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Saving for Retirement: Love It? Hate It?

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Growing up, I never had personal finance as part of the curriculum. But everything I’ve learned about motivation to save for retirement, I’ve learned in high school.

Recently, TeacHer Finance wrote a post sharing her perspective – she hates saving for retirement.  I understand her reasons.. maybe that’s why I don’t really think about them – because I am afraid of mentally discouraging myself from saving!  It is difficult to balance retirement with shorter-term goals, that is for sure.  And although there are good, logical reasons to save for retirement, the motivation factor, like I mentioned at the beginning of this post, was completely from high school.

From High School to Retirement Saving

This might be a nerdy way to explain it, but here is it. When I was in high school, I’d often slack off a little at the beginning of the semester – I wouldn’t study as hard as I should have, or prepare for the occasional pop quizzes that I KNOW will come up in class.  It’ll be okay, I told myself, I will work harder for the next test, the next presentation, the next project.

Towards the second half or 2/3 of the semester, I’d look at my class progress reports, feel disappointed, and then I’d hunker down and put my nose to the grindstone. But the simple mathematical truth was that for every 80% I got in the first half of the class, I’d have to get a 100% to achieve the 90% ending score I wanted. Let’s just say that it was a rare day that I got those 100%s.

And every time before the final, when it’s 4 AM in the morning and I am still pouring over my notes on European history or statistics or macroeconomics, stressed out of my mind, I think, why didn’t I start preparing earlier? If I had JUST prepared a little more at the beginning of the term, I wouldn’t have to work so hard towards the end, I would give myself more wiggle room, and I would probably have gotten a better grade.

The lesson I learned? Put the work in early, get better results for less effort.

That’s the thought process I bring to retirement saving. I am saving as much as I can right now so that I wouldn’t have to panic and start saving 30% of my income when I’m in my 30s or 40s, when I will surely have more financial obligations.  Now, when I think of not saving for retirement, I think of high school.

Do you love saving for retirement (is love too strong a word?) Do you hate it? How do you motivate yourself to save for something that is so abstract, and so far away?

6 Reasons Why the Roth IRA Rocks

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Exactly 6 months after I made my first contribution, I maxed out my Roth IRA for 2010, meeting one of my new financial goals for this year.  That makes 5 full years of maxing out, or $23,000 worth of contributions.  Of course this $23,000 will grow to $9,490,308,898 by the time I retire, right? Right?

All jokes aside, I am glad this is done. I want to give an anonymous shout-out to my middle-school science teacher, “Mr. Rob,” who explained to me both the concept of the Roth IRA and the mechanics of opening an account online over a meal of chicken salad at Appleby’s.  A more financially educational meal I’ve never had.  It’s funny, the most valuable things I’ve learned from teachers, I learned them outside of the classroom.  Thanks, Mr. Rob.

Qualified distributions and capital gains are tax-free

You put after-tax money into the Roth IRA, and then your money can grow tax-free. Qualified withdrawals are also tax-free. We don’t know what the federal tax rate will be in the future, but having a source of tax-free earnings can never hurt. Many people have traditional 401Ks (which are funded with pre-tax dollars and thus will be taxed when you withdraw in retirement), so having a Roth provides important tax diversification.

Available to all with earned income (i.e. not employer-sponsored)

You can start a Roth IRA as long as you have earned income. In other words, this option, unlike the 401K, is not dependent on employer sponsorship.  I didn’t have a 401K for 2008 and part of 2009, but I can save via Roth IRA. If parents want to encourage their teenager to save, this is also an excellent method. A 16-year-old who earns $2,000 babysitting in a year can contribute all of that $2,000 to the Roth. For added incentive, parents might provide matching funds,(say, 50 cents for every dollar saved.)

Spousal IRAs: because nonworking parents need to save too

Stay-at-home parents (SAHP) takes care of the family, but the Roth IRA gives them a way to take care of their retirement needs too. Tax law allows a working spouse to contribute $5,000 a year (the current federal IRA limit) to an IRA in the stay-at-home parent’s name, even though the SAHP may not have earned income. If you are a SAHP, insist on having a Spousal IRA set up for you so that you have a way to access tax-advantaged savings in your name.

Penalty-free withdrawal of contributions

You can withdraw your contributions (not gains) at anytime, penalty free. Ideally, you should leave your retirement bucks to work for you as long as possible, but in a pinch, money in the Roth IRA can also double as an emergency fund or a down payment.

