The Best Money Move You Can Make With An Extra $500 A Month

At the end of Tuesday’s Juice on Gen Z and millennial struggles, we said: 

If you’re lucky enough to be making enough to pay high rent, drive a new car and still go out to eat at pricey restaurants and bars, you probably can — quickly and painlessly — find a couple to a few hundred bucks a month to sock away.

Lucky enough, because it’s not easy. 

Let’s say you’re a millennial or member of Gen Z living in Los Angeles. The typical one-bedroom there goes for $2,400, which is, somewhat surprisingly, not that much higher than the national median of roughly $1,966 for all unit sizes. Comparisons aside, it takes an annual income of $96,000, or $8,000 a month, to spend no more than 30% of your income on rent. 

But that’s a before-tax personal finance standard. 

Take away taxes and, in California, you’re taking home roughly $5,800 a month. Deduct the $2,400 rent from that and you’re left with $3,400. Go modest with your car and put the total monthly cost of ownership at $600 and you’re left with $2,800. We’ll conservatively put student and other debt at $300 a month, leaving you with $2,500 left over. 

Of course, you need groceries. According to a recent study by HelpAdvisor, the average household in California spends about $298 a week on groceries. This actually isn’t much higher than the national average of $270. Anyhow, we’ll say a single person comes in at half of average, bringing their weekly bill to $150 for food and sundries. That’s $600 a month, dropping your monthly surplus to $1,900. 

You probably have other expenses. And if millennials and Generation Z like going to restaurants and bars and drinking Starbucks coffee everyday as much as the media says they do, you can see how “hard” it might be to have cash left over at the end of the month. 

We put hard in quotes because, while we do understand the struggle for young (and old!) people, with some sound choices and a bit of discipline, a person making just shy of 100 grand can find money to save and invest at the end of the month. Even in pricey LA. And they can do this, while funding and maintaining a large emergency fund. 

That last point is super key. 

In part, because of what we discussed earlier this month in The Big Problem With 401(k)s And IRAs. You don’t want to end up doing what lots of people are doing these days. Raiding retirement accounts — and potentially paying taxes and penalties — to cover the cost of the business of doing life. 

So, while you need some semblance of financial stability to invest at all, you probably need it times two to invest in tax-advantageous retirement accounts. 

But, if you can, the differences can be astonishing. 

No matter how you do it, the best thing you can do with your budget is find $500 a month to save/invest every single month. It adds up like crazy. 

But here’s how it adds up differently in a taxable account versus a Roth IRA. 

If, starting at age 25, you invest $500 a month every month (that’s $6,000 a year) for 40 years and earn just 7% on average annually, you’ll have $825,680 in a taxable account. However, in a Roth IRA, where you enjoy tax-deferred growth and don’t pay taxes at retirement (assuming you satisfy IRS rules), you would have $1,281,657. 

That’s a difference of $455,977. And that’s a huge difference. 

If you estimate needing $65,000 a year in retirement, that difference takes care of an additional seven years. And we haven’t even gotten into the fact that the balance you haven’t touched can keep growing or the addition of Social Security payments. 

The math  — even the conservative math — is clear. The hard part is getting people, especially younger people, to think into a distant future where they’ll have to take care of a version of themself they can barely picture in 2024. 

The Bottom Line: Okay, so, you’re young or want to offer some help to somebody who is. If it’s the latter, please forward them this email and tell them to sign up for The Juice newsletter. It’s free. 

In our next installment, we’ll start detailing ways to spread that $500 around. We’ll consider savings, particularly an emergency fund. Because it’s important. And we’ll consider actual investments. Some of them are in today’s Trackstar top five. Because in addition to individual stocks, ETFs can comprise the foundation of almost any strong long-term retirement portfolio.

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