of hundreds of dollars a year.

So here we have the other edge of the double-edged credit card sword (now there’s an image for you). On the one hand, when used the wrong way, credit cards can cost you thousands of dollars in interest. On the other, when “rewards” credit cards are used the right way, you can get hundreds of dollars in cash back. And that’s not to mention other added perks. My favorite is the automatic extended warranty — when I use my card to make a purchase, the duration of the warranty on the item is automatically doubled, up to a full year.

Right now, if you like cold, hard cash-back rewards, two of the best cards out there are American Express Blue Cash and Chase’s Amazon.com Rewards Visa.

I highly recommend Blue Cash. It has all the perks of a normal American Express, including the aforementioned extended warranty, and also pays 3% or 6% back at grocery stores, 2% or 3% at gas stations and department stores, and 1% on everything else. This is new as of April 2011. It used to be that Blue Cash had this tiered system where you got 1% or 0.5% until you spent some thousands of dollars over the course of the year, but that has recently changed; now that the tiers are removed, it makes sense for even more households. And of course there’s no annual fee — for the 3%/2%/1% version, anyway; for 6%/3%/1%, you pay $75 a year. Whether it’s worth it is a simple calculation, if you track your expenses.

(You do track your expenses, right?)

But back to the cards: the Amazon.com Visa is good, as well. You get 3% back on Amazon.com purchases, 2% at gas stations, restaurants, and drugstores, and 1% on everything else. You can buy nearly anything on Amazon.com (deodorant! video games! phone chargers!) — and since you’re not charged sales tax (edit: in some states; here in Texas, that’s going to change as of July 1, 2012) or shipping (if you choose Super Saver), you’ll almost always get a good deal, even without the normal discount that is applied to most Amazon.com items. So 3% on top of that? Sounds good.

The big difference between these cards and others like Discover is that there is no limit to the rewards you can get. Discover was a pretty good card when it came out; you get up to 1% back on purchases, and somewhat recently they added 5% back on certain categories for certain limited times. But as I pointed out last year, you only get the extra 5% bonus up to a certain paltry amount of your purchases, say $300. Generally, it’ll net you less than $5 a month above and beyond the 1% (or less) you normally get.

A final word: all this talk of rewards may sound exciting, but caveat emptor. A friend of mine got really excited when the Amazon.com card came out, as they did a bunch of shopping there; however, a few months later they were several thousand dollars in debt, and the interest rate on the card was nasty, to the tune of almost 19%. That’ll null out your 3% bonus real quick.

(Oh, and if you’re hunting for a new credit card for whatever reason, I recommend NerdWallet.)