Dear Quentin,
I am 23 years old. I have about $10,000 in my savings. Due to a military accident, I was retired and currently get a pension of $2,000 a month for the rest of my life.
I just started last month working for the federal government making $73,000 a year. I contribute 5% toward my Thrift Savings Plan, and the government matches that.
I don’t own a house, and the only debt I have is a car loan of $30,000. My credit score is 650. I don’t have a spouse. I do have a 3-year-old daughter.
What can I do better to save more and become more financially stable?
Twentysomething Father
Dear Twentysomething,
Your car loan makes up almost half of your salary, so start with that. The sooner you reduce your income-debt ratio, the faster you will be able to save — and hopefully, at some point in the not-so-far-off future, buy a home. Do everything you can to pay off your loan and/or downsize to a less-expensive vehicle.
A Roth IRA is a good idea for someone in your situation who is in a low tax bracket, but expects to enter a higher tax bracket in the future. The reason is that with a Roth IRA, you make deposits with post-tax dollars and, therefore, withdraw the money tax-free when you reach retirement age.
The earlier you start with a 529 plan for your child’s education, the better. You can withdraw money from a 529 account without paying federal and state income taxes on that amount in most states, as long as the money goes toward qualified higher education expenses such as tuition, books and laptops.
Like 401(k) accounts, 529 accounts are defined-contribution plans tied to market performance. How the money is invested depends on your risk tolerance and the number of years before college. Your money can compound faster because you don’t pay taxes on investment income or capital gains.
To get your foot on the property ladder, consider a VA loan on a small house. You would first need to obtain a Certificate of Eligibility before applying for a mortgage, and you will need to submit a DD 214 form that shows your record of service. You can read more here about affordability considerations to keep in mind for a VA loan.
A 650 FICO credit score is considered “fair,” and you will need to work on that. It’s imperative that you continue to pay off your car loan and credit card — if you have one — on time every month. Try not to spend more than 30% of your credit-card limit, and pay it off in full every month. It’s a myth that carrying a small balance helps your cause.
You’re missing an emergency fund — typically six months of expenses — so put a little money aside for that every month, and figure out what you can do to cut your spending. If you have a two-bedroom apartment, for example, you may want to consider a roommate, even for a short-term let.
Max out your Thrift Savings Plan, if you can, and keep doing what you’re doing. Thank you for your service.
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