Am I overspending?
I am 22 years old. I started a new job about six months ago. I totaled up my deposits for a total of $26,402 from Jun 22 - Dec 22. I gave $5,590 to pay off federal student loans and $362 for a state loan, leaving me with $20,449. However, to date I have $11,104 in savings. I also have a credit card bill of $1,372.
This is my first full time job and I do pay things like gas, bills, groceries, and other payments, however, I am unsure if I am over spending in other departments (shopping, miscellaneous expenditures). I do like to go out to eat with friends so I think that could be an issue. I live with family so I do not have rent to pay.
How much should I have in savings to be financially sound? Do you think I am overspending and how can I fix my problem now before this affects me in the future?
Let me start by congratulating you on your ability and initiative in paying down your student debt! In addition to paying down your debt, you have a healthy savings account which isn't something a lot of recent college graduates can say. The best way to figure out how much you're spending is to track your spending with a budget. I like to do this using the mint.com app which can be linked to your credit card, bank account, etc. You can track your expenses on a monthly basis and tailor your budget into categories until you find consistency in your spending. Once you find a number that seems to be consistent I would recommend establishing an emergency fund that is 6 times your monthly expenses (you may already have this in your savings) since you only have one income source. As for your credit card bill, it is perfectly fine to charge expenses on your credit card, so long as you pay the balance off at or before each due date. I would not recommend carrying a balance forward on your credit card as the average interest rate is ~17%! All in all, continue to pay down your student debt while you don't have a rent/mortgage payment, pay off any credit card balance in full, track your spending to establish a budget and invest the excess cash into a retirement plan like a Roth IRA to start saving for your future retirement.
P.S. If your employer sponsors a 401(k) or other qualified retirement plan, enroll as soon as you can!
It depends of what your goals are. You shouldn't compare to others as you might want something that out of the norm. Many young adults these days are trying to find financial freedom early in life. Many of these people are trying to save more than half of their take home pay, but if you have a normal goal to be able to work until 65 and live a comfortable life while you're working and in retirement, here's a few of the metrics that you can follow:
- You should try to save 15% of your before-tax income. Use different types of accounts (401k, Roth, Individual) to get different benefits. If you are diversified that way, you should be able to have money for whatever life throws at you.
- Try to maintain to housing expenses to no more than 25% of your net income. This includes rent or mortgage payment, insurance on your home and real estate taxes. This should make sure you are not house poor.
- Maintain your committed expenses below a max of 60% of your net income (And that is the ultimate max!!!) These expenses include your housing expenses and any other bills you get on a regular basis. Your goal should be to lower this amount as you pay down debt and earn more.
- Lastly, you should have about 20% of your net income to spend on your lifestyle expenses. This is anything that makes your life more enjoyable (restaurant, clothes, trips, entertainment...) As your other expenses are lowered compared to your net income and you are staying on track to reach your investment goals, you should be able to spend more of your income on lifestyle expenses. Which is what it should be about.
You should be proud of yourself! At the age of 22, you are light years ahead of most people your age. If you put together a budget plan like I just demonstrated for you, you will be successful at controlling your money. You will make money a key to more freedom instead of having it become a source of stress in your life.
I hope this helps.
If you are adding to your savings and paying off your credit card every month, you are not overspending. The average American doesn't even have $1,000 in savings, you have $11k. This is very good! It appears your living expenses are quite low since you do not pay rent and have very little debt. A good rule of thumb is to have at least 3-6 months of living expenses saved in case of an emergency or if you lose your job. From what you've provided, this seems to be the case. I would focus more on automating your savings habits. You can do this by first tallying your regular average monthly expenses as you listed above such as gas, groceries, etc., then determine how much you have left over after that each month. Take half of that leftover amount and have that automatically going into your savings account or something like a Roth IRA (up to $5500/yr limit) every month. The other half leftover, you can spend however you please. Here's a Net Income/Expense Worksheet you can use to help you do this. Congrats on having some solid savings already at age 22!! Best of luck to you :)
The best way of knowing if you’re overspending is to set up a detailed budget. Savings goals and immediate obligations are often at odds with one another - yes, you need to have money for retirement, but you also need to eat food now. Knowing whether you should cut back on dining out depends on how much money you have left over after you’ve budgeted for saving and necessary expenses.
Everyone has their own system for tracking money and staying organized, so do what works for you. If you don’t already have a method, look into an online budgeting tool that will help you get organized. YNAB, Mint, Quicken and other companies can help you establish a budget and prioritize your dollars so you don’t spend too frivolously. This will make it much easier to ensure you cover immediate expenses, maintain your emergency fund and avoid going into debt.
With $11,000 in savings, it doesn’t seem like you’re overspending. If you can keep growing your savings and investment accounts while paying down your credit card each month, you’ll be in great shape. Once you’ve spent a little time working on a budget and allocating your funds appropriately, I think you’ll get a much better idea of whether or not you need to adjust your spending habits.
Dear "Am I Overspending",
Bravo on having your first full time job!
Bravo on your discipline to execute a plan to pay off debt.
Execute this disciplined path long term to pay off student loans and credit card debt.
You are fortunate to have a family willing to allow you to stay at home and not pay rent. Utilize this time wisely to grow a separate fund allowing you to purchase a first home or condo with a sizable down payment.
Think about life and your investments as a tree. Grow the branches strong and secure. Therefore take time to understand and learn about investment basics. Research ways to automate savings so you know whether you are over spending. There are amazing programs out there designed for millennials to provide you a road map to automate your finances. ("Lets Automate Your Money") by David Shephard. A fabulous web site empowerment course teaching automation of finances, growing awareness, become financially independent.
Utilize APP (mint.com) to organize and balance your finances. There is great accountability with awareness. Mint provides the awareness if you include everything both debt and income not leaving anything out.
Stay disciplined- stay focused- stay reality based. Enjoy the ride with diligence and discipline. It is you controlling the ride not a bill collector. Empower yourself to be financially independent as soon as possible.
Dominant behavior patterns training you to think before spending and to pay debt prior to accumulating other debt will pay off for you towards financial independence. At your age you are ahead of most (20 year olds).
Further your education, seek strategies to invest for the long term, increase your income, position yourself for life as a leader/entrepreneur of your money and finances. Financial professionals will provide you with financial plans tailored for your needs for you to execute and automate. If there is a 401K or 403B plan at work, start immediately putting away up to what is allowed annually and matching if possible. Find out if there is a pension at your employment. Create other diverse savings strategies- open a separate investment account, IRA, with TD Ameritrade or Fidelity. Purchase real estate and or land to create yet additional diverse strategies to be profitable to achieve financial success long term. Start a small business, be entrepreneurial.
All of this takes time- at 20 - you have precious time to learn and grow- empower yourself now!
Find a Financial Advisor you trust and can work with you and your situation- allow yourself to be mentored by someone willing to share information about money management. They can advise how much you should have in an emergency fund, they can provide you with projections in ten years, twenty years if you stay the course estimating present earnings potential from your money and your present income stream. Enjoy!
Please contact me should you wish for assistance now.
Again, Bravo and all the very best to you!
Jan Attard, MBA, RIA, CMT
J. Oliver Maxwell, LLC