What should my finances look like at 18?

Question

So, I'm 18, making 50k+ a year. Living at home for now, and thankfully that's not costing me anything. Not going back to school next year, and I have no loans to pay off. Right now, I kinda suck at keeping a budget, and my mindset is kinda "I got the money, why not?" - I'm trying hard to correct that.

Anyways, one of my hobbies is making my truck nice and beautiful. I've probably sunk about 10k into it so far. No regrets, it makes me happy. In the upcoming weeks though, it's going to potentially start costing a lot more... and I'm starting to think about enjoyment now vs my future. Not a lot of 18 year olds are even in the situation to have to make the decision. Most will just say live it up now, start life at 24 or something.

I want to move out soon, with my income and the economy how it is, I want to buy a house. I don't have the credit yet, so I mean, spending all this money will build up my credit.. which could help, right? How much money should I be saving? Where should I be putting it? Should I stop spending my money on things I enjoy and just become an old man like right now?

Any advice would really be appreciated!

Answer 1

Assume you will need to retire with a few million in the bank to maintain an average lifestyle. I had an analysis done for me (at 33) that shows my family, to keep it up lifestyle will need to have 3.4MM in the bank so in retirement I can draw down enough cash.

This number reflects inflation.

Now that you are 18, if you make consistent but small savings you will achieve that financial stability. Try to make it automatic so you aren't tempted to spend.

1. Carry no debt, but feel free to use credit to create a good credit report. Buy some of your truck parts on a credit card and pay it off each month.
2. Have an emergency fund. This can be low since you are young, but keep it around 3 to 6 months of your monthly expenses. Keep it in cash in a credit union or online bank account. Increase the fund as your expenses grow.
3. Feed your matching 401K accounts up to the match. (when you are working)
4. Feed your Roth investments if you are eligible. (when you are working)
5. If you aren't working, then feed a low cost investment account at Vanguard or similar in an index fund or a target retirement fund. Put $100/month in. More if you like.
6. Spend your money, enjoy your youth, don't sweat your investments, just keep feeding them.
7. Save money for a house. I think (in my opinion) 18 is way too young to buy a house because you shouldn't be tied down.

There is more you can do but since you have such an early start, you can do less than most people and still have plenty.

Even thought it is great you are thinking about it, don't forget to be young, move around lots and have fun. Just pay yourself first and have fun second.

Also, thank whoever guided you to this point. If you did it all on your own, be proud.

Answer 2

To buy a house, you need:

At least 2 years tax returns (shows a steady income history; even if you're making 50k right now, you probably weren't when you were 16, and you might not be when you're 20; as they say, easy come, easy go).

A 20% down payment. These days, that easily means writing a $50k check. You make $50k a year, great, but try this math: how long will it take you to save 100% of your annual salary? If you're saving 15% of your income (which puts you above many Americans), it'll still take 7 years. So no house for you for 7 years.

While your attitude of "I've got the money, so why not" is certainly acceptable, the reality is that you don't have a lot of financial experience yet. There could easily be lean times ahead when you aren't making much (many people since 2008 have gone 18 months or more without any income at all).

Save as much money as possible. Once you get $10k in a liquid savings account, speak to a CPA or an investment advisor at your local bank to set up tax deferred accounts such as an IRA. And don't wait to start investing; starting now versus waiting until you're 25 could mean a 100% difference in your net worth at any given time (that's not just a random number, either; an additional 7 years compounding time could literally mean another doubling of your worth).

Answer 3

If you're making big money at 18, you should be saving every penny you can in tax-advantaged retirement accounts. (If your employer offers it, see if you can do a Roth 401(k), as odds are good you'll be in a higher tax bracket at retirement than you are now and you will benefit from the Roth structure. Otherwise, use a regular 401(k). IRAs are also an option, but you can put more money into a 401(k) than you can into an IRA.) If you do this for a decade or two while you're young, you'll be very well set on the road to retirement. Moreover, since you think "I've got the money, why not?" this will actually keep the money from you so you can do a better job of avoiding that question.

Your next concern will be post-tax money. You're going to be splitting this between three basic sorts of places: just plain spending it, saving/investing it in bank accounts and stock markets, or purchasing some other form of capital which will save you money or provide you with some useful capability that's worth money (e.g. owning a condo/house will help you save on rent - and you don't have to pay income taxes on that savings!)

18 is generally a little young to be setting down and buying a house, though, so you should probably look at saving money for a while instead. Open an account at Vanguard or a similar institution and buy some simple index funds. (The index funds have lower turnover, which is probably better for your unsheltered accounts, and you don't need to spend a bunch of money on mutual fund expense ratios, or spend a lot of time making a second career out of stock-picking). If you save a lot of your money for retirement now, you won't have to save as much later, and will have more income to spend on a house, so it'll all work out.

Whatever you do, you shouldn't blow a bunch of money on a really fancy new car. You might consider a pretty-nice slightly-used car, but the first year of car ownership is distressingly close to just throwing your money away, and fancy cars only make it that much worse.

You should also try to have some fun and interesting experiences while you're still young. It's okay to spend some money on them. Don't waste money flying first-class or spend tooo much money dining out, but fun/interesting/different experiences will serve you well throughout your life. (By contrast, routine luxury may not be worth it.)

Answer 4

The golden rule is "Pay yourself first."

This means that you should have some form of savings plan set up, preferably a monthly automatic withdrawal that comes out the day after your pay is deposited. 10% is a reasonable number to start with.

You are in a wonderful situation because you are thinking about this 10-15 years before most of us do. Use this to your advantage.

You are also in a good situation if you can defer the purchase of the house (assuming prices don't rise drastically in the next few years -- which they might.) If your home situation is acceptable, then sit down with the parents and present a plan. Something along the lines of:

I'd like to move out and start my life. However, it would be advantageous to stay here for a few years to build up a down payment and reserve. I'm happy to help out with expenses, but do need a couple years of rent-free support to get started.

Then go into monk mode for one year. It's doable, and you can save a lot of cash.

Then you're on the road to freedom.

Answer 5

I was in a similar situation at age 18/19, but not making quite as much money. I maxed out an IRA and bought savings bonds, although rates were decent then.

I did flitter away about half of what I earned, which in retrospect was probably dumb. But I had a good time!