Reader Question: I Rock At Saving Money, But What Now?

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One of the best thing about this blog is the chance to help ACTUAL READERS with ACTUAL PROBLEMS instead of just hypothesizing about financial matters. Today’s reader sent me a question, and after reading it a few times, I was in complete awe of how awesome she is! I wanted to share her situation with you, not only to show that millennial are lazy, entitled jerks, but also to inspire those who may be starting college, or just out and are trying to get their bearings in life, including what to do with their money.

Plus, I want YOUR input on this question! I have some suggestions, but I’d like to hear from YOU on what you think Laura should do in this situation. So, without further ado, here’s her email:

Hi Jake,

I need some financial advice! I’m 23 years old and have a full-time job. I held part-time jobs all through college and have been a compulsive saver my whole life. I have 6 months of expenses saved in an emergency fund, and I’m contributing 8% of my gross income to my company’s retirement plan (a Roth account). I’ve got quite a bit of extra money between my savings and a CD that just came due (over 15k) and I’m just not sure what to do next. I still have about $9500 in student loans to pay down, at very low interest rates.

Do I:

-start contributing more to my Roth account (through work)?
-start a separate retirement account on my own, through my insurance company?
-pay off all $9500 of my student loans?
-put this money aside to eventually pay for my future wedding or buy a home?
-treat myself to a killer vacation?
-give myself a little extra spending money each month?
-do something else with my money that I’m not familiar with (like investing)?

I know I’m fortunate to be in this position, I just don’t know how to proceed. Everything I’ve found online is about how to save for that 6 month emergency fund…. but there’s nothing out there on what to do next. Any suggestions are welcome!



First Things First

Laura, I just want to commend you on your aptitude for putting yourself in such an advantageous situation financially. What you have done thus far is nothing short of remarkable, especially this day in age when things like “working during college” are not even encouraged! So THANK YOU for setting an awesome example for the readers here! I honestly hope to raise my kids to have the same drive and “get r’ done” attitude that you have, and give them the joy of working hard to put themselves in a similar situation.

Retirement Investing

I’ve got a really simple philosophy on retirement investing, and it falls in line with many of the popular finances gurus out there. It goes like this:

  1. Invest up to your company’s retirement match (if they have one)
  2. Max out a Roth or Traditional IRA
  3. Invest any excess back into your company’s retirement account

Since I’m a tax guy, I like the idea of putting most of your retirement money in tax-advantaged accounts. I also like the idea of balancing out your tax situation with regards to your investing. Since you stated that your work has you on a Roth plan (I’m assuming 401k), after hitting the company match, I would opt for a Traditional IRA to max out (2013 max is $5,500). The reason for this, is that you get some tax savings form the traditional IRA right now, and you’ll get tax savings on the Roth IRA later. Once you’ve maxed out the Traditional IRA, then go back to your work’s Roth 401k and max it out (when you have the money to do so).

Extra Cash From CD

As you probably know, interest rates are abysmal for savings accounts and CD’s right now, so I DO NOT recommend throwing that $15k back into another CD. And since your emergency fund is in place, you don’t need any more cash reserves. So we’re left with a few choices with what to do with that money that you have diligently earned and saved. I’ll put them in order, from the most HIGHLY recommend to the LEAST recommended (in my opinion):

1. Start a separate retirement account on my own, through my insurance company? I DO recommend starting a Traditional IRA, but PLEASE do NOT do it through your insurance company. They specialize in insurance, a necessary evil to protect you “just in case.” They should not be handling your financial future through investing. I would connect with a company like Vanguard who can get you set up with an IRA, and help you invest in low-cost index funds for your retirement. I just moved all my money over there for my Roth IRA, and am excited to be working with them, as they are a non-profit company (you know, not here to siphon tens of thousands out of my retirement account over time to grow their empire). You can max out the IRA this year ($5,500), as I assume your company is not matching more than the 8% you are currently investing through them.

I bet this looks pretty nice after all your hard work. Make it happen! :)
I bet this looks pretty nice after all your hard work. Make it happen! ๐Ÿ™‚

2. Treat myself to a killer vacation? With about $10k left, I say grab $2k of that and have yourself a week-long vacation wherever you want to go (within reason, of course). Heck, if you find a cheap condo on vbro.com or airbnb.com, you might be able to stretch it out even longer! Now, for me, I use credit card rewards to fund my vacations, and I suggest doing that if you can. Or at least start with one card to get a round-trip airline ticket to get the flights taken care of. Up to you, and if you don’t care for the credit card game, just use your cash without guilt, BECAUSE YOU’VE FREAKING EARNED IT!

