I’ve been waiting to write this article since I started this blog. It’s about my oldest daughter’s journey from college graduate to her first $50,000 saved. I’ll keep documenting her story because she’s in a completely different financial place that my wife and I. Plus, I’ve got another daughter graduating college in May 2020 and it’s nice to document their stories for others to follow.
“The first $100,000 is a bitch.”
Charlie Munger at a Berkshire Hathaway shareholder meeting decades ago
You hear many say the first $100,000 is the toughest but that’s just a catchy number for the media to hear. When you are young (or older and playing catch-up), every $1,000 or $10,000 is tough. Compounding or investment returns don’t mean much in the early stages … it’s all about your savings rate. The amount you save is the determining factor to how quickly you get to $50,000 or $100,000.
My oldest daughter will be 25-years old in November and she’s been working for 2 years. She got her first job out of college making $43,500 in September 2017. A year later, a recruiter messaged her on LinkedIn and she got into her ideal career making $55,000 per year. That’s better money than I thought she’d be making with a criminal justice degree. She is doing great!
Total = $50,665
She’s reached her first $50,000 25 months after her first job. Here’s a detailed breakdown (as of 10/26/19):
- Short-term emergency fund = $1,661
- Long-term emergency fund = $10,374
- Regular IRA (rollover from Job 1) = $6,928
- Roth IRA (2 full contributions + rollover from Job 1) = $18,170
- Regular 401k (current job) = $5,548
- Roth 401k (current job) = $7,984
In 2 years, a young single female averaging a $49,000 salary per year accumulated $50,665. I couldn’t be prouder of how she manages her money and she will be in a great financial situation later in life. And before you ask … there was no magic, her lifestyle has been good, she spends too much on her cat, and she’s planning a trip to Europe in 2021. She’s not starving or living a deprived lifestyle.
Fast Start: The First 12 months
My wife and I are believers to get our kids off to great starts and we think the first 12 months are critical. Not all parents share our belief but to each his/her own. I’m a firm believer in “pay me now or pay me later.” I don’t want boomerang kids coming back into the house while we are retired. So we thought a few tactics would help both my daughter and us.
Here’s some things WE did for our daughter’s first 12 months:
- Housing – My daughter got a job about 10 minutes from our house so we suggested she live at home and save. She didn’t have to pay us rent, which saved her about $1,200 per month in her first year for shelter. This was tough on us all but she saved so much money it was worth it. The expectation was that she save nearly all her paycheck. If she didn’t save then we were prepared to ask her to get her own apartment.
- Food – As part of living at home in the first year, we paid her grocery bill too (including if we ate out as a family). This probably saved her $300-$400 per month. She paid anything outside the home if she was by herself.
- Medical/Dental – We have a family plan through my work and we are keeping her on it until she turns 26 years old. We pay those premiums but she pays her own out of pocket healthcare expenses.
- Transportation – She drove our vehicle to work in the first year or I’d drop her off on my way to work. In year two, she got a new job on the other side of town. She got her own apartment and we bought her a 18 year old vehicle for $1,900. We’ll likely pass down our older vehicles to the kids once we’ve gotten our 10+ years out of them.
- No Debt – She graduated from college with no debt and still has no debt (though I consider rent a debt).
Within the first year, she saved about $30,000. In the second year of working, she got a new job across town and move into an apartment close to work. We’re glad she’s living on her own but we are also glad she has a solid foundation to her finances. She continued saving once she moved out and that will create some exciting circumstances for her later in life. This is a young person wanting to control her own destiny – well done!
My youngest daughter will likely live out of town so she won’t be living at home. This just means we’ll have to make some changes to the plan to get her off to a great start too. Either way, if you want to give your kid a head-start with their finances these items really helped our oldest daughter.
So How’d She Get There?
In April 2019 just after the NFL Draft, I put together an article titled You Are On The (Retirement) Clock. It listed the Top 10 things to do to get your financial self on track. Based on individual circumstances, the list allowed for some wiggle room in the order of your actions. So let’s see how’s she’s doing against the list:
- (NO) Tracking expenses – I’ve tried to get her to do this but she’s not interested at this point in her life. She’s got a pretty good understanding of where her money is going and she doesn’t have a complicated financial life. For now, I can live with this but at some point this will need to change. Most importantly, she is living/spending beneath her means.
- (YES) Short-term emergency fund – She has $1,661 for short-term unexpected expenses but I know her goal is in the $2,000 range.
