Friday, August 04, 2006

Bad Idea?

Bad or good idea? Let's hear your opinions on this piece, from the Wall Street Journal Real Estate Journal:

Keep Your Financial Footing at 22 So You Can Buy That House at 32

As soon as you graduate and land a job, you are supposed to move quickly to build up an emergency reserve, buy a house, fund your employer's 401(k) plan and open an individual retirement account. Worthy goals? Certainly. Realistic? I don't think so.

My advice: If you're just out of school, don't worry too much about saving for retirement and buying a house -- and instead strive mightily to stay out of debt.

I am not saying all debt is bad, and I am not arguing that folks in their 20s, if they have the money, shouldn't purchase homes and fund 401(k)s.

But it strikes me that, for most of us, our initial working years are about learning to live within our means, pay the bills on time and stay out of financial trouble. How do you know you are succeeding? If you aren't piling up credit-card debt and taking on big auto loans, you're probably on the right track.
...
Don't expect to live like your parents. It took them 25 or 30 years in the work force to achieve their current standard of living. If you're eating out as often as they do or taking equally extravagant vacations, you're probably spending too much.

By leasing or borrowing, you could likely drive a car that's almost as fancy as your parents'. Moreover, the tab might seem pretty manageable, with a 48-month $20,000 auto loan costing maybe $480 a month.

Problem is, you will be setting yourself up for big insurance bills and you will be lavishing all this money on a depreciating asset. A better strategy: Buy the clunker -- and put the $480 a month toward a house down payment.
...
While carrying a credit-card balance is foolish, don't necessarily rush to pay off student loans. The interest rate may not be that steep, and the interest should be tax-deductible. Instead, if you have spare cash, put enough in your employer's retirement plan to get the full matching contribution and then earmark the rest for a house down payment.

Mooch off Mom and Dad. Moving home for a few years after college may crimp your lifestyle, but it should also bolster your bank balance.

33 Comments:

Blogger thatbigwindow said...

That is what I did, therefore I say "Good Idea"!

When I graduated college I messed up with the car buying situation. I should have bought the clunker, but I went for image. Oh well, live and learn. I own the car now at least :)

8/04/2006 06:47:00 AM  
Blogger grim said...

I have issues with the suggestion to not fund a 401k. Sure, every situation is different, and there may be cases where it is not appropriate, but in my book a broad statement like that is nothing but bad advice.

grim

8/04/2006 06:54:00 AM  
Anonymous Anonymous said...

I think it is outrageous the advice this article is giving regarding 401k plans. My advice is to max this out. This is money that is tax deferred and in many cases the employer matches at 50%. Where else can you get 50% return on your $, in a tax deferred vehicle. This is forced savings at its best. Before you decide where to invest this $, please do your homework. Make sure the investment is right for you. Remember you are already receiving 50% from your employer match. I don't think there is any argument for not funding your 401K. Pay yourself first before anyone else!!!!

BC Bob

8/04/2006 07:18:00 AM  
Blogger Richie said...

Free advice is what it is--- free advice.

Everyone should fund their 401k, at a minimum 5 percent, otherwise if your employer does any matching, match the companies maximum contribution.

A better strategy: Buy the clunker -- and put the $480 a month toward a house down payment.

Do NOT buy a 'clunker'. Just because a car is cheap, does not mean it will save you money over the long term. Maintaining a crappy car will cost you time, and lots of money. Buy a RELIABLE car. Their wording is very poor on this subject.

-R

8/04/2006 07:27:00 AM  
Anonymous Anonymous said...

That $480 a month will get him to a 20% down payment on a NJ house in only 20 short years! Of course by then the prices will higher and he'll have to save even more.

Today, Sisyphus would be a guy saving for a first time home purchase.

8/04/2006 07:32:00 AM  
Anonymous Anonymous said...

"I am not saying all debt is bad, and I am not arguing that folks in their 20s, if they have the money, shouldn't purchase homes and fund 401(k)s."

What poor advice. Not fund your 401k?
This time is vital to compound your money over years so you can have enough for retirement. Pensions are long gone. Better start early.