Variety of investment options

Think of the Roth IRA as a basket, and specific investments (stocks, mutual funds, bonds, etc.) as eggs that you put in the basket. With so many firms offering Roth IRA services, it’s easy to select one that works for you. Those who wishes to invest in low-cost index funds can choose Vanguard, Fidelity, or Charles Schwab. If you want to select your own stock, brokers include Etrade and Scottrade. Many banks and investment firms also have Roth IRA options. Your 401K might be dependent on the investment choices your employer provides, but no such limitations exist with the Roth IRA.

Catch-up provision for older workers

If you are 50 or older, you can contribute an additional $1,000 in 2010. So, a 55-year-old worker can contribute a total of $6,000 in the Roth IRA. The catch-up contributions feature is a great way to accelerate savings before the retirement years.

A version of this article first appeared in BlogHer.

Balancing Retirement with Short-Term Goals

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balance 300x199 Balancing Retirement with Short Term GoalsAh.. balance. That holy grail most personal finance bloggers (including this one) searches for. Saving for retirement is one of my biggest financial priorities, but I know that I have to balance saving for the far off future with saving for the near-term future.  Prepare for tomorrow but enjoy life today, right? I recently wrote about my dilemma: should drastically decrease my cash for near-term expenses by contributing the full $16,500 to my 401K, or should I opt for more cash on hand?

After considering the should I max out my 401K? question (thank you for all your helpful insights), I’ve decided to compromise, and contribute $15,000. I’ll leave the maxing out for 2011.

I admit, I was a little worried about the impact the $2,500 monthly contributions ($2,500 x 6 months = $15,000) would have on my net cash flow.  So in comes the Paycheck City calculator.  After I crunched the numbers, I saw that if I am careful with budgeting, I should be able to contribute the $15,000 for the rest of this year.  It also helps that I will have rent that’s $200 cheaper starting in a month. icon smile Balancing Retirement with Short Term Goals   I can theoretically afford to contribute $16,500, but that would be cutting things very tight.

Of course I want to save as much as I can in the 401K, but I wasn’t quite comfortable with putting away the entire $16,500 this year.  A few things tilted me towards that decision:

  • My car seems okay, but it’s nearing 230,000 miles. Though I hope it lasts me another 2 years, I have to be prepared to get a new / new-to-me car at a moment’s notice.  Having to purchase a new vehicle will knock about $10,000 of my cash savings.
  • I want to save $30,000 for graduate school. My mother had previously indicated to me that she will put $30,000 of her inheritance from my grandmother towards my graduate school costs. That makes $60,000, or roughly 1 year of tuition + living expenses at a full-time MBA program.  My goal is to only take out loans for the second year.  If I were to need a new car, I will need to rebuild that cash cushion.
  • Enjoying life today is also important to me. I want to eat! and travel! And eat while traveling… and all that takes cash.  I don’t want to end up so cash-poor for the rest of the year that I will be taking money out of my savings.

Near-term goals have to be balanced against retirement goals, so this is the compromise. Including $5,000 in Roth IRA, I’ll be able to put away $20,000 for 2010.  Considering how I spent a quarter of the year making barely $2,000 a month because I was freelancing / collecting unemployment, I think I am doing OK. Next year I will plan on putting away the maximums allowed under 401K and Roth IRA.

How do you balance retirement goals with big-ticket short-term goals such as travel, graduate school, down payment, car purchases, weddings, etc?

Should I max out my 401K?

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401k Should I max out my 401K?Most personal finance experts recommend contributing to the 401K up to the match.  Even without a match, the plan provides a fairly easy way to automate your savings while lowering your taxes.  With open enrollment approaching at my job, I’m faced with the question: Should I max out my 401K? When I first got this position, I set a goal to contribute $16,500, the maximum possible.  Now, that figure seems a bit intimidating. Spread over 6 months, $16,500 will be $2,750 per month, or more than a majority of my monthly paycheck.

