Ask Money

Good education. Good job. Now what?

Chris Farrell Feb 2, 2012

Question: After close to a decade in graduate school, a post-doc, 24 job interviews, and almost as many rejections, I am elated to have started my first bone-fide adult job. Which in this day and age is not only a blessing, but a miracle, for which I am truly grateful for. While I have mastered the manipulation of matter at the atomic and molecular level, I am pretty clueless about how to manipulate my finances.

My question: what should my financial priorities be? repayment of school loans? saving for retirement? putting money into an emergency fund?

I am currently working at a start up (which could succeed or fail) and want to have a some sort of emergency fund. I received an $8000 inheritance that I am keeping as an emergency fund, but maybe the emergency fund should be more?

I finished school with $72,000 in loans and the good news is that their interest rates are low (2.65% and 2.1%). Should I sit on these since the interest rates are so low or try to get them off my plate as soon as possible to become debt free?

Fortunately, prior to grad school, I was employed for two years and now have $28k in a 401k and $10k in a defined contribution plan. They’ve been out of sight, out of mind. should I roll them into my current companies 401k? in addition, since I’m already 35 and way behind my peers in savings, I’d like to max this out. Should I also put more into IRAs and Roth IRAs?

Any assistance you’d be willing to offer in helping me to assign my priorities as a late comer to the working world would be appreciated. Thank you and love the show. keep up the great work. Romas, Berkeley, CA

Answer: Congratulations on the job. It sounds exciting. And with your education I imagine you have a rewarding career ahead of you.

My recommendation is that you put a priority on boosting your personal savings and your retirement savings at work. You can concentrate on the debt later on, as well as the IRA or Roth-IRA.

First, let’s look at building up your safe savings. You have a good job, but it’s risky. A healthy cushion of safe savings offers you some shelter in case the business dries up, the stock options go bust or some other setback. 

However, establishing a good margin of financial safety is much more than taking out an insurance policy against a layoff or some other kind of setback.  The practical return-on-savings measured in your lifestyle could be huge. An emergency fund eventually becomes an “opportunity fund.” It’s the money that lets you make your own choices.  Savings can finance risk-taking with your career and job, give you the freedom to try something new and, at the same time, limit your downside risk.

 Safety and opportunity, like risk and return, are two sides of the margin-of-safety coin.

I would put the maximum into your current 401(k) if you can. Your current employer may allow you to take the from your previous 401(k) account and add it to your current 401(k). That’s okay if you’re happy with the choices and management of your current plan. (Your employer doesn’t have to allow the transfer.)

Still, it often makes sense to roll a earlier account into a rollover IRA. The money is under your control. You choose where to invest the money it. If you roll the money into an IRA make sure it’s an institution to institution transfer. It’s a simple way to preserve its tax-sheltered status.

Now, you have a lot of debt, although the low interest rate buys you some time. So, once you’ve built your emergency savings fund into an opportunity fund and are taking maximum advantage of your 401(k) you’ll want to target the debt. You may well decide that the best use of some of your savings is to pay off a big chunk of principal all at once. With a good savings cushion it will be your choice. The other thing is as you get raises I would devote the new money toward reducing debt.


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