8/04/2006 07:47:00 AM  
Anonymous Anonymous said...

This guys advice is not the greatest. People should fund the 401(k) as soon as possible.

See, I warned you yesterday about the WSJ.

SAS

8/04/2006 07:56:00 AM  
Blogger njresident286 said...

i am 25, and I think what most people my age do not realize is that by this age, you should not be living in a 2700 square foot house, you should not have a BMW, and you should not be going on 3 vacations a year (I have friends who do all 3).

Renting was made for people who were saving to buy a house. Right now, things are out of whack, but to me it still makes sense to Rent.

I do agree living home is a good thing, only if you use that time to save A LOT of money, and fund your 401k. I do not think it is ok to live home with your parents and park a new Benz in the driveway and go shopping every weekend.

Also saying "folks in their 20's" is a huge statement. 22 and just out of college is way different from 29 and about to get married and be promoted. 2 different mentalities as well as much different earning power.

My main point of contention with anyone in my age group is student loans. I know teachers who borrowed 60k to get a master at NYU, when one from a state school would have provided the exact same benefit. I think that college tuition is another bubble, but one that may not pop because people who would not have gone to college 30 years ago go now instead of going into manual labor type jobs. and then since everyone has a college degree, to seperate from the pack more people are going to Grad school.

I think taking out these student loans for private colleges is more of a disadvantage than the advatage gained from the diploma. I think you would be better off at a good state school that is 1/3 of the price, working harder to get excellent grades, tryign hard for an internship or 2, and making it big through hard work and dedication and not depending on the reputation of the school that is on your diploma.

College loans put a HUGE burden on 20-somethings, and sometimes that burden lasts into your 30's if the loans are big enough.

8/04/2006 08:09:00 AM  
Blogger RentinginNJ said...

Not bad advice overall, but I disagree with respect to 401k contributions. If your employer offers matching contributions (mine matches 50%), then you contribute to your 401K. Early contributions are important because of the compounding effect. If you don’t start early, it may be really difficult to catch later.

For example, if you contribute 5% of a $50K salary at 22 ($2,500), your employer matches 50% (now $3,750) and you retire at 65 with 5% annual interest, you will have over $30k. If you wait until 35, you will need to contribute $4,700 to get the same $30k at retirement.

8/04/2006 08:11:00 AM  
Blogger thatbigwindow said...

I forgot to say, I disagree with the 401k too..I guess I shouldnt skim the article before posting

8/04/2006 08:23:00 AM  
Blogger grim said...

I do not think it is ok to live home with your parents and park a new Benz in the driveway and go shopping every weekend.

You've just described every sub-30 year old in my neighborhood. A neighbor down the street leased a new Infinity. Nice car, all the bells and whistles, the sport package with the fancy Brembo brakes, etc. A nice set of wheels for a freshman in college, at least she took a part time job to pay the lease. Too bad her parents got stuck with the college bill though.

grim

8/04/2006 08:23:00 AM  
Blogger njresident286 said...

Grim -

Here are the cars are my 5 good friends I have graduated with. all 5 live home with the parents, 1 makes 95k, 1 makes 65k, and the other three all under 50k.

1 Brand new Acura TL fully loaded with navigation and sat. radio

2) Brand new GMC Yukon Denali with after market 19" chrome rims, navigation, after market stereo and sat. radio

3) Brand new mustang

4) BMW M3 that is absolutly beautiful

5)Lexus is350


My one friend who in the last 3 years averaged 65k a year right out of college has less than 2000 dollars to his name in all of his bank accounts, not including retirement. he had to borrow money from his parents, who he lives with, to use as a down payment for the BMW. That's right, he has made close to 200k in 3 years with no housing bills and has NOTHING to show for it (well besides a quickly depreciating BMW and a lot of sunglasses)

8/04/2006 08:42:00 AM  
Blogger chaoticchild said...

njresident286,

Interesting point on tuition bubble. I am in my late 20s, I went to a state school.