3. Put this money aside to eventually pay for my future wedding or buy a home? Now we’re getting to some of the good stuff. It sounds like you do have some long-term goals in mind that are going to require a decent sum of money to accomplish. Here’s how I like to approach these things (let’s use buying a home as an example). Figure out some basic details about where you want to live, what style of house, and start searching for some actual houses on the market that you would want to buy. You can then get a ballpark range for how much the house will cost. Then take 20% of that for a down payment (so you can avoid PMI), and that’s your goal.

You then reverse engineer that goal by saying “I want a house in 3 years. I need $40,000. So that’s 36 months away. I’ll need to save just over $1,000 a month to hit that goal, but I can help myself by saving this extra $8,000 I have toward that goal. Now I only need $32,000, and that’s about $900 a month.” You see how that works? You set a number and a date, then divide by number of months, and you have your monthly goal. Adding the extra $8,000 you have left will help reach the goal much easier or quicker. It all comes down to your priorities at that point, and I’ll touch on that later

4. Pay off all $9500 of my student loans? Honestly, the “right answer” is to have these paid off before you buy a home. Getting a home while debt free is probably the best thing you can do. BUT, having said that, we didn’t do this. We bought a house and STILL have student loans, because it was a priority. Yes, I’m paying SL interest, yes, it sucks. But sometimes finances have some gray area, and we chose the home route.

Based on the latest market, our home has now outgained the interest paid in value, so I feel comfortable saying you can save for a home while the loans are still here, as it is an investment. Especially if they’re fixed rate loans in the low 4% or less range. Houses are a great value right now, I don’t think anyone would argue that. Just make sure you only buy what you can afford, and I would suggest to be more conservative that we were when purchasing (maybe like no more than 30% of take home for mortgage would be a good rule of thumb).

On the other hand, if you want to kick those pesky loans to the curb, the yes, make it happen!

5. Give myself a little extra spending money each month? I would say that spending cash is something best derived from your monthly income, not boosted to extra saved cash. Spending cash is a recurring expense, so if you feel the need for more, I would say you should work it into your budget, and cut something else out that maybe you don’t care about as much.

6. Start contributing more to my Roth account (through work)? Since you’re most likely already up to the company match, I would put a hold on investing any more here until you max out a Traditional IRA. See above commentary.

7. Do something else with my money that I’m not familiar with (like investing)? You can invest it, but with the retirement options above, and some goals that are less than 5 years away (possibly), I wouldn’t risk this capital until you’re comfortable letting is stay invested for the long term.

Figure Out Your Priorities And Goals

Of course, everything I just wrote out is all subjective, being filtered through my brain and injected with my opinions. BUT, your priorities and goals could be different than mine! Which is why I always suggest writing out your priorities, and THEN you can set a list of goals, in order of importance to you. Heck, maybe a wedding is the most important thing on the list, and you’d rather save $10k for that over a house down payment. Then do that! Or maybe you need even more security, and want to dump a majority of it into retirement accounts to ensure you are FLIPPIN’ SET in 20 years. Then make it happen!

I just wanted to give you my (very uneducated) opinion on what I would do with the cash, and some things to think about with each option. I can’t tell you exactly what to do, because it’s up to you. But since you’ve already made some amazingly wise choices at such a young age, I have full confidence that you are going to set yourself up very nicely here. And hey, this is just my opinion, but I also have awesome readers that want to help too. So feel free to come back and read through the comments to see what others think. Maybe I’m just a crazy old cook (I’m 27, after all) who is completely out of touch and is giving out TERRIBLE advice that you should run from. Who knows?!

All I know is that I’m glad you stopped by, am astonished at how awesome you are with your money, and wish you the best in whatever you choose to do. Heck, come back and let us know! ๐Ÿ™‚

Comments: What do you think Laura should do in this situation? Should she kill the debt and get on with her life? Or should she blow it all on a sick 4-week vacation to the Bahamas? Or maybe she should have it all cashed out in $1 bills, fill a swimming pool and swim in it like Scrooge McDuck?

Jacob Wade

Jacob Wade

Jacob Wade has been a nationally-recognized personal finance expert for the past decade. He has written professionally for The Balance, The Spruce, LendingTree, Investing Answers, and other widely-followed sites. 
Heโ€™s also been a featured expert on CBS News, MSN Money, Forbes, Nasdaq, Yahoo! Finance, Go Banking Rates, and AOL Finance.

