At 22, I Have $35K in My Checking Account: What Should I Do with It?

A Reddit user is currently trying to figure out what to do with his money. 

He is 22 years old and makes $63,000 per year. He currently has $35,000 in his checking account, and he just invested $14,000 in his Roth IRA. This investment was for both the prior and current tax year, so he hit the annual contribution limits for both years.

Now he is trying to decide what to do with his remaining $21,000. He’s not sure if he should invest the funds or save the money as an emergency fund. So, where is the best place for the money to go?

Should the Reddit user invest or build an emergency fund?

As a general rule, it is a good idea to have three to six months of living expenses in an emergency fund. However, the Redditor poster said that he lives with his parents and is saving around 75% of his monthly income, with the rest of the money going to help out his family with the bills, groceries, and mortgage. 

If his parents aren’t relying on this money, then he would not really face much financial hardship if he lost his job. Still, he could experience an emergency like a medical issue or a breakdown of his vehicle, and need money to help him cover it. So, it’s a good idea to have some funds saved for these types of unexpected events. However, he likely doesn’t need six months of expenses or probably even three. 

If he saves a few thousand dollars for emergencies, he should be protected against most of the unexpected costs he might face. Since he has so few financial obligations and he’s pretty young, investing most of his money could be a great way to set himself up for a secure future.

However, a lot will depend on how long he plans to continue living with his parents. If he’ll be there for a few more years at least, then he should invest as aggressively as he can. Then, when he starts getting ready to think about moving out, he can begin saving for other goals such as buying a house, as well as shoring up his emergency fund even further. 

Investing young can pay off big time

If you are lucky enough to be in a position to invest a lot of money at a young age, like the Redditor is, then you should absolutely do so. The earlier you invest, the more powerful compound interest becomes and the easier it is to get wealthy.

Say, for example, that this poster is able to stay put with his parents for another few years and he can invest $100K by age 25 — including some of his current $21,000. That’s absolutely doable if he’s making $63K and pocketing the majority of it.

If he earns a 10% average annual return, which is reasonable given that the S&P 500 has consistently produced around that much over the long-term, and if he keeps his $100K invested from age 25 to age 65, that $100K would become $4,525,925.56.  That’s how much that money would grow to even if he never invested another dollar. 

A $4.5 million nest egg would produce about $166,500 if the poster followed a safe 3.7% withdrawal rate. That money alone, when combined with Social Security, would likely give him enough to live on as a retiree. Of course, he could also keep investing more and retire early or retire even richer — but, either way, he would have set himself up for great success with a few years of sacrifice. 

So, the Redditor should absolutely take advantage of the opportunity he has to invest now while living at home and paying no bills. Keeping a few thousand in an emergency fund should be good enough, and he can invest the rest until he’s starting to get ready to leave mom and dad’s.