I have a lot of friends who went to NYC and Columbia (or other expensive private schools). Some of them own 100k when they graduate, yet they have no advantage in the job market over my state school degree. I have actually done better most of them because I have worked hard for the last 7 years. And these folks just think they will get ahead because they have bigger degree.

Most of these folks are from modest mean families. They and their families live non-flashy lives. They don't spend more than they earn. When it comes college, everyone wants to "Gucci" out.

Most of these folks have these idea that once they get an expensive private college degree. They can entitled to upper middle class lives........

Most of these folks still live with their parents. And the guaranteed comfortable lives still are no where in sight.

CC

8/04/2006 09:12:00 AM  
Anonymous Jung said...

I just turned 28... and I still live with my parents, which really is not that unusual for 1.5 generation korean.

I made $6100 first year out of college, and now I'm up to $110k. My employer doesn't match 401K, but I still pour in over $14000/year. That is on top of $4000/year I put into RothIRA, which I may not even qualify for this year because of AGI limit.

I used to chip in $1500/month for my parent's mortgage, but they told me to stop since they're far more rich than me, and mortgage has been paid off. My car payment, gas insurance, meals, entertainment, phone, probably don't exceed $1000/month. (I do have a soft spot for eletronics, so I think I probably blow on avg. $3000/year on those :-x)

I'm happy to pay $30,000/year in income tax. I think it's a small price to pay for the privilage of living in this nice country. I'm guessing by the time I'm ready to buy a house in couple of years, I'll have $200k in savings.

So yes... there are many irresponsible young folks, but a lot of my friends (different races) are happily married and leading fiscally responsible lifestyle. (And we're all waiting for the housing market correction. lol)

8/04/2006 09:19:00 AM  
Anonymous Anonymous said...

{{{My one friend who in the last 3 years averaged 65k a year right out of college has less than 2000 dollars to his name in all of his bank accounts, not including retirement. he had to borrow money from his parents, who he lives with, to use as a down payment for the BMW. That's right, he has made close to 200k in 3 years with no housing bills and has NOTHING to show for it (well besides a quickly depreciating BMW and a lot of sunglasses)}}}


Seems like the average person under 35 these days. You see many like this in Queens & on Long Island. What you drive & what you wear is very important.

This is the 'gotta have it now' 'can't wait' generation. Would rather go into debt for $300 jeans & $800 Sunglasses rather than invest money.

And we all know that living with parents is not so they can save money to buy a home (unless parents give them the downpayment & make mortgage payments) but a way for them to live a lifestyle of 'shopping & clubbing'. Shopping for designer clothes and spending $1,000 on some overtrendy club in Manhattan every weekend.

At some point, it is best to leave the lifestyle of a college student and start functioning in the real world where life is more than clothes, cars, vacations & electronics.

8/04/2006 09:31:00 AM  
Anonymous Anonymous said...

{{Most of these folks are from modest mean families. They and their families live non-flashy lives. They don't spend more than they earn. When it comes college, everyone wants to "Gucci" out.

Most of these folks have these idea that once they get an expensive private college degree. They can entitled to upper middle class lives........}}

And you can't go anywhere without the designer wardrobe, the newest cell phone or ipod either.

They think that they are entitled to everything because they have that 'college degree' which has as much value as a high school dimploma did 20 years ago in the workplace. No one is impressed, but they expect $60,000 starting salaries for their first job without experience because Salary.com, the media & their friends told them so..

8/04/2006 09:34:00 AM  
Blogger chaoticchild said...

anon @ 10:34:10 AM said

And you can't go anywhere without the designer wardrobe, the newest cell phone or ipod either.
They think that they are entitled to everything because they have that 'college degree'


It is so true. Most of these folks are upset that everyone else is living in a nice apt in Manhatthan and going to these vacations.
It seems to me that they think a economics degree from Columbia or NYC entitled them to Sex & the City lifestyle.

I remember one of them was telling me that she had to charge $450 into her Credit card for a pair of sunglasses from Lord & Taylor. Because she had to have for the summer......

CC

8/04/2006 09:50:00 AM  
Anonymous Anonymous said...