In 2018, Jacob quit his job and his family decided to sell everything (including their home) to take off on an adventure. They traveled the country in an RV for nearly 3 years, visiting over 38 states, 20+ national parks and eventually settling in the sunshine state!

29 thoughts on “Reader Question: I Rock At Saving Money, But What Now?”

  1. First of all, that’s AWESOME that she has saved so much, so soon, AND is contributing to a retirement account. Secondly, you offered her a great response, Jacob. My advice wouldn’t be much different, but it would vary slightly..

    1. PAY OFF YOUR STUDENT DEBT. You have $15,000 that’s completely separate from your (fantastic) emergency fund. There is absolutely no reason you should sit there and continue to pay off those loans, with all their interest, over a period of years when you could take care of it now and save yourself money. Especially since your student loans, at $9500, will not eat away the entire chunk of what you’ve saved. You’ll still have $5500 left – a good chunk of change, which you can then use to..
    2. Take a vacation. It sounds like you definitely deserve it. I would say be smart about it though, and aim to spend more like $1,000 ($1,500, max). You can take a seriously nice vacation for $1k, and probably less if you’re good at shopping for travel deals – they’re out there.
    3. With the $4,500 you have left, I’d start looking at how you can make that money work for you. As Jacob suggested, Vanguard is a good organization to go with. You can invest SOME of that money into index and mutual funds and make it grow for you. You have the absolute biggest advantage in investing working for you right now: time. Take advantage of it. I would just avoid throwing in the entire amount, because as Jacob pointed out, you have other important goals in mind that deserve your money and attention, too. Maybe devote $1,000 to this sort of account – it’ll get you started with some investments, but it won’t be so much that you have nothing left over for other important stuff.
    4. Now you’re left with about $3,500. Put it in a Roth IRA. Max that sucker out every year, again like Jacob said. If you need to reduce your contributions to work work retirement to do so, I would consider it – just make sure you’re getting your employer match if you have one. He also mentioned the future tax benefits of putting your money here, and another big benefit of a Roth that I’m not sure was mentioned is the fact that you can withdraw the principle at any time without penalty. So stick the rest of your savings here and let it grow like crazy. If a wedding or home comes up sooner than expected, you can take a small amount back out of the Roth if needed. You’re such a good saver that if you don’t expect these expenses to come up immediately, I bet you have the time and the drive to save a significant amount when those big life events happen.
    5. And speaking of Roth IRAs – because you can withdraw the principle without penalty, I would also advise you move your emergency fund into a Roth if it is money that is for REAL, serious, worst-case scenario emergencies. You’ll earn more on this money than if it were sitting in an extremely liquid savings account at the bank, and you can still get to your funds fairly easily in case of emergency.

    Just my advice based off my experiences! I hope you find it helpful. Although, with all that being said, the Scrooge McDuck plan would be kinda fun.. ๐Ÿ™‚

  2. Kudos to Laura – wish I was that smart when I was that age. Heck, wish I was that smart at DOUBLE her age! ๐Ÿ™‚

    And I like your advice starting out – get as much done behind the “tax wall” that you can. However, I’m not nearly as confident in employer plans of any sort, because over the years they’ve almost all become laden with return-sapping fees.

    I’d put out another train of thought for Laura to consider: if you’re up to it, save up a down payment on a rental property close to you. Then put an extra $500-1000 into the principal repayment to get it paid off quickly. Once your loan-to-value drops below 40%, get the next one.

    TO make this work, you have to not mind dealing with people (i.e. not be a geek) and have peace with the fact that some tenants will break things and that the place will stand empty for a month or so between tenants. But if you do, it is a great way to go.

  3. I don’t know much about investing in the USA but I also agree that I would kill the student loans before buying a house. If she can get rid of that at least if something were to happen she won’t have a mortgage and the student loan hanging over her shoulders. She is fortunate to be in this situation. Kudos to you Laura for saving the way you have. Cheers

  4. Kill the debt! It’s so freeing!

    Then focus on building up your nest egg, the more gratification you defer now, the more it pays off later, so stall the vacation for a little bit.

    Keep doing what you’re doing Laura, it’s great to see someone your age taking responsibility for their financial future beyond just logging in to see if their parents deposited an allowance.

