When I started my first "real" job at a small daily newspaper in Brookings, S.D., back in the early 1990s, I don't think the words "retirement" or "savings" ever crossed my mind.
My wife and I were focused on getting through college, paying the rent, keeping our car running and having enough money left for dinner and a movie now and then.
When we both landed jobs in Utah in 1995, I enrolled in my new employer's 401(k) plan. But I didn't really know what I was doing. I remember asking my dad if I should, and him saying it would be a good idea.
So I admire the writer of this week's question. Elle sent me an e-mail to say she is a recent college graduate who just landed her first "real" job.
"I am not sure what I should do to start saving and what my plan of attack should be," Elle wrote. "I have heard a lot about different options — IRAs, Roth IRAs and 401(k)s — but what is my best bet as a young person?
"I heard that the first thing I need is an emergency fund, so I am working on building that up, but what is next, and do I need a financial planner? My company is small and does not have a 401(k) plan, but I have been doing some reading of financial books, and I understand the benefit of saving when you are young. Can you give me some advice and help me to know what I should be doing?"
First, Elle, congratulations on planning now for your financial future. The fact that you are saving already puts you ahead of the game.
For more specific answers to your questions, I contacted Ray LeVitre, fee-only certified financial planner in Salt Lake City and author of "The Retiring Boomer's Financial Handbook." Ray recently taught a seminar on finances for graduate students at Brigham Young University, and he is working on a book that focuses on people in your situation.
Ray wrote in an e-mailed response that the premise of his book is that habits, not income, dictate wealth. In other words, if you develop good habits while you're not making much money, you will keep those habits when you are making a lot of money.
Toward that end, Elle, Ray recommends that, first, you follow a strict budget.
He also writes that you should set aside 15 percent of everything you make. You should start — as you already have — by building an emergency reserve of three months' living expenses. That money should be put into a high-yielding money market account, separate from your regular checking account.
His next bit of advice involves your consumer spending habits.
"Choose wealth instead of status," Ray writes. "Example: Pay $5,000 cash for an older car and have no payments vs. buying a $25,000 car and having payments of $466/month ($5,600/year) for five years. Without the payment, you can save $466/month for five years. Investing $5,600/year into your 401(k) (at a 10 percent rate of return) over five years would be worth $38,156.
"I'd rather be wealthy than look wealthy."
Along those same lines, Ray recommends that you pay off all of your consumer debt and make a commitment not to use credit to purchase anything that will depreciate, such as cars, furniture, technology, vacations, clothes, etc.
Next, start saving 10 percent toward retirement and 5 percent toward items you will need to purchase over the next year, like a new sofa or snazzy Apple laptop.
"For retirement, I would recommend a Roth IRA or Roth 401(k) while people are in lower tax brackets, and to buy a diversified portfolio of no-load mutual funds," Ray writes.
"Once short-term reserves and spending goals are covered and you have no consumer debt, then begin saving 15 percent of your income into retirement accounts."
When it comes to long-term investments, Ray writes, you should consider when your money is going to be spent.
"Money that you will likely spend over the next one to two years should be kept in a money market," he wrote. "Money that may be spent over the next three to seven years should be invested in bonds. And money that won't be spent for eight-plus years should be invested in stocks. With younger investors this approach means investing 100 percent of their long-term money in stocks/stock mutual funds."
I hope this helps, Elle. You're an excellent example of someone who is wisely developing good saving habits while young. I'm sure it will pay off for you in the future.
For more information about Ray, his book on baby boomers and some nifty financial calculators, go to networthadvice.com. Or, if you have a financial question for me, send it to firstname.lastname@example.org or the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110.