We sometimes get questions about how other people may be using Ellevest to reach their goals — so we’re sharing some stories to help bring its power to life. Meet “Sonia.” *
Sonia is a 24-year-old college grad — and she’s already the boss of her money. She’s a junior project coordinator making $45,000 a year. Right now, she lives with two roommates. She wants to focus on keeping her rent low, avoiding credit card debt (which she’s doing — go, Sonia!), and paying off her student loans.
So … what are her next steps? Should she be investing if she still has student loans?
Sonia’s goal: Nail the basics
She needs to build up an emergency fund, because life happens. Roommates move out without giving notice. Roommates move their obnoxious boyfriend in, and then you have to move. Roommates just can’t make the rent this month, and they’re really very sorry. At Ellevest, we recommend saving up 3-6 months’ of take-home pay in cash to have as a cushion.
Sonia also knows she needs to start saving for retirement because investing a dollar in your 20s can be worth more (in some cases, a lot more) than a dollar invested later on in life. That’s due to the magic of compound returns, aka “the most powerful force in the universe.” Compounding means that you’re earning money on top of the money you earn in market returns. (And “returns” are what they sound like — the money that comes back to you from market gains or losses.)
Sonia’s not as worried about the 50/30/20 rule, where 50% of her paycheck goes to needs (groceries, rent, utilities), 30% goes to fun, and 20% goes to savings and investments. She’s willing to hang out and cook meals at home with her roommates (who really are very nice people, even if they sometimes flake on the rent) for the next year, because she knows how important it is to get started on her retirement and build that cushion.
Sonia’s playbook: Build up fast
Save 21% of her take-home pay — $785.62 a month — in an Emergency Fund goal for a year until she’s got three months of take-home pay squirreled away. Her goal amount = $9,426. This goal is held in cash, because she needs to be able to get it quickly if she needs it.
Contribute 8% of her pre-tax salary — $300 a month — to her company’s 401(k). Her company matches up to 2%, so she’s really getting 10% (yay!).
She invests her 401(k) in a low-cost diversified portfolio that begins at 96% equity and becomes more conservative as she reaches retirement. On this track, Ellevest estimates she’ll have an annual income of $107,800 a year when she retires (but Sonia intends to keep bumping up contributions until she’s able to max out down the line).
Once she reaches her emergency fund goal, she plans to reallocate some of her salary back to fun — fun is important. But she’s also planning to increase her 401(k) contributions and start working on other goals. (She’s a go-getter, and is already thinking on when she can ditch those roommates and buy her dream house.)
Note: Sonia’s not real. We made her up so we can show you the kind of decisions people can make toward their goals. In other words, this is a hypothetical client scenario that doesn’t represent any Ellevest client, and it’s by no means individually tailored investment advice. Her roommates aren’t real, either, so don’t judge them for flaking on her.
See the Disclosures section below for how we calculated how much the hypothetical Sonia would hypothetically need to hit her hypothetical goals.
© 2018 Ellevest, Inc. All Rights Reserved.
We assume Sonia contributes 21% of her pre-tax salary monthly to her emergency fund, which is held in FDIC cash. We assume three months of her after-tax salary equals $9,426, at an approximately 19% tax rate. Her monthly 401(k) contribution reflects 8% of her pre-tax salary. We calculate needs and fun as the remainder of her monthly salary after she has contributed to her 401(k) and emergency fund.
We assume her 401(k) is invested in a low-cost diversified portfolio that begins at 96% equity and becomes more conservative as she reaches retirement. We used a Monte Carlo simulation — a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results shown reflect a 70% likelihood of achieving a retirement income amount of $107,800 per year, or better, and include the impact of taxes and inflation.
The projections of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
All opinions and views expressed by Ellevest are current as of the date of this publication, for informational purposes only, and do not constitute or imply an endorsement of any third-party’s products or services.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.