- (YES) Company Match In Tax Advantaged 401(k) – She saves 7% of her pre-tax income, which is more than enough to receive the company match.
- (YES) Long-term emergency fund – She has over $10,000 but I’d like to see it at around $20,000. Because she doesn’t track expenses, I’m guessing the $10,000 gives her about 4 months worth of expenses. Everybody’s situation is different and this could change for her in the future.
- (YES) Eliminate Credit Card Debt – She has no credit card debt and uses her card to gain points for her travel.
- (YES) Tax Advantaged 401(k) – She currently contributes 7% to regular 401(k) and 13% to the Roth 401(k) at work.
- (NO) Taxable Account – She’s not ready to contribute to her taxable account yet. I’m thinking in 2-3 years we can start this process. I’d like to get her 401(k) to 25% contribution (or maxed out) and then everything past that can be considered for a taxable account.
- (YES) Debt Free – Other then monthly rent, she has no debt and drives an 18 year old car.
- (YES) Tax Advantaged Roth IRA (or Roth 401k) – She contributed for two years to her Roth IRA but has recently been contributing 13% of her paycheck to her Roth 401(k) at work instead.
- (NO) Fee-Only Financial Planner – She has me guiding her for now but at some point in her life she’ll want to connect with a fee-only financial planner.
So she has achieved 7 of 10 top actions to take from my list. For a 24-year old single person she’s off to a great start.
Her Path to $100,000
I suspect that if she does nothing different in the next 5 years, she’ll probably have accumulated about $125,000 in total. But given how important the early years are to benefiting from the impact of compounding, she could make some tweaks. For example:
- Increase her 401(k) to a 25% contribution (or meet the 2020 maximum $19,500 contribution limit)
- Double her long-term emergency (from $10,000 to about $20,000)
- Start saving for a down payment on a home
- Start saving in a taxable account if she has the capacity and after she contributes 25% to her 401(k) or has reached the maximum limit
I’m just happy that she get’s it. She gets that living within your means is a must. She knows that cars are a wealth destroyer. Her understanding that debt is bad unless you are using it to buy an asset (i.e. real estate) is significant. Honestly, I’m very proud of how she handles her finances. Assuming she stays on the right path, she will retire before most people her age.
Becoming Wealthy
To become wealthy, nearly everyone starts with the first $50,000. Some take baby steps, some take giant leaps (i.e. a financial windfall), and most have found a way to live within their means. But the first $50,000 will eventually lead you to something wonderful if you keep persistently saving.
Sure, having a high income early (or later) in life is great and will get you there quicker. But most people just keep saving and rarely do you know who is wealthy and who is not. BMW’s, expensive clothes, large homes with great furniture make someone look wealthy but usually they are not. They probably are making a good income or using lots of debt but they might not be wealthy.
As a 25 year old, I was in the banking industry. An executive gave me a promotion and sent me to a branch in a crappy part of town. The branch had the lowest trust department and investment referral rate of any branch in the entire state. What I found out quickly was there was money in the area but it wasn’t “fancy” money. It was money from hard working, average income, heavy saving, and low debt residents.
Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.
The Millionaire Next Door
I also found that many had mortgage-free homes and had been living at the same house for decades. Within one year, I turned that branch into the highest trust department and investment referral branch (out of about 250 branches) in the state. The executives were amazed and thought I had the magic touch. It wasn’t magic, the executives just didn’t understand how most wealth was being built in that area. They needed to change their profile.
I learned more about the people and how they lived. They had been ignored by the bank because they didn’t fit the profile of what wealthy clients look like. Most people have to build wealth the old fashioned way – slowly and living within their means.
Summary
My oldest daughter is probably 15 years ahead of the pace I set when I accumulated my first $50,000. Starting early is critical. Her compounding will be much greater than I will ever reach because she’s got her first $50,000 before she turns 25 years old.
If she doesn’t add one more penny to her $50,000 and leaves that money alone until she turns 65, it’ll be worth about $750,000. If someone had $50,000 by 45 years old and didn’t touch the money for 20 years it would only be worth about $200,000. That’s the power of starting early and letting time do it’s compounding magic.
Having an emergency fund will also keep you from going into debt when times are bad. And there will be bad times … that’s just how life seems to work. But she’s setting herself up to handle those tough times. Like I said, I’m proud of the decisions she’s making with her money.
Helping her get a solid start helps her and us. Her financial success means we won’t have a boomerang kid. She’s setting a great example for her younger sister, who graduates in May 2020 and will start her own financial journey.
Thanks for reading!
Mr. TLR