I received an email from a college student today, who I will call Erica. She told me the following:
I’m a 19 year-old university student. I have no debts and all my university fees are covered by scholarships. I live at home, so I have no rent or household related expenses. Since I have had a job since I was 13, I currently have $25,000 invested. This summer I landed an internship where I make $750.00 per week. I have very few expenses and a decent income. I have been looking for budget advice, but very little seems to apply to me. Do you have any suggestions? Also I am planning on getting my Ph.D. in Economics, so I will be in school for quite a while.
Erica is off to an incredibly solid financial start in life and has all of the opportunity in the world in front of her. She has basic financial sense and some good career sense as well; she’s obviously setting herself up for a great life. So what should Erica do with her good fortunes? Here are a few things I recommend for Erica – and for anyone else in a similarly good situation early in life.
Give yourself a very simple budget and stick to it With no debts and only minimal expenses, most of Erica’s money this summer could potentially be invested. I would budget a small spending stipend from each check (it really depends on your lifestyle), cover all expenses, and then automatically invest the rest somewhere else. You’ll have some very large expenses to cover later on down the road – if you can sock some money away now, all the better.
Start a Roth IRA Erica is likely to be far below the income threshold for a Roth IRA now, but late in life she will likely be in a rather high tax bracket. Take advantage of the tax shelter now and use some of that investment money from the internship to fully fund a Roth IRA this year. Funding $4,000 into a Roth IRA at age 19 means that it will have a worth of $181,037 when you can take it out at age 60 – and you won’t have to pay a dime in taxes on any of it.
Put the money in something simple There’s no reason to worry about portfolio management. Just invest in a low-fee broad based index fund. I’m a big fan of Vanguard and I strongly agree with their low-cost investment philosophy. If you want to really dig around and learn more, try reading The Bogleheads’ Guide to Investing.
Here’s some additional advice that might apply to Erica, not directly financial but quite valuable nonetheless:
Build relationships with people at the internship and at college Build a strong connection with people while you’re there and make every effort to keep in contact when you leave. These will be great professional contacts to have down the line. If you’re like me and this sounds like an “easier said than done” task, I really recommend reading the book Never Eat Alone – it’s a great look at how to do this well.
Follow your interests It’s your life – follow the things that excite you, not the things that excite other people that you merely go along with. College affords you the opportunity to really figure out what your interests are – don’t miss out on it because you’re worried about fulfilling expectations.
Be involved Find an organization or two that really speaks to your interests and get involved with gusto. The others you find there who are also deeply involved will likely be people who will match up well with you throughout the rest of your life.
Good luck, Erica. You’re already off to a great start.