and more sacrifices are in order. In other words,
get used to packing your lunch.
Second, a young professional like Kelli should have
four months’ gross pay in the bank in case of emer
gency, Frick says. If Kelli loses her job, for example,
she’ll have this cash reserve to fall back on. Based on
buy a car or make a down payment on a house.
She’ll have to prioritize and moderate her spending
(dare we say the word budget?) to build this “disci
plined savings.” Adamic suggests investing in a
growth mutual fund, which is a somewhat riskier,
Kelli s salary, she should
work toward putting away
$6,750. This money
should be placed in low
risk and easily liquidated
investments, says Adamic.
A short-term treasury bill, a short-term CD, and a
money market are good cash reserve investments.
RETIREMENT READY After paying down her
high-interest debts and setting up an emergency
fund, Kelli needs to contribute to her employer’s
401 (k) plan as soon as she is eligible (this varies by
employer, but in Kelli’s case it’s one year). See for
yourself how lucrative this form of saving is: At age
25, if Kelli puts 10 percent of her annual salary and
bonus into a 401 (k) account, and if her account is
diversified in a range of investments (“no wimpy
bond funds,” Frick says), she’ll have $1.8 million
(around $770,000 in today’s dollars) when she
retires at age 65 (assuming a 10 percent annual
return). If she had started saving at age 22, just three
years earlier, she would have $950,000 in today’s
dollars—a difference of $180,000. “The idea is that
if you start early, you’re not going to have to save
that much to end up with a ton of money in retire
ment,” says Frick.
Federal law limits your 401(k) contribution to 15
percent of your salary, but individual employers
may set lower limits. When Kelli begins contributing
to her 401 (k), the money will be deducted automat
ically from her paycheck (before taxes), so there’s no
danger that she’ll spend it on clothes or entertain
ment. Frick adds that if Kelli’s employer has a
matching policy, it’s important for her to think of
that contribution as gravy. If your company does
not offer a 401 (k), you should open a Roth IRA,
which is also a tax-deferred investment. Unlike the
401 (k), you can only contribute up to $2,000 a year
and there is no matching benefit.
RISK AND return Once Kelli has paid off
her credit card, has a cash reserve for emergencies,
and is contributing the maximum to her 401 (k),
Frick advises that she start additional investments.
This is the money that Kelli will eventually use to
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“The idea is that if you start early you’re
not going to have to save that much to
end up with a ton of money in retirement.’
higher-return investment than Kelli’s cash reserve
account. She can safely assume the risk because she
won’t need the money for many years, and the
longer you can invest your money, the more risk
you can afford. Kelli should follow the stocks in her
growth fund and begin to learn more about risk and
return in the stock market. Once her disciplined
savings account gets fairly fat—around $10,000, says
Frick—Kelli can consider investing a small amount
of it (maybe 10 percent) in more-aggressive funds.
At this point in her financial life, Kelli can’t afford to
lose any money in casual online investing. Anyone
who does dabble in online stock trading should not
rely exclusively on those investments.
Kelli’s last priority should be paying down her
student loan. Even though it’s her single largest lia
bility, she should pay only the minimum amount
due each month. That’s because Kelli can earn a
higher rate of return on her investments (12 per
cent in the stock market, on average) than she is
-- ymmmwmm
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being charged on her loans (the current rate on
Stafford loans is less than 8 percent), thereby off
setting the money she has to pay on the loan.
Frick says every individual’s investment strategy
starts with setting priorities, and Kelli shouldn’t feel
overwhelmed by the options he has set out for her.
“At this point in Kelli’s life, as long as she’s putting
the max into her 401 (k) she’s going to be in very
good shape,” he says. His investment philosophy is
one we can all live with: “It’s got to be a balance. You
need to have fun, and you need to enjoy life.” ©
Senior Editor Laura Sweeney hasn’t balanced her
checkbook since she was in college.