    Maybe I’m the crazy old kook?

  5. I’d first max out my retirement account contributions, then throw the rest at debt. As far as the vacation or other spending spree: I’d suggest working the cost of regular vacations into your budget. If you’re saving the max in retirement accounts each year and have paid off your debts and have that tidy emergency fund put away and are contributing monthly to whatever other planned savings funds you might like to set up (like for a wedding), then by all means take a nice vacation each year. We’re all different, but I wouldn’t “blow it” on a single, expensive trip. Fight the mindset that how much fun you can have = how much a vacation costs!

  6. 1. Pay off the student loan NOW!
    2. Take a moderate vacation [$1K]
    3. Save for short term goals i.e. car replacement
    4. Save for house downpayment or pay for house in cash!!

  7. Wow! Congratulations to Laura, who is in a situation many people much older would admire! ๐Ÿ™‚

    There’s a lot of great ideas above, but I’d like to recommend that she gets rid of the student loan. The reason for that is cash flow. Right now she’s got a certain amount going out on a regular basis; it’s part of the budget. Get rid of the debt, and that money becomes available for other things.

    In case of unemployment or illness, having those debt payments also means that the emergency fund would last longer, too!

  8. Great job! I’m 23 too, so I know how you feel. I would actually get rid of the debt. We had a car loan of about $5K when we graduated and I just eliminated it by ramping up my payments. I feel so much better and secure. I would also max out your ROTH and then start maxing out your 401K. This way you won’t even feel the money is yours.

  9. These are all great ideas! I’m going to echo them.

    Kill that student loan. The interest doesn’t really matter. It’s tying up your monthly cash flow, and if circumstances change, it’s better to just have that outta the picture. Since you can do it today, I say just do it.

    Take a portion and go on a vacation. Definitely.

    Open a Roth IRA, and do it through Vanguard since the fees are incredibly low.

    You didn’t mention your income, so it’s hard to know what 8% of your gross represents to your retirement. It would probably be worth it to kick that up (after maxing out the Roth IRA).

    And why am I suggesting a Roth IRA vs. traditional? You mentioned you want to maybe save for a down payment on a house. With a Roth IRA, you CAN take out contributions and put that toward a house (there are some rules to this…how long you’ve had the account, and how much you can take out, and stuff) but the point is, the Roth IRA gives you more options than the traditional in this regard.

    Circling back to your student loan, what was your monthly payment? Take that exact amount, or round up, and start putting that money toward retirement or some other investment. That way, it doesn’t just get absorbed with your budget.

    Do you have a car? If so, you might start saving up for the next one so you can pay for it in cash (even if you think you’ll get 10+ years out of your current ride).

  10. Get rid of the debt first, it will feel great to be done. Plus like everyone else said, you’ll still have a good chunk of money left over. Take a nice vacation. We spent about $1000 on a 5 day vacation for 2, we managed to find cheap tickets and great prices on hotels and we bought some groupons for meals which was the best thing we could have done. You can definitely have a nice time for a grand, you deserve it. Then save for your wedding or for a house. Weddings, even small, simple ones, can be so expensive so save up. Same with a house, even smaller houses are expensive and a big commitment money wise so if you can have a nice down payment, go for it. Good luck and give yourself a pat on the back for doing so well so early on.

  11. I don’t think we have enough information yet to advise her on any of these options. I’d want to know what her priorities were first before recommending one course over another. Why throw money at retirement that you can’t get until after 59 1/2 if all of the priorities are before that date?

    I’m want to know what her goals are and what they cost before moving forward. Funny, dude! We both had letters we’re answering in our posts today, but they’re completely different questions.

  12. I agree with your advice. I would add that investing for your future is probably the most important thing you can do. If you hold off because the market is volatile or student loans, you have lost that time forever!

  13. First of all, I’d like to say a huge THANK YOU to Jacob for his fantastic response, and to all of the commenters as well. You’ve all given me tons of food for thought!

    In response to the question about priorities: I’m gonna be a typical 23 year old and say I have no idea. I went to college in a major city on the East Coast and uprooted my life about a year ago to take me dream job, which is unfortunately located in the Midwest. Good for saving money (it costs next to nothing to live here) but I’m a little stir crazy. I go back and forth between “do I stay at a well paying job that I enjoy” and “do I return to a lifestyle that I enjoy, surrounded by people I love, possibly making less money at a job I won’t like as much” – I still haven’t made up my mind.

