Updated on 06.27.07

All The Opportunity In The World

Trent Hamm

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.

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  1. Joe says:

    I don’t know that a Roth IRA is a good choice. With all the schooling ahead of her, it is unknown how much of her tuition will be covered with scholarships and she may need access to money much sooner than 60. What about short-term CDs where she can get access to the money at those times where expenses are expected, like at the beginning of the fall semesters?

  2. Ted Valentine says:

    Why does this person need budget help? Sounds like she’s got it whipped.

    If she’s going to grad school, rather than putting all the money away towards retirement, why not invest some of the money in an ESA or 529 and get tax free growth to pay for that.

  3. 60 in 3 says:

    This may sound counterintuitive but I would recommend finding things to spend on. If you plan for and think about your spending, rather than doing it frivolously, you can get quite a bit of value out of your money. For example, now could be a great time to take a trip and experience the world for a bit. Later on in life, you might have too many obligations to do so.

    Now this doesn’t mean go out and spend needlessly. It just means that not all money has to be saved. Spending money wisely for things and memories that will last you a lifetime can also be a good investment.

    I traveled cross country one summer all by myself. I spend a minimal amount of money due to some good planning but I gained an incredible experience that will always stay with me.


  4. Travel and see the world? I realized typing the other day that it wasn’t money that held me back from travelling it was meeting the right person so early in life at 20, that I didn’t have a chance to travel. I couldn’t bear to leave him. So as you age and become “Responsible” imagine being tied down, even if you were super responsible and rich how do you travel? Maybe your SO doesn’t have time off, and would you really just jetset off for 3-4 weeks without them?

  5. Erica,

    Definitely travel before you buy a house! It can be done very cheaply if you share rooms in hostels, or even more cheaply if you land a caretaking gig (not as hard to find as you might think). I am a huge fan of the UK’s tradition of a “gap year” between college and permanent work. You’ve got the rest of your life to tend your garden.

  6. Seth says:

    To the first comment, most Econ PhDs have grad school paid for and receive a stipend. Sometimes you can get in without a scholarship, but often those students are ignored and generally I wouldn’t recommend you go to a grad school who lets you end without funding.

    How about you look for an internship or travel opportunity that might not pay, but would be great for a career. I interned a couple of places in DC unpaid. Just be careful to make sure you get a place you will get meaningful work.

  7. liz says:

    Thank you for this post! My (brand-new) husband and I are fairly young but in a great financial position given all the factors (debtless save for school loans, which are comparatively small to what we make) and we are thusly earning a lot, but we really have no idea what to DO with it. “Invest” can be such a general term – especially when really we just want to leave our money someplace safe where it can earn. We’re not really money-minded people, just incredibly frugal.

  8. Minimum Wage says:

    Must be nice to be a subsidy kid! I worked and saved up $4K (about $20K in today’s dollars) by the time I graduated high school, then I paid my own way through college, ending up with student loan debt. Since I couldn’t afford to take an unpaid internship, I didn’t get the experience, and didn’t get ajob after graduating. (Well, I did get a job, but it was aminimum wage job, not a real job.)

  9. Sean says:

    I’m 19 and it’s unbelievable to me to think of having $25,000 saved up. I don’t even think I’ve made that much money yet. That is awesome. Although I don’t think this girl is from the U.S. (if that makes a difference) since I don’t know anyone who would say “university student” rather than “college student.”

  10. Does Erica think that very little budgetting advice applies to her b/c she is young and cash rich for someone her age?

    How about reading some books on investing suited to someone with her savings level while sitting on a beach on vacation? Kill two birds with one stone. I have to agree with most of the posts, she should see the world.

  11. Tim says:

    The first thing in having a budget is to have short, mid, and long term goals. goals will drive your budget. saving just to save is good, but without goals you are just doing that..saving for the sake of saving.

    we already know one goal: getting PHD. in this case, put a portion into 529 or ESA, unless you know with absolute certainty that you are your grad and post grad education is going to be paid for.

    does your internship offer 401K? what is the $25k that you’ve saved invested in now? What are your other expenses (you have stated you have some minor expenses)?

    there’s plenty of “budgeting” stuff that applies to you, although you’ve saved a bunch. mom/dad are being nice now, but in a few years they may have a change of heart and nudge you off on your own or start talking about contributing expenses. it’s hard to believe, but it happens. More importantly, you might want to move on your own. if you haven’t done so, there are a host of things you have to be prepared for and think about if you want to maintain your savings.

    at the very least, put everything in a high yield savings account, short term cd, or MMA until you figure out what to do.

    remember, a budget isn’t for just getting out of debt or save necessarily. a budget is actually a tool to allocate money to spend whether it is now or in the future.

  12. Tim says:

    you have to set goals for your money, whether it be a new pair of sandals, education, kids, a trip to Tuva, or retirement. the “DO” part about your money are your goals.

