How should a 23-year-old making $85k per year manage their finances?

Other personal finance
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How should a 23-year-old earning $85k annually manage their finances? I’m 23, making $85k/year in MA.

I recently graduated college and am working in Boston. After taxes, I bring in about $4,900 per month. I’m looking for ways to invest wisely and minimize my tax liabilities. Any suggestions?

Expenses:

  • Rent: $1,300
  • Utilities: $50
  • Food: $400
  • Renters insurance: $20
  • Spotify / Hosting: $10

This leaves me with approximately $3,100 leftover each month. I don’t own a car, and my phone bill is covered. I also have around $25k in savings.

What’s the best strategy to maximize this money?

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Contribute $18,000 annually to your 401k, $5,500 annually to a Roth IRA, and $3,350 annually to an HSA (if you have a qualifying health insurance plan). Any surplus should go into a savings account insured by FDIC or NCUA. Whenever you receive a raise or bonus, allocate half of the after-tax increase towards boosting your savings account deposit.

Once your savings exceed six times your monthly living expenses plus expected near-term expenditures (like a home down payment), consider opening a taxable investment account with Vanguard or Schwab. Redirect your monthly savings deposit into this new account for additional long-term investments.

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The maximum contribution for a Roth IRA this year is $6,500! However, you’re doing exceptionally well otherwise! I would suggest setting aside some money for an emergency fund and using a portion of your funds to treat yourself and enjoy life! Let’s go have some fun! Make the most of your financial resources while you’re young and enjoy the freedom of not having to worry about paying rent. :stuck_out_tongue:

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I recommend that you build an emergency fund equivalent to 3-6 months of living expenses in a high-yield savings account. Given your current monthly expenses (~$1,780), aim for an emergency fund between $5,340 and $10,680. You already have $25,000 in savings, so you are well-covered here.

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I advice that you contribute to your employer’s 401(k) plan, especially if there’s a match. Aim to max out the contribution limit ($20,500 for 2022) for tax-deferred growth.

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What I recommend is investing in a taxable brokerage account. Consider low-cost index funds or ETFs to diversify your investments. Popular choices include S&P 500 index funds (e.g., VOO, SPY) and total market index funds (e.g., VTI).

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I’m grateful, Esthley! It makes sense to follow your suggestion on creating an emergency fund. As you advise, I’ll try to budget for three to six months’ worth of costs. I feel more assured about my financial planning now that I have your advice.