    Because of this, my priorities fluctuate. Sometimes I think I’ll stay here at least 5 years to get fully vested in my company’s 401k matching program. Other times I think I’m getting the heck out as soon as my lease is up in a year. This makes it difficult to say when I plan to buy a house, where it would be, or even get a general idea of how much it would cost. I don’t know if I even want a house for sure – I’d love to live in a city again. Maybe I should be saving up for my future moving costs?

    I think the general consensus was to look into IRA options, which I’m going to do. Someone mentioned saving for a car – I’m about one year into a 3-year lease on my car, so I’m not sure if I should be saving to buy it at the end of the 3 years, or paying off larger amount each month, or what my other choices would be. Regarding the vacation, as amazing as that sounds, I don’t have many friends who can afford a lovely tropical vacation, and I don’t want to go by myself! So that might go on the back burner for a while ๐Ÿ™‚ (Side note – Jacob, I read your post about credit card rewards and holy crap, I need to get in on this! I use a Delta sky miles card and have flown home for free a few times, but certainly haven’t had an entire vacation!)

    Someone also mentioned that paying off the student loans means one less “bill” each month. That’s an intriguing thought. I pay $120 a month in my loans… it would be lovely to put that $120 toward something else (lots of shoes?). Perhaps I’ll pay off a large chunk of my loans to lower my monthly payment.

    I’m definitely going to look into Vanguard, so thank you all for that suggestion. I guess my only concern is putting too much into that IRA and then in 5 years, kicking myself because I’d rather use that money for a down payment on a house or for a wedding (let’s ignore the fact that I am not in a serious relationship so I might not have a wedding in 5 years haha). That’s why the Roth IRA is an intriguing option, though I’m reluctant to open a Roth IRA if I have a Roth 401K through work… I’d rather have the variety of Roth and traditional.

    Anyway, sorry for my rambling… just wanted to thank you all for your suggestions! I’m going to keep Googling and doing my research, and will figure out what works best for my situation. I appreciate all the advice – the comments section can be a scary place! Up until this moment, I thought the comments section on websites was proof that the world is really mean, haha. So thanks for proving me wrong! ๐Ÿ™‚

    • Sounds like your best move is to get your investments automated (with the 401k as you already are, plus a Roth IRA for the extra flexibility of those funds…remember, you can use some for a down payment if you wish).

      What is your tax bracket? That can help determine if it’s better to have a traditional vs. Roth IRA.

      Bank up that cash and if you want to pick up and move, it’s easy. Or if you want to buy a house, then there’s your down payment.

      Leasing a car is generally a lousy, expensive deal. It might be worth investigating how to deal with that lease. Perhaps buying it when the lease is up, or buying a different car with cash.

  14. I think your advice is pretty spot on, especially at the end when you encourage her to make sure she’s got her priorities identified. It’s really tough to make a meaningful plan when you don’t know what you really want to aim for. If she’s shooting for financial independence, maybe more goes toward retirement. But if she really wants to settle down in the next few years, maybe more goes towards a down payment. It just depends on what you want from life. And THANK YOU for warning against investing with her insurance company. Without having any idea who her company is, I can almost guarantee that that would be a terrible idea.

    With all of that said, one tiny complaint. Please do not view your home as an investment. It may save you money over renting, but it is not an investment. And temporary increases in price are not evidence otherwise. You are consuming shelter. If it ends up making you money above inflation, factoring in ALL of the costs along the way, you got lucky.

  15. There is a lot of good advice in the comments already. Since you have done this well with money already I’m sure you will make a wise decision on what to do with your money.

  16. I’d definitely go the student debt first, like a lot of people are saying.

    I’ve had the same issue as you at times, it’s hard to know what the ‘right’ thing to do is! I reckon enjoy a short-ish cheap holiday, and then settle into a target for wedding/house and work towards that. I don’t entirely understand the US retirement products, so I won’t comment (but I contribute $50 extra per week above my employer’s compulsory contribution, just to ‘keep ahead’)

  17. I’m with Kali. Pay off your debt, treat yourself, out in the minimum to max out any accounts that will match your contributions, and then use a Roth IRA ($5500 a year). If you still have extra, add more to your 401k or Roth 401k or whatever your main retirement plan is. ๐Ÿ™‚

  18. As many people have said, well done to Laura for being in such an excellent position at such a young age.

    Personally, I would pay off the student loan as the priority, and then move onto other investments/savings afterwards.


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