Sunday, November 22, 2015

Roth IRAs and Emergency Savings a Clever 2-in-1

Sometimes, I feel like I'm being pulled in too many directions when it comes to deciding what to do with my money.  It feels like there is not enough money coming in to contribute to all of the places that I need to be.  I've paid off all of my credit card debt, but I still have student loan debt that I'd like to eliminate.   I haven't obtained an 8 month emergency savings account yet, and I'm concerned about saving for retirement.  I feel like I have to choose, but I'm torn.  On the one hand, the more debt I have, the more income I need, so eliminating that will free up some money.  On the other hand, my retirement isn't going to pay for itself, and right now, I have 30 years until I retire.  That makes this the perfect time to allow my money to really compound and grow for retirement, but if I delay contributing, I will just end up having to save EVEN MORE money later in order to catch up.  Still there is a THIRD side to my conundrum.  If I don't have a properly stocked emergency savings, any disaster that comes upon me will require me to wrack up a credit card balance.  I REFUSE to let THAT happen!  So, what's a person to do?

Kill two birds with one stone, that's what.  Open a Roth IRA and start contributing the max (or as much as you can).  In 2015, as long as you are earning income, and make less than $116,000 (or $183,000 if married) you can open one.  You are allowed to contribute $5500 per year ($6500 if you are 50 years of age or older).  That's $458.33 per month.  If you can pull it off, the benefits will be tremendous.

Now, I'm sure a few of you are confused about how this relates to your emergency fund, right?  In a Roth IRA, you are allowed to withdraw any money that you contributed without a penalty.  You just have to be sure that you don't dip into any of the interest that it earns.  The interest earned in your Roth IRA must be left very well alone.  Well, actually, there are circumstances where you can also take the earnings, but that is considerably more complicated.  My recommendation is to simply leave that part alone.

So, if you are strapped for cash, but feel the need to do SOMETHING to start saving, I recommend opening a Roth IRA and funding to the max (or as much as you can).  This can double as an emergency savings as long as you only withdraw the contributions (not earnings).  You are to avoid having to do this at all costs.

Part two of this strategy is to consider where you will open it.  If you open it at a discount brokerage, you can invest in a manner that will likely grow your money much more quickly, but if you need access to the money, it will take longer (3-4 days) for them to transfer the money to your bank account.  My strategy is to open a Roth IRA savings at my local credit union.  Right now, the interest rates are terrible, but I can get the money into my checking account the very same day that I call them.  In a true emergency, this is a bonus.  I will only fund this one up to 1 month of my expenses.  Then I will switch over to funding one at a discount brokerage to maximize my money's growth.

Eventually, I will be able to fund both of these things separately, but until then, this is a good strategy.

Update:  It is also important to note that you can contribute to your IRA for the PRIOR year all the way up to the day that year's taxes are due!  For example, I am writing this update in Feb. of 2017.  Right now, since I haven't maxed out my IRA for 2016, I can make a contribution, and have my financial institution apply it to the 2016 tax year.  This is perfectly legal.  If you didn't contribute to it at all last year, you can use this strategy, and it will allow you to take the Retirement Savings Credit, which could be a HUGE benefit on your taxes!

Sunday, November 15, 2015

How finding my "holiday magic" lead to starting a new holiday tradition

In my house, we are gearing up for the holidays.  We had already decided to stuff stockings for each other, and only to give one gift per person.  Furthermore, we set dollar caps on the amount to be spent.  That being said, I feel that we have done a terrific job of taking care of our monetary selves, but to be honest, I feel as though we were neglecting our emotional selves.

As a little girl, I always looked forward to Christmas as a magical holiday.  I'm not even referring to the myth of Santa Claus, or even the sheer amount of gifts under the tree.  I am referring to an emotional well-being that I've always felt as a result of the time I've spent with people I love and the sharing of stories and traditions.

When I reflect on that time, I realize that the gifts that I looked forward to were largely based on time spent with people, and traditions.  The problem is that many our holiday traditions are intertwined with a culture of overindulgence.  In order to replicate the "magical" feeling I had as a child, I felt the need to be honest in pinpointing that which created it.  My fondest, most magical holiday memories are watching a holiday program (children's play, ballet, singing Christmas tree, bands, choirs, or a holiday movie...), baking something with my mother or grandmothers (frequently something Norwegian, as that is my cultural background), music, and staying up late, in my pajamas, watching a movie with my family.  There are very few times, when the memory involved a gift.  When that did occur, it was usually a give that was the kind you cannot buy in a store:  the blanket my grandmother crocheted when I was an infant that was given to me as a teen, the wedding ring that my late father had given my mother, etc.  Really, if I am honest with myself, it was never about the money.

We have discussed this at my house, and have decided to try out a new holiday tradition.  The one gift each of us will be getting is a box with new pajamas and our favorite movie snacks.  We are going to decide on a favorite holiday film (possibly more than one) to watch, pop popcorn, and sit with our beverages and snacks of choice, and enjoy some time together.  I am already feeling the anticipation of my new PJ's, and hope very much that sour patch kids make the box.  I'm voting for Home Alone, and possibly some cartoons from my childhood.  Prior to the holiday itself, I think I want to make some Norwegian edible, and go see something live (maybe the Rockettes).  Even with show tickets this should cost us $200 or less, and the idea of it provides me with more happiness than the idea of expensive gifts.

I know that this has been a slightly different kind of post because it is less about advice, and more of my personal story, but there is a reason for this.  I want to challenge you to consider the source of holiday magic for you.  When you get to the root of it, does the source of your holiday bliss need to set you back financially?  I've discovered that mine does not.  My goal right now is to achieve financial freedom.  I want the freedom to choose what I am going to do with each and every day of my life.  I do not want to do anything out of obligation, and that is worth so much more than becoming intoxicated by December, and experiencing "holiday hangover" in January.