  13. Tim says:

    once you know your goals, the more difficult part is how to do it. The how are the investment vehicles out there. which form of investment vehicle you choose will depend on your risk tolerance. your risk acceptability will determine whether you need to adjust your time table in achieving your goal, earn more income, or reduce spending in other areas.

  14. Lisa says:

    She is apparently a smart girl, so these are probably not issues, but…

    1. She needs to make sure she has health insurance of some sort, either through her parents or through the university. One major illness or accident will wreck her savings.

    2. She should practice chastity, if she isn’t already. Notwithstanding reasons of virtue, an unplanned pregnancy could wreak havoc with her well-laid plans.

  15. julie renner says:

    I hope that you are helping with the household expenses, paying some to your parents, and helping with the household chores.

  16. Paula says:

    @Minimum Wage:
    After seeing so many of your posts, I think you should read this to see if it fits. http://www.nimh.nih.gov/healthinformation/depressionmenu.cfm You sound really depressed.

  17. Karen Isaacson says:

    Another option is an annuity. You are guaranteed not to lose your investment, and by the time she is ready to start on the Ph.D., she will have extra funds available. A Roth is so much longer-term that it seems to me that it is only part of a good investment strategy, and overkill at this point if all she ends up with is $180K [which, by her retirement years will probably be worth $18K at the rate we are going].

    As for chastity: health insurance is a must at some point but right now her parents can cover her, although that ends at graduation from college or age 24, whichever comes first. The human sex drive is strong enough that even the most dedicated economist-to-be may give in to the urge and without birth control a pregnancy is a 50/50 chance. Being aware of your own values and goals and being in control of the choice to become sexually active or not are more likely to delay the onset of sexual activity than any admonition to abstain.

  18. Laura says:

    I think for a 19 year old to be so ahead of the game is fabulous and good for her and (I’m assuming here) her parents for teaching her the benefits of saving and investing.

    My one concern here is (along the same lines as Julie) that she is not learning much about the real world. It is great that she is still living at home, but since she is making good money now ($750 a week for an internship is fabulous), and going to school on a full scholarship, shouldn’t she be a little self-supporting? I believe that since she is making her own way in the world, she should offer to pay rent at her parents house. If she were living on her own, she would have to learn that responsibility. She has learned the responsibility of saving and investing, but what about the real responsibility of taking care of yourself? I think that is going to hit her like a ton of bricks when she realizes that making house payments, utility payments, etc is not taken care of with a scholarship.

    I hope that, in her letter when she was asking for budget help, this is what she was referring to. It is great that she has such an awesome start in her young life, but she should also be aware of the realities of adulthood.

  19. PF says:

    Graduate student stipends are horribly low. Low wages coupled with the fact that many major universities are in expensive areas can make being a grad student a pretty rough existence. Be sure to keep some funds available so that you won’t have to live at poverty level. I’m referring to the U.S. Perhaps it isn’t that way in other places.

  20. minimum wage says:

    Paula, thanks, I haven’t read it (yet) but I’ll readily agree that I am probably depressed.

    But I don’t believe there is any help available, since the underlying causes of my depression (minwage income, high debt,lousy stressful job, no marketable skills, no money to go back to school to get a marketable skill, no real prospects for future success or even getting out of debt) are valid.

    Also, while I was in hospital several years ago with physical ailments and neurological complications, one of the doctors put me on an antidepressant and it pretty much zoned me out, which didn’t make me more productive in any way.

  21. andrea says:

    I’m a PhD student and a lot of the advice above is already great, but I’ll pass along a comment from an undergrad prof–graduate stipends are minimal. A car breaking down, having to travel to a conference, or an unexpected surgery even with insurance will not be covered by the stipend. Most grad students get in trouble at these times and start putting things on credit cards. (Actually, this isn’t true, many grad students are in debt because they think they need to live like “grown ups” and spend more than they have). So with the bit you’ve saved, be sure to keep liquid an emergency fund/budget for conference travel and technology that will help you get your work done.

    Finally, don’t go to graduate school un-funded. If you can’t get funded, you probably don’t belong in grad school. (Get more experience and apply again/ ask how to improve your application.) There are a few programs that are excellent but poor, but they are few and far between especially in econ.

  22. Violetta says:

    Having almost finished my grad school career, here are a few items that I have found most Econ PhD students should budget for:

    1) A really good laptop.

    2) Someone already mentioned budgeting for attending conferences. You may also want to travel for research purposes. Many universities have funds to help grad students with research projects and conferences, but it is nice to have extra funds so that you can do more.

    3) Depending on where you end up in grad school, you may need or want a car.

    4) Depending on where you attend grad school, you may need to budget extra for a place to live – Boston or New York are much more expensive than Iowa or Minnesota.

    5) Funds for an extra year of living if you don’t finish your dissertation on time. Most grad programs will give you funding for four to five years only. If you don’t finish in that time, (not an uncommon occurence) you are better off funding yourself for a year of dedicated dissertaion work than trying to teach enough extra classes (at $3000 or $4000 per class) to cover your living expenses.

    Good luck with your academic career!

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