So I’m saving some money, what do I do with it?

Dollar bills planted in a garden

You’re a young adult now, independent, a few months into your first real professional job, living on your own, self-supporting. You’ve finally gotten to the place financially where you are able to pay your rent, cover your necessities, and save some money every paycheck. Congrats! Now, the question is, where do you allocate that money? 401(k), savings account, emergency fund, pay off debt, IRA, so many options. All are good choices, but what should the priorities be?

Here’s the basic beginner’s guide:

  1. 401(k) with match. If you have a job that offers a 401(k) with employer match, always immediately sign up to contribute enough to get the maximum employer match. The way this works is, you can only contribute to a 401(k) if your employer offers it. A typical employer match looks something like, they will match 100% of your contribution up to 3%. This would mean that if you earn $800 per week, and sign up for a 3% contribution, then you will have $24 deducted from your pay each week and put into an investment account that you own and control. And on top of that, your employer will give you another $24 each week, doubling your savings.
    This is your money, you can take it with you when you change jobs. It’s tax sheltered, meaning your contributions are deducted from your taxable income. It also can grow tax sheltered, meaning as your money earns money, it is not taxed. And the match is free money, so it’s crazy to not take it. A small note – if your employer offers a Roth 401(k) as an alternative to a traditional 401(k), you should take the Roth version – but this is rather uncommon, so if they only offer the traditional 401(k), that’s still great.
  2. Emergency fund. Since you are young and fortunate enough to have parents that are able and willing to help in a crunch, you don’t need the full blown 3 or 6 months of living expenses type of emergency fund yet. If you had a real, major crisis, your fallback plan would just be move back home with us. As such, you only need a small emergency fund, to bridge you for small crises like a few weeks between jobs, perhaps, or an unexpected critical expense. Probably about 1 month’s rent would work for now. So save that up first, in a high interest savings account (right now 1% or better is a decent interest rate for savings of $500 to $1,500 or so; later when you have more savings you can get higher interest rates).
  3. Pay off debt. Debt is a giant drag on your progress towards financial independance, and the faster you get to zero debt the better. Once you have taken your 401(k) match and have a minimal emergency fund, 100% of your savings should go towards paying off your debt till it hits zero. Pay off your highest interest rate debt first, till that is gone. Then pay the next highest, and so on. If you have two debts with the same interest rate, pay off the smaller one first. That will reduce your minimum payment requirements and thus reduce your emergency budget (that’s the amount you need each month to cover you absolutely mandatory expenses, in an emergency), as well as simplifying your record keeping.
  4. Roth IRA. Your next step is to max out your Roth IRA. If you don’t already have one, you can open one at Vanguard. You are allowed to contribute up to $6,000 per person per year to your IRA, as long as you have $6,000 or more of earned income from a job. (Note this amount is as of 2019 – these amount change every year or two, typically rising slightly). There are two types of IRAs, Roth and Traditional. Right now, you are low enough income that you will get much better benefit from the after-tax saving of a Roth. Once your income is higher and you have a meaningful tax burden, you may want to switch to the pre-tax deduction of a Traditional IRA, but for now let’s not worry about that.
    You will need to invest your IRA money in someting – the best is an index fund, or a target date fund. I recommend VTTSX (Vanguard’s 2060 target date fund), but feel free to pick a different year. The year just signifies when you would start drawing on these funds for retirement. You will need to have saved up a minimum of $1,000 for the target date fund. You could also choose VFIAX (Vanguard’s index fund that tracks the S&P 500), but you’d need to have saved up $3,000 to get started with that, so I’d start with the target date fund and maybe make changes later on.

That’s enough to get you started. Once you have paid off all your debts, started a basic emergency fund, maxed out your Roth, and of course taken the full employer match for a 401(k), check back with me and we’ll talk about next steps.

Important Note

Once you have a Roth and/or 401(k) with an index fund or target date fund, you are now invested in the stock market, and own lots of little slices of lots of companies. The stock market will go up and down. A lot. Over the long haul, if you invest regularly (every week, every month, like clockwork), your money will grow. And it’s nice to see those numbers go up. But, sometimes, the market will drop, sometimes a lot, and then all of your numbers will shrink, maybe even to less than you put in originally. That can be scary.

Do NOT panic and sell when the market drops!

The single most important thing to know is that when the market drops, you must not sell. The only time you really lose money is if you sell after the market drops. Be patient, do not sell. If you have some spare cash, this is actually a great buying opportunity. You can think of it as the stock market having a sale. So buy, if you can, or sit tight and wait, but do not sell.

Market drop = buying opportunity!

Lower the School Dropout Age: It’s Better for Kids to Have Choices

An Open Letter to Governor Tom Wolf of Pennsylvania

Governor Wolf,

You have recently been campaigning to raise the high school dropout age. This is a really, really bad idea. Actually, you should lower it. There are a lot of good reasons for this, but I’m going to start with my own story. You see, if the dropout age had been 18 when I was a teenager, I probably would have had a very different and dramatically worse life. Being able to drop out of high school saved me and saved my family.

