What I Wish I Had Known

At work, there has been an influx of fresh faced young employees over the past few weeks. Some just out of college, others just out of grad school. I’m enjoying meeting all these new people, and it’s always great to have new, enthusiastic employees.

There has been a lot of talk as of late as to what sort of personal finance information recent college grads and recent high school grads should know, and as I watched these new employees arrive, I started to think about what I did and didn’t know when I started my first job after college.

I was lucky in that I knew a fair bit about personal finance when I first started working. I had held a credit card for four years, I was good about paying my bills, and I understood the benefits of a 401(k) plan. I didn’t contribute to my employer’s 401(k) plan at my first job for a few reasons – I knew I was leaving in a year to go to grad school, and I needed every penny for grad school, and they didn’t start matching until you had worked there for over a year, so I knew I would never meet eligibility.

Perhaps not the best decision, but not a bad decision and not one I regret. The one thing I wish I had known though was that I could contribute to a Roth IRA. I really didn’t learn about Roth IRAs until I was 26. I could have made contributions to that instead. Sure, I did need money for grad school, but I could have contributed a few hundred dollars at least. I didn’t make much during grad school, and again, I needed that money to pay for fun things like textbooks, but I wonder how much a few hundred dollars might have grown over the years.

I’m not sure how I missed the boat on Roth IRAs. And I don’t think that not contributing for those few years really hurt, because the contributions wouldn’t have been huge. But I still suggest Roth IRAs whenever I get the chance.

Abundant Life Spending Spree - $1600

$1600 would go to a year long gym membership along with a bunch of personal training sessions. I've been sick the past few weeks and I can tell by how my clothes fit that I'm quickly falling out of shape. I could use someone to kick me into gear!

May Net Worth Update (+8.22%!)

This month was a great month for my net worth. It increased by a whopping 8.22%!

Ok, so that was mainly due to a very generous gift from a family member that is being tucked safely away.

Aside from that though, my investments are continuing to rebound. It's slow going, but it's at least moving in the right direction. My cash accounts took a bit more of a hit this month, thanks to vacation, but those were planned expenses.

With this generous gift, my net worth is up 7.68% from the beginning of the year. My goal for the year was to increase my net worth by 20%. I thought it was a tight goal, but possible. With the markets as they are, I just don't think it's possible to make that goal. Doesn't mean I'm not going to try though!

I also made my full Roth IRA contribution for 2008 this month. Sadly, it is already worth less than when I invested the shares. But it's money I won't need for years, so I'm not too concerned. Just got to keep on keeping on.

Retirement funds - DCA or no?

Thanks to a generous family member, I came into a bit of money in the past week. It was enough to fund my Roth IRA for the year with a bit leftover. So of course, step one was funding my Roth. I couldn't decide whether dollar cost averaging was the way to go or not. I did know that I wanted to add a fund to my IRA - a fund tracking the international markets - and at the financial institution I use, that required a minimum of $3000 to open. So that was an easy decision. I decided to just use the additional $2000 to purchase additional shares in a fund I already own. I thought about it for a while and decided to just drop all $2000 at once rather than do dollar cost averaging. Basically, I just wanted to have it done and not worry about it anymore.

With the market fluctuating as it has the past few months, I've really been ignoring a lot of my investment accounts. I know that I have chosen good funds for my Roth IRA. I know that I've chosen good funds for my TSP (not that there are a lot of options). The market is what is is, and I can't change it, so I might as well not worry about it. Besides, these are retirement accounts. I'm 27. I won't need them for quite some time.

When the market is good, it's fun to check in on retirement accounts and see how they are growing. But when the market is not so good, it can simply be added stress to log-in to an account and see how much money you've lost in the past few days. I've decided that's not added stress I need.

I do check my retirement accounts every month when I calculate my net worth for the month. And when the value is up, I'm happy, and when it's down, I just shrug and know that things will get better.

So that's why I decided against dollar cost averaging for the last $2000. I don't want to have to worry about it. There's no way to predict which method is better, though my hope is that the market is on a rebound and will keep bouncing back. But for my mental health, it was the right choice.

(Of course, what to do with the rest of the money is another story for another post.)

Roth IRAs as Emergency Funds?

I have seen a number of personal finance websites suggesting that people keep their emergency funds in a Roth IRA. After all, the point of an emergency fund is to never have to touch it, saving for retirement is good, and one of the benefits of a Roth IRA is that you can take out the money you put in without any sort of penalty (of course, you can't touch your earnings until you're 59 1/2).


I'm still not sure whether or not I think this is a good idea. I have to admit that when I thought about starting a Roth IRA, one of the things I considered was the fact that if an emergency happens, I can pull that money. But I also have an emergency fund with enough money to cover almost 10 months worth of normal expenses.

I don't think it's a good idea to have all of your emergency fund in your Roth IRA. But it might not be a bad idea to put some of it into a Roth IRA. Let's pretend that your monthly expenses are $3000. Now let's say you've managed to save 6 months worth of expenses, meaning you've got a high yield savings account with $18,000. To fully fund your Roth IRA for 2008 would mean a deposit of $5000. That would leave you with $13,000, enough to cover you for over four months. And if things got bad, you could pull from your Roth IRA.

But wait. Roth IRAs aren't like savings accounts. They aren't even like stuffing the money under your mattress. They're not guaranteed to make money over time. Mine lost $500 in the first six months. If I was depending on that money for my emergency fund, I'd be out of luck.

I think my opinion has to do with how big your emergency fund is. As I said, mine is nearly 10 months worth of normal expenses, much of which could be cut in an emergency situation. So yes, I would be fine with putting some of that into a Roth IRA. But do I think your entire emergency fund should be in your Roth? Absolutely not. If you want to make it work for you, tie it up in CDs. Sure, you'll take a small hit if you have to redeem the CD early, but nothing like the hit you could take from a Roth loss.

Of course, Roths are designed to grow, so it's possible you could deposit $5000 of your emergency fund into it and discover that your retirement fund has grown.

I think this is a decision that everyone has to make, but I still think that everyone should try to have three to six months worth of expenses in an emergency fund, preferably closer to six. Where you put it is up to you. Just be aware of all of the benefits and the risks.

The current state of the market

I used to love to look at my investment accounts online and see what had happened in the previous few days and see how much my investments had increased.

Now, not so much.

The one that bothers me the most, I think, is my Roth IRA. I opened it with a lump sum of $4000 in November. I really picked a bad time to open it, I think, as it has now dropped almost $375. However, there was no way for me to have known that. If I could go back and do it again, I would still do exactly what I did. I knew that it was important to have a Roth IRA, and at 26, I should have probably opened one earlier, but I wasn't educated enough in the world of personal finance to know that. Plus, I had the funds. So it made sense.

I cringe a bit when I see the estimates of retirement funds growing at an average rate of 8%. I suppose that could still happen with my Roth IRA this year. Who knows what's going to happen with the market. Sure, predictions aren't good, but I prefer to look at the world as glass half full. I'm not going to pull my funds out of my Roth, so I might as well hope that the value increases.

Now, the big question is whether I should be investing more in my Roth IRA right now or wait and do the lump sum thing again. I think I'll probably invest in smaller amounts rather than lump sum, but still wait until I have $1000 to invest and then do so, then build up another $1000 and invest. It seems like that might be the way to ride out the market's highs and lows. I might be buying low, I might be buying high, but at least the two will balance each other out. At least, I think that's how this whole investing thing is supposed to work out!