I just accepted an offer for a much higher paying job than I’ve ever had before. What can I do to start building wealth and using all this extra disposable income correctly?

Submitted by drewing12 t3_10q8aml in personalfinance

So today I got offered and accepted a job that pays 96k per year. My current and soon to be previous job pays me $65k per year - this is a pretty significant jump for me.

The new role is fully remote and has full benefits along with 401(k) match up to 5%. So i’ll be saving on commuting costs and feel I can finally start maxing my 401(k) contributions, but past that I don’t really know what else to do.

I am 26 year old guy, I am single with 2 cats, and I spend most of my free time in the gym, reading, or playing video games - so not the most expensive hobbies. I live just outside of a major city but cost of living isn’t too bad. I pay just over $1500 a month in rent for my apartment and the other costs come out to about $650 without including food/groceries. So i’ve lived extremely comfortably within my means with some disposable income at the $65k per year.

So now what should I do with all this extra disposable income i’ll have moving forward? Do I just buy some stocks? Or focus on creating a strong savings nest egg? I will essentially have an extra $2k a month after taxes from before and I have no idea what to do with it. Any advice is appreciated, thanks!

EDIT: Thanks for all the great advice and pointing me the the Wiki/prime directive.

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Law5_LOTG t1_j6ofm1z wrote

Look through the the Prime Directive and the Wiki and see if you have any questions. A lot of people recommend The Money Guys when it comes to wealth building videos/podcasts as well.

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micha8st t1_j6oidi0 wrote

Congratulations.

First of all, I'd encourage you to do your best to keep your lifestyle as-is...at least for the short term. By that I mean keep your expenses as if you're still making 65k

There are 4 things I'd recommend:

  • increase 401k dramatically. At least take the match, but if you put 22,500 into the 401k, that eats 2/3rds of the increase.
  • Save for a house / other expenses
  • Invest in a taxable investment account
  • invest in an IRA.

The only problem I see with so much going into an IRA or 401k is that it's money that in all likelyhood you will not be able to access for 30+ years. Plan for that, in any case. Both are intended for retirement, so assume that's a hard and fast rule.

A taxable investment account is a great option. Yeah, you lose some to taxes, but you also aren't stuck with the governments rules around your age. Plan to keep any money you put into a taxable investment account for 5 years.

I'm assuming you're "average" in that eventually you'd like a spouse and kids. Most people like having a house for raising kids. But that's not a necessity (I actually lived most of my childhood in apartments). My Aunt is still single and has no kids in her 80s, so married and kids isn't for everybody. She still owns her Condo but has effectively moved into the home she inherited from my Grandmother.

Even if you don't want that life and don't want a house, a savings fund for future spending is a good idea...

Now...how you decide to allocate between those 4 above is up to you!

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fraidycat t1_j6p80j4 wrote

There are ways to access retirement funds even if you retire early.

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micha8st t1_j6peg5w wrote

There are, today. If I remember correctly, OP-age + 30 came out to be 56. So yeah, might be able to retire at 55 and access the 401k without problem. Or, Congress could intervene and change the rules.

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Psycholit t1_j6okvc5 wrote

Congratulations on the new job!

Try to minimize lifestyle creep. You've been living comfortably at $65k, so make sure you barely even see the extra income. I would proactively increase your pre-tax retirement contributions through work, and also increase the percentage of your income that goes straight to savings rather than checkings. Keep the amount you're living on the same or almost the same.

Other people have linked or referenced the PF 'prime directive.' It's basically a flowchart that tells you the ideal way to do exactly what you're asking. Follow that.

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The_Blue_Tears t1_j6ohrs1 wrote

do you have any debts? If so, pay them off.

If not, congrats, you're on your way to building wealth! Check out the wiki for guides. There's also a massive flow chart to follow on the wiki: "Prime Directive: How to Handle $"

Do you have an emergency fund established already? If not, this is the time to start. If so, you can contribute to it to cover 6 months of expenses. This is also on that flowchart.

I would say you should look into getting a home in the future. You can start saving for a down-payment now.

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IntelligentHalf4367 t1_j6ol3z4 wrote

Congratulations, it has to feel good to get a $30k raise on top of what you are making now.

I agree with all the advice you've gotten, but as someone 10 years older than you with a wife and kids I would advise that you take some (not all) of that raise and set it aside for something special for you. I got a promotion last year with a healthy bonus so I got courtside tickets to a basketball game for me and my dad. Whatever it is, I would suggest being financially responsible with 80-90% of the bump up and doing something for you with the rest

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sciguyCO t1_j6ol668 wrote

>So now what should I do with all this extra disposable income i’ll have moving forward?