When I was 14 years old, my dad lost his job, and moved away. My mom was a homemaker with no work experience and no experience managing money – my dad had always handled all of that. All of a sudden, we had no income, and a lot of expenses. I had grown up pretty affluent, but it turns out my parents were spending money about as fast as my dad made it, so there weren’t much of any reserves. So we need a source of income, fast.

My mom started looking for work, but she had no skills, and couldn’t find much. I knew I needed to do something. So I looked at my options, and I figured out that I had exactly one marketable skill which would pay decently. I had grown up riding horses and I was good at it. And I knew friends who had made money riding racehorses.

Horse and rider jumping over a fence.
Yes, this is me, at a riding competition, I was about 12 or 13 I think.

So, at the age of 14, I dropped out of high school, borrowed a car, and drove 6 hours to the nearest racetrack. I lied about my age (because of child labor laws – another bad idea borne of good intentions), and got a job immediately as an exercise girl and general stable helper, riding racehorses out for exercise in the mornings and mucking out stalls and doing general work in the afternoons.

It paid pretty well – $15/hour at a time when the minimum wage was $3.35. It was hard work, and a big change from the sheltered private school small town environment I’d grown up in. But it gave me the opportunity to help my mom pay our mortgage, and it let me control my own future. And I learned a lot – about hard work, about professionalism, about showing up and doing what had to be done even when it was freezing or pouring rain or sweltering hot. About working as part of team, even when the other people were difficult or unpleasant. About taking pride in paying my own way and earning my own independance.

After a bit more than a year, I’d made enough money that we were out of the woods financially. I’d also grown tall enough that making weight (staying at the expected low weight to ride racehorses) was getting harder to do, and I’d seen one friend die in a freak accident in the starting gates and a couple of other friends have serious injuries that left them unable to ride again, so I knew I could not do this forever.

I started exploring options, and after a little while I was able to get a job training horses and managing a small barn back in my home town, on the strength of my experience at the racetracks. And this job even came with health insurance! I was now 15 years old, working full time to support myself and help my mom, who had found work as a home health aide.

Next I wanted to find a career with better long term prospects. So I went to see the principal of our local public high school. He and I talked for quite a while, and he said that in his opinion high school was not the right place for me and I should go apply to the local college. Now note, I was a high school dropout with a 9th grade education. But I went, took the SATs as they asked, got a good score, and was enrolled on a probationary basis, I’m sure at least partly due to the principal’s recommendation (thank you to Larry Liggett of Asheville High School!).

I continued to work full time at the barn and also went to college full time (they admitted me as a degree seeking student after I got A’s during my first semester). Because I knew how hard it was to make money without an education, because I had spent the previous year shovelling manure and riding bad tempered horses in the freezing rain, because I was paying my own tuition out of my own pocket, I hugely appreciated the value of this opportunity and I studied like crazy and worked very, very hard in college.

I graduated in 3 years, cum laude, and was admitted to a Ph.D program at Stanford University with a full fellowship and a stipend. Since then I’ve had a generally good career, moving from research to computer software development to technology consulting, and I am, I think, a success by most reasonable standards. Not bad for a high school dropout, right?

But, you say, I’m not really a high school dropout. I got a college degree, got a graduate degree. And yes, I did, and yes, that education was incredibly valuable. But this isn’t about whether education is worthwhile (spoiler: yes!), it’s about whether it should be forced on young people on a fixed schedule without them having any say about it, without regard for what else may be going on in their lives.

So, let’s examine an alternate universe, the one where dropping out, helping my mom, and seizing control of my own life is a criminal act.

I go to drop out at age 14. I’m told that it against the law.

Scenario One, I leave anyway, and am now a criminal truant at risk of being jailed, and having my mom jailed for not stopping me. For the crime of trying to make money so my mom and I don’t wind up homeless.

Scenario Two, I stay in school as I am forced to by law. My mom can’t pay our mortgage or buy our food. We go on public assistance, but still can’t afford the mortgage. We get foreclosed on and wind up homeless. Maybe, if all goes well, I graduate from high school and go to college anyway. Maybe not. But both my mom and I endure years of misery along the way, because I can’t help when help is most needed. Maybe I wind up in foster care, since my mom can’t support me. Or maybe I find a way to succeed and prosper anyway, but it’s harder, because I can’t legally take the path I believe to be in my own best interest. Because the goverment is forcing me to do what it thinks is best for me, and denying me the freedom to make my own choices.

So, Governor, before you pass a law that criminalizes teenagers who want to make their own choices, who might want or need to take a different path than the one the goverment thinks is best, I strongly urge you to think about my story. And think about the founding principles of this country: freedom and self-determination.

Lower the dropout age. While you’re at it, lower the working age. Let young people have more say in their own lives. It worked for me.