{{{I remember one of them was telling me that she had to charge $450 into her Credit card for a pair of sunglasses from Lord & Taylor. Because she had to have for the summer......}}

Living at home is what enables this. If you have no housing expenses and can live rent free, then you really don't have many 'real world expenses'. In the suburbs, it seems like moving out of your parents home is a foreign concept.

At my last job in Westchester near White Plains, many were in their early - late 20's and most lived at home BUT they all had BMW's, SUV's, Saabs, & Audis. Probably making between $40,000 - $60,000. Always complained about the number of hours and the workload.

Why does everyone think they are entitled and don't need to prove themselves???

My coworker who complained about her too small of raise & her $40,000 year salary told me last Friday that she was going to Bloomingdales on her way home.

On Monday she said she bought three pairs of Jeans (Seven's) and a few tops and charged them on her bloomies credit card.

8/04/2006 09:55:00 AM  
Blogger grim said...

I have no problem with people buying nice things, whether it be sunglass, jeans, cars. Heck, even $100 steaks are OK in my book.

The foundation of our economy is the American consumer. Without the American consumer, this country could not exist.

Besides, it's really none of our business what people want to blow their money on. I just wish I owned the company selling those mega-margin must haves.

However, when consumerism is fed by irresponsible debt, it becomes everyone's issue, spenders and non-spenders alike.

I don't care what you do with your dollars, but when the government asks me for an extra one to support the irresponsibility of another, I begin to care.

grim

8/04/2006 10:02:00 AM  
Anonymous Anonymous said...

Grim: You and me, Buddy.

I've never taken a dime, never had more debt than needed to build credit, and never lived with anyone after Age 18. Did the State Univ. MBA, paid as I went with two jobs. SO I KNOW IT CAN BE DONE!

At 24, all I could afford was 3% into the (k), but I did it, and drove a 5-year-old Ford so that I could do it. The first time I had to drive one of the Partners home from work, he laughed all the way home to his mansion. The next day, I walked into his office, told him I wanted a 10% raise immediately, and he gave it to me. The next time I drove him home, still in the junker, he laughed even harder.

I will protest to the death if we have to bailout the mortgage industry.

This thread actually is giving me coffee heartburn.

Pat

8/04/2006 10:33:00 AM  
Anonymous Anonymous said...

{{{However, when consumerism is fed by irresponsible debt, it becomes everyone's issue, spenders and non-spenders alike.}}}

But that the whole problem today. Everyone but me is spending liek crazy on must have items. I have my GED and can make just as much as those people but even if I did I wouldn't spend on status items.

Gotta go, soup kitchen open soon and I want a good place on line.

8/04/2006 10:40:00 AM  
Anonymous Anonymous said...

A five year old car is hardly a junker! Its just hitting it's prime!

8/04/2006 10:41:00 AM  
Blogger Jiggles the Clown said...

I'm a 30-something, and I think the current generation of 20-somethings, aka Generation Y, could easily be renamed Generation G35 or Generation M3 because they just have to have exotic luxury cars.

Buying a clunker is a bad move - I chose that route and I probably broke even vs. a reliable newer used car or a new economy car. Car repair is a royal pain in the neck, and it will bite you at the worst possible moment.

Saving for a house has been pointless over the past few years because everyone is using Monopoly money to "pay" for them. Now that home prices are falling and interest rates rising, cash is king and saving is worth the effort. I've tried the best I can to avoid expensive liabilities, such as BMW loans, plasma tvs, and girlfriends (well, not by choice). I'm in a position now to do some serious saving and I'm looking forward to a 20% down payment on a condo in a couple of years.

8/04/2006 10:55:00 AM  
Anonymous Anonymous said...

I just stopped in to get a feel for the market.

I see jeans are still at $300.

8/04/2006 11:59:00 AM  
Anonymous Anonymous said...

Yeah, but wait until the 8th.

After that, we'll have to have $325 jeans Fridays.

8/04/2006 12:38:00 PM  
Anonymous Anonymous said...

