That’s doesn’t just go for kids, it’s basically the definition of a good emergency fund!

1. Debt repayment
2. House down payment
3. Emergency fund
4. Retirement
5. Starting a side business
6. Vacations

I’m hoping to get 2 or 3 of those out of the way before thinking of a wedding or kids, but my honest recommendation is to pay down that debt. As my loan payments come down every month, I have the ability to put more into my retirement account; its a great way to kill two birds with one stone.

1. Debt repayment
2. House down payment
3. Retirement
4. Emergency fund
5. Starting a side business
6. Vacations

I’m hoping to get 2 or 3 of those out of the way before thinking of a wedding or kids, but my honest recommendation is to pay down that debt. As my loan payments come down every month, I have the ability to put more into my retirement account; its a great way to kill two birds with one stone.

Goals are good, but overall your plans need to also have flexibility.

Let me make things a little easier on you:

To get started:
10% of gross for retirement
10% of net for expensive next-five-years goals

CASH:
Between 21 and 30 or 35, most people will need cash for the following: a car, a down payment on a house, and a wedding. You might also consider graduate school or starting a business, but the first three are practically guaranteed expenses. Figure out what you think is reasonable to spend on each of these and that’s how much you should shoot for in cash savings.
Late-model used economy car: $10K
House, 10-20% down payment: $10K – 60K depending on your part of the country.
Wedding, $0 – $25K depending on your taste and the size of your family.

Even assuming you want a small car and a modest house in a low cost of living area, that’s $20K in cash outlays. How aggressively you save depends upon your timelines. You’ll have to save a lot harder to get a down payment by 25 than you would to do it by 30 or 35.

I majored in Finance so I knew what it would take to save up a $20-30K down payment. I didn’t really want a house at 22, I still don’t, but I started with just $20 per week toward that goal because I know when I decide I want a house it’ll be time for the painful cutbacks to save up. Each year, I’ve grown that amount by $20 or so, and I add in 80% of all my found money and bonuses…and STILL I need to do $450-500 per month to meet my goal of 20% down on a modest place in my area.

I am saving 7.5% of my net pay for a house and a car…10% would get me to my goals a lot quicker.

Realistically, I might wipe out both funds to go to grad school, but what I use it for doesn’t matter…either way, these are “in the next five years” things so the money should be kept in cash.

Even if your specific goals change over those five years, it’s almost guaranteed that you will want at least one cash-sucking big item.

INVESTING:
Don’t invest in a taxable investment account until you have at least $20K to play with. The account fees and transaction fees will kill your returns if you’re only investing small amounts. $4/trade for Sharebuilder sounds cheap, til you realize that’s 8% of $50.

RETIREMENT:
Aim for 10% of gross pay, plus whatever your employer gives you. A lot of employers have cut back on the 401K matches because of the economy, so you don’t want to count on the matching $ any more than you’d count on Social Security. 10% done every year from age 22 to age 65 should give you a comfortable retirement.

MOST IMPORTANT:
Bust your tail to impress the right people at work and grow your salary. If your paycheck goes up 10% so should the amounts you put into retirement and into savings…which will work out for you in the long run.

I think getting started is a challenge too. I don’t think it should be over looked. Some people know why they should invest but still don’t do it for whatever reason.

-Nate

Oh well. ;)

Essentials:
-checking acocunt: For regular expenses (groceries, gas, rent, mortgage, utilities)

-savings account (or 2): At a minimum, one as an emergency fund. This could be as little as $200 or as much as $20,000 or more depending on your needs. You may also want another account for short term savings (wedding, car, vacation, etc.)

-401k if their employer offers a match: To pass this up is to give away free money.

-a Roth IRA if they are eligible: This is a great opportunity to guarantee tax free income in retirement. In most cases, contributing 6-8% to a 401k and $5000/yr to a Roth from age 25 will be plenty for retirement.

Optional: another taxable investment fund. For things like kids college, a house in the future, extra retirement savings if you maxxed out the other options or want to access some earlier.

In 1999 the yield was 1.1% It was up to 1.8% i think in 2006. It is currently relatively high at 3+%, but only because prices have fallen so far in the last few months and some companies haven’t yet moved their dividends downward in response to their falling earnings.

So even if you assume an average yield of 2% over the last ten years, you’re left with a rate that is substantially less than you would have earned if you had put your money in treasuries, cd’s and high yield saving accounts. If you take into consideration your capital losses due to the 50% price decrease, then there is no question that putting money in the index fund in 1999 was a mistake.

I also didn’t mention the taxes on dividends and the expense ratio, which I know is small, but it is still that much less money at the end of 10 years.

If Carl is pretty aimless, it seems to be that adopting both very long-term (retirement) and very short-term strategies (cash) seem appropriate. No one wants to be old and broke, and retirement vehicles are so tax-favored that it seems silly not to invest in an IRA. Putting the extra savings in cash means that he’ll both have an emergency fund when he graduates and that he’ll easily be able to invest the money in a more appropriate vehicle when the outlines of his life become clearer.

You might want to keep it in the back of your mind that you may change your mind on kids one day. I was vehement when my husband and I married that I never wanted kids. Then one day, after many happy years just the two of us (and the dogs, of course) it just clicked with both of us that we wanted children.

I’m not saying that *will* happen to you too, nor am I suggesting that everyone needs to have kids. Just know that you and your goals and dreams will change over time. 10 years from now you won’t be the same person you are today.

You’re forgetting about ten years of dividends in this comparison. If you buy an index fund, you do collect dividends.

I think Trent has a good point in determining what it is that is being saved for but also think it is important to know exactly what direction you hope to take in life so that you can develop a path in order to get there. Once you do that you can pave your path in financial successes and accomplish the goals and dreams which you set out to achieve.

Good post Trent, and I encourage those who are interested in more reading on this subject to visit my site.

My point is that over that specific 10 year period, and many others over the history of the stock market, buying and holding an index fund would have been a major mistake.

If you want to play “buy and hold” you should be investing really long term, at least 20 years, unless you plan to get lucky.