I'd say try out a new perspective: no income is "disposable", it just gets different jobs of varying importance. As a responsible adult, you get to set your own priorities. Though there are guidelines to help out.

The wiki has its Prime directive that gives a good roadmap. The top part of the flowchart there sets you up with a good financial foundation:

  • Set up a budget where you plan your outgoing money to be <= your incoming money. This will likely take some time to nail down, especially as things shift while you progress through the next steps.
  • As part of that budget, you allocate income to your mandatory expenses (rent, transportation, minimum debt payments)
  • Contribute enough to your employer's retirement plan (if any) to maximize the amount of match (if any) you can get from them.
  • Pay off high-interest debts (especially credit card balances) as fast as your income allows
  • Build an emergency fund to protect you against unexpected events
  • Save 15% of your income towards your eventual retirement.

Once you've nailed down those half-dozen things, you have a bit of flexibility on how to move forward. You can (within your budget) expand your lifestyle. You can save for a big future purchase (new car, first home). You can aim for early retirement. Or any mix of those that matches your goals / values.

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lucky_ducker t1_j6p3lgk wrote

Max the 401(k) and an IRA first.

The trick to saving and not succumbing to lifestyle creep is to automate saving. Open a taxable brokerage account and put part of your pay in it. My employer uses ADP and I have a Schwab brokerage account. Schwab gives your account a standard ABA routing number and account number, and I have it set up in my ADP portal to direct deposit a fixed amount into the brokerage account every payday, and the "remainder" deposited to my everyday bank account. It's amazing how quickly it adds up.

If you don't have a good emergency fund, use the brokerage to start building one. Invest in T-Bill ladders and a money market fund like SWVXX until you have six month's living expenses. After you have that much in your e-fund, start investing in a total market ETF like SCHB.

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dortress t1_j6p6alk wrote

  1. Immediately set your retirement contributions to the max to meet their match. Your retirement is a bill you need to pay for yourself every month, without fail.
  2. Set a auto deduct to put a portion of your new income into savings. Building savings is a bill you need to pay to yourself every month.
  3. set aside a reasonable amount for you to expand on spending for something you enjoy. You work to live, not live to work.
  4. If you have money left over at the end of the month, the question you should ask yourself is: can I put more toward retirement or savings, or, if you still have cc bills, throw it at them. Don't carry them.

Congrats and good luck!

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Upset-North-2211 t1_j6ojsb4 wrote

You should max out a Roth each year, $6,500. Increase your 401k deferrals to about 10%, and save the rest in a taxable brokerage account. At 26 your long term investments should be 100% stock, emergency fund in a savings account, and short term savings (house, new car, big vacation, etc) in either a HYSA or an index fund.

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ct-yankee t1_j6op36z wrote

Give the money guy podcast a listen, also look at the wiki here/prime directive. Absolutely max our your 401k contributions. First and foremost, fight the urge to raise your lifestyle/expenses to the new salary. Manage your budget and be deliberate. your future self will thank you.

  1. Have a few months of emergency savings/enough to cover your deductibles.
  2. Get rid of ANY debt you have in that $650 budget. (Car, Cards, Loans etc.)
  3. You can start setting aside more in the format you choose (brokerage, etc)

Lots of good info out there. Cheers and congratulations on the new gig!

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davepsilon t1_j6p4z4i wrote

The key to building wealth is to spend less than you make. That’s basically it. Simple, but hard.

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winchestertonfield t1_j6p8fka wrote

You like to read!

Book 1: Simple Path To wealth by JL Collins

Book 2: your money or your life by Vicki robbins

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Interesting-Dish8894 t1_j6oknnr wrote

In addition to what has been posted. The easiest or at least most logical way to build wealth is to reduce expenses so you have more to invest.

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Luxferro t1_j6ouszx wrote

Max your 401K, roth IRA, and HSA. Buy the whole market via index funds - check out bogleheads https://www.bogleheads.org/wiki/Three-fund_portfolio . You should be able to do all that without making any adjustments from your previous job. Keep doing that for 20+ years and you'll be set at retirement, and probably be able to retire early.

If index funds aren't your thing and you like to gamble, then you could always pick stocks too... But if you are clueless the first option is the best, and you could always add single stocks as you learn.

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