Yee, I agree with the young fellow about the tuition bubble. He/she is right on. But, if I could add to that a little. Your tuition bubble is at the ivy leagues and some of the big name schools. There are many really great colleges or city colleges that are dirt cheap.

In Manhattan you have Columbia and NYU. But those people there are idiots, thats right idiots. Most people pay so much for that tuition that most (not all, so relax) will never make that back.

Those kids at those school think they are hot shit because they are there on mommy and daddys dime, and life is good.

Hell.....everyones life was good under the Greenspan era.

Things are about to change, and I think the fed can't control it.

Things will be very interesting. Its going to be a rough job market out there for new grads.

I would take a city college boy over Columbia anyday. Don't come to me with Columbia on your CV, cause it goes in the trash.

SAS

8/04/2006 01:11:00 PM  
Anonymous dreamtheaterr said...

SAS,

Can I come to you with my resume? I have a State Univ MBA! I could never afford NYU nor Columbia.

Besides, I come from India where I earned $300/month as an equity analyst! So affording $60K tuition is out of the question here.

So I came to the US in 2001 for a state uni MBA, did 18 credits a semester and worked 30 hrs on campus serving burgers and pizzas during the msemester. Worked 50 hours during summer and winter breaks. I graduated debt-free in 2 years, so yes it can be done. OK, its not a Columbia or NYU degree but I came out making almost six-figure salary. My wife (Russian) who I met in school in the US in 03 graduates with a Masters degree this winter debt-free, while raising our 7 month baby. We still save 20% of our one-income salary a year because we LIVE BELOW OUR MEANS. It's that simple.....spend less, save more, stop whining that life sucks coz you don't have an Infiniti or BMW.

Renting for now in Middlesex county...

8/04/2006 01:45:00 PM  
Anonymous dreamtheaterr said...

Sorry, I said "did 18 credits a semester and worked 30 hrs on campus serving burgers and pizzas during the msemester. Worked 50 hours during summer and winter breaks."

I meant 30 hrs/week and 50 hrs/week

8/04/2006 01:53:00 PM  
Anonymous Anonymous said...

Hell, if you are willing to travel overseas, and are driven by hunger to make money, have no fear, and willing to call bullshit when you see it. Not afraid of a fist fight and broken wine bottles in the gut at meetings and buisness deals then, I'd bring you aboard.

These are things they don't teach at Columbia or NYU. I know, they don't teach that anywhere. But only a certain element can handle this type of world, and that element can't be found at the ivy leagues.

;)

SAS

8/04/2006 02:19:00 PM  
Blogger chicagofinance said...

grim said...
I have issues with the suggestion to not fund a 401k. Sure, every situation is different, and there may be cases where it is not appropriate, but in my book a broad statement like that is nothing but bad advice.
grim
8/04/2006 07:54:22 AM

I've done a 180 on Clements. He's just an idiot who tries to push people's buttons. Ultimately, he chronically contradicts himself and says a lot of half-truths that could cause more harm than good. This article is a perfect example.

8/04/2006 04:39:00 PM  
Anonymous Anonymous said...

Funding a 401(k) straight out of college might not be a good idea. You're at a point in your life where your marginal tax rate is probably pretty low. Deferring taxes until retirement might hurt you more than it helps. If your employer matches, put in up to the matching point, then put the rest of your retirement savings in a Roth IRA.

8/04/2006 04:41:00 PM  
Blogger chicagofinance said...

In Manhattan you have Columbia and NYU. But those people there are idiots, thats right idiots. Most people pay so much for that tuition that most (not all, so relax) will never make that back.
=========================

SAS:

I find these comments really insulting.

Cornell BS 1990
Chicago MBA 1997

My mom contributed about $8,000 to my undergraduate education. I paid for the rest through scholarships, loans, and working two jobs at school and years of blood, sweat and tears.

It was worth every minute of it.

Please don't denegrate my classmates either. Most of them really busted their humps.

chicago

8/04/2006 04:52:00 PM  
Anonymous Anonymous said...

Shytown,

My man, you missed what I said in the parenthesis (****).

;)

SAS

8/04/2006 09:45:00 PM  

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