Why I should NOT max out my 401K:

  • $16,500 is a lot of money to be tying up – I may very well need money for a new car, graduate school tuition, big moving expenses, etc. in the next 1-5 years
  • The next open enrollment period is January 2011, so basically once I set my contributions, I’m locked in. I can’t decide in September that I’d like to scale back.
  • I don’t have an employer match
  • I can access lower expense ratios in my Rollover IRA / Roth IRAs

Why I SHOULD max out my 401K:

  • There is no better way of enforced savings. Truly. 401K contributions come out before Federal Income tax, for goodness sakes. You know how Uncle Sam always gets his money where it’s due? Well, maybe it’s time for Auntie Retirement to get hers too.
  • Lower taxes. Right now, about 28% of my paycheck is gone before the money even hit my checking account. Maxing out my 401K will dramatically reduce my Federal income tax.
  • I will be very thankful that I maxed out 401K if I go back to graduate school in a few years. An MBA comes with big loans, not tax-deferred retirement vehicles.
  • On a related note, the next 5 years will likely be filled with a lot of moving pieces, both personally and professionally. Hopefully I will be earning a higher salary in 5 years, but I will also have more personal obligations (some possible big expenses that come to mind are: wedding/honeymoon, grad school, new car, cross-country relocation, etc). So it’s probably wise to save as much as I can right now.
  • I didn’t have a 401K for 2008. So really I’m only saving $8,250 a year if you spread the contribution over 2008 and 2010.
  • When I roll over my contributions, I can invest the money in a much wider variety of funds. But I have to have the money in a 401K first before I can roll anything over.

So.. there you have it. I have until June 30th to make a decision. A reasonable suggestion might be to contribute $10,000 to the 401K, but I admit I really like the sound of maxing out 401K!  I have been saving for the past couple of month in an savings account that I dubbed the “cash-flow subsidy account” to supplement my paycheck for the rest of the year.  I have enough cash savings so that even if my car dies tomorrow (knock on wood!), I can buy a new economy car or a 2nd hand Honda and my emergency fund will still be in fairly decent shape.

What do you think? Should I max out my 401K or not?

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The Pudding Index: Get Your Retirement Score

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pudding index retirement The Pudding Index: Get Your Retirement ScoreRetirement planning is as much an art as a science.  One of the most common questions is: How am I doing?  No one can tell you for sure, but one nifty little website tries to give you a sense of your progress compared to a predefined index. This website, the Pudding Index, tries to answer the question: when you retire, what percentage of your income will your retirement accounts provide?

The Pudding Index does so by comparing you to a Benchmark Account (represented by the score 100). The Benchmark Account for women means that you are on track to save 55% of current income by age 65.  For men, it means that you are on track to save 65% of current income.  If you score above a 100, it means that you are ahead of the 55% (or 65%, if you are a man) of current income. If you score below a 100, you are lagging behind the index. The Benchmark Account for women is lower because women tend to live longer – another reason we ladies need to save early and save often.  The Benchmark assumes that your investments will grow at 7% a year and that you will contribute 9% of pay to retirement every year.  It also adjusts for inflation in terms of pay.

The Pudding Index calculator requires four simple inputs: (1) birth date, (2) gender, (3) current income, (4) defined contribution assets (401Ks and IRAs for most people). Then the Pudding Calculator spits out a single number to show how you compare against the index.

This Index doesn’t take into account cash savings, possible Social Security benefits, government / private pensions, or other assets (such as real estate, inheritances, business interests) that can become retirement assets.  It’s not a perfect measure (and one doesn’t exist), but it is a good way to check your progress against an Index based on just what you have saved in defined contributions accounts.

Most retirement experts I’ve read recommend 70% to 90% of your current income.  When I input my factors, I received a score above 100. The website says that if my account’s performance were to match the Benchmark Account’s (i.e. every year I save 9% of pay and my investments grow at 7%), my retirement assets can replace about 65% of my income at 65.  Given that retirement is always a moving target, I prefer to err on the side of saving too much rather than too little. I am glad to know that I’m on the right track, though.

Feel free to share your scores in the comments. Did this calculator teach you something new? Or did it confirm what you’ve already known?

image source: puddingindex.com

5 Reasons I Save for Retirement

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saving money 300x207 5 Reasons I Save for RetirementWe all know we should be saving for retirement… but it’s not easy to do. Life gets in the way and retirement seems so far off. I’ve managed to make retirement my biggest financial priority through a combination of positive (financial freedom!) and negative (fear of spending old age in penury) motivation.

Here are the 5 things that I tell myself to save for retirement:

1. I want to enjoy retirement free from financial worries.

I want a retirement filled with volunteer work, extensive travel, a comfortable, paid-off home, and plenty of friends and socializing (I’ll be that old lady at dim sum on a Wednesday morning). I would not enjoy my retirement if I spend my days worrying about deciding between groceries or the house payment. I would not enjoy my retirement if my sole source of income depended on Social Security.

