You’re Grown Up: Now What?

The average age of new hires in government is 31. Depending on how many birthdays you’ve celebrated, that is either very young or pretty much over-the-hill.

Regardless of how old you are, most experts say you should have a plan. And this is especially true for younger feds who, if they invest in the TSP, could have a million dollar account balance when they retire.

Today we asked financial planner Rebecca Schreiber to sound off. She specializes in counseling younger people.

Here’s what she says:

Buy Yourself Time with a Financial Holding Pattern

The effort is finally paying off – you’ve found a comfortable apartment, an entertaining group of friends and a job that may actually last longer than a year. You’ve got regular hangouts, a favorite grocery store and you might even get a pet. Don’t look now but you’ve created a life. Things feel kind of stable and you’ve started thinking year-to-year instead of month-to-month.

What do you do now?

Many people don’t know what they’re going to want one, three, or five years from now but they know they’re going to want something. How do you plan for the future when you can’t visualize it? Prepare for possibilities by creating a simple, manageable group of accounts that can meet any plan you come up with. Developing your own financial holding pattern gives yourself time to circle your choices before landing at a decision. This pattern requires only four accounts and can be managed on one hour per month:

1. A checking account with direct deposit and free online bill-pay for short-term money. This account is going to get the most action – paychecks coming in, payments going out. Check this account once a week. Any money you expect to use within the next six months should be here. The purpose of this account is to provide cash flow so choose your bank by convenience and website usability, not interest rates on the checking accounts.
2. A high-yield checking account or money market account for emergency funds and upcoming purchases. This account will hold your emergency money and any cash you expect to spend within the next six to 18 months. Since this money doesn’t need to be terribly convenient (unlike ATM withdrawals from your checking account) feel free to use an online bank or any FDIC-insured institution whose website is easy to use.
3. A Roth IRA for long-term purchases, sabbaticals and retirement. Roth IRAs are ideal for housing money you don’t intend to use within the next 1-5 years and help keep your savings away from the black hole that is your checking account. The nice perk to using a Roth IRA is that you don’t pay taxes on the interest you earn. For example, if you put money for that new couch you’d like to buy in a year into your Roth IRA and then later pull out your contributions, the interest that you earned can sit, grow, and later be used tax-free for a home or retirement. Just make sure you stay within the annual limits ($5,000 for those under 50, $6,000 for those ages 50 and older) and only withdraw your contributions. Even if you don’t have any definite plans for an upcoming purchase open the account and start the clock. Many key perks to the Roth IRA require the account to be open five years.
4. A 401(k), 403(b), TSP account or other retirement vehicle for long-long-term savings. If your employer offers a match and you’re confident you’ll be there long enough to vest, go for the full match. If you’re just starting to save for retirement then contribute as much as you can to the TSP. For those who have a few years of retirement savings behind them, consider sharing your retirement dollars between your pre-tax account (401(k) or TSP) and a post-tax account (i.e. Roth IRA or brokerage account).

Savings with no place to go tends to disappear. Now you know where to stash your cash. Looking to buy a car in the next few years? Put the money in your Roth IRA. Saved some emergency cash? Send it to your money market account. Received a travel reimbursement you need to pay off your credit card? Deposit it in your checking account. Follow this plan and you’re emergency fund won’t end up invested in stocks or your retirement money in a savings account. Best yet, there are only four accounts to keep track of. Stick to the holding pattern and you’ll have the money to move forward when you finally decide where you want to go. Rebecca Schreiber

Nearly Useless Factoid

Alfred Hitchcock didn’t have a belly button. Sure, he was born with one, but it was reportedly sewn up and over after surgeries.

To reach me: mcausey@federalnewsradio.com

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