2. I want to afford a reasonable level of medical care.

With family members who work in the medical field – and who see, every day, the consequences of being old, sick, and poor in America, I am well aware that health care costs will probably exceed anything I can imagine at this point in my life. I don’t know what the state of health care will be like in 40 years, but I do know that even with health insurance, (1) illnesses will be expensive, and (2) having more financial resources will make me more comfortable in a time of sickness.

3. If I have children, I do not want to burden them with my care.

I want my children to fret about getting me the perfect birthday present, not to worry that if they don’t send me money each month my gas will be shut off. Freedom from worry about my financial situation is one of the best gifts I can give to the next generation – it’s a gift that my parents have given me, and I would want to continue that.

4. I do not want my parents to worry about my financial well-being.

I’ve been fortunate to receive a lot of educational assistance from my parents. There’s even the possibility that they will leave a little bit of real estate to me in the future. But I never want my parents to worry about my ability to provide and save for myself after they are gone. They should enjoy their hard-earned money. If they leave me something, great. But I don’t want my parents to scrimp and save because they are afraid that my finances depend on getting an inheritance.

5. I want to leave an inheritance in event of unexpected demise.

If I die before I retire, I want to leave something to my loved ones. One of the refrains I’ve heard is that “you can’t take it with you when you go,” which is true – you can’t take anything with you when you go. But I don’t see leaving money behind as a  waste. In fact, I would consider it a privilege to leave a bequest – however small – to the people whom I love and who love me.

Why do you save for retirement? Are your reasons similar to mine?

image source: www.mynmi.net

Will Social Security Be There When I Retire?

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social security retirement age Will Social Security Be There When I Retire?Will social security be there when I retire? Probably, but with caveats

One common refrain I’ve heard is that today’s young adults don’t (or can’t) expect Social Security (the combined Old-Age, Survivors, and Disability Insurance Trust Funds) to be there when we’re older. I understand that sentiment. There are very serious issues facing Social Security. Unless changes are made, we can’t keep paying out benefits the way we have been. (See this CNN Money series that explains the system).

But I don’t believe in the knee-jerk response that Social Security is dead! or that we are only going to get a few pennies when we reach our dotage. Government retirement / disability insurance is a valuable safety net for the disabled and seniors, even though I am still 40 years away from retirement age, I expect some form of Social Security payment to be there when I retire.

Safety net, not the whole kit and caboodle

Expecting some form of Social Security, however, doesn’t mean that I expect 100% of my benefits nor do I expect the government retirement insurance to be my only source of income in retirement. In fact, the Social Security Statement (an annual statement that is mailed about 3 months before your birthday) that I received last year tells it pretty much like it is:

…Social Security was never intended to be your only source of income when you retire. You also will need other savings, investments, pensions or retirement accounts to make sure you have enough money to live comfortably when you retire.

…the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s young workers are ready for retirement. In 2017 we will begin paying more in benefits than we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 78 cents for each dollar of scheduled benefits.

These are sobering facts. Still, 3/4 payout of scheduled benefits (or even 1/2 payout) is a far cry from the dire prediction of absolutely zero benefits. Of course, many things can happen in the next 30 to 40 years, but I think it’s more likely that Congress will enact changes, such as means-testing for benefits, increasing eligibility age, lowering benefits, increasing the income that can be taxed under Social Security, etc. than allowing the entire system to go “bankrupt.”

What you can learn from your Social Security Statement

Looking through my Statement was quite interesting – it detailed the years I worked and my taxed earnings, the basis for which my future benefits will be calculated. According to my statement, I do not qualify for retirement benefits or Medicare benefits (although I have qualified for disability benefits) because I’ve only been working for a few years. You need 40 credits to get retirement benefits – a maximum of 4 credits per year. Every year, the income needed to get each credit changes – for example, in 2009 you would earn 1 credit for each $1,090 of income. That means if you’ve earned $4,360, you will have earned the full 4 credits.

Apparently, I only have 17 credits, but of course as I work more I expect to very quickly reach retirement payment eligibility. Now I understand why people who have stepped away from full-time work are penalized under the system – not only are Social Security benefits calculated from your total income, your own eligibility is determined by the number of years you’ve worked.

My bottom line on Social Security

Nobody knows what today’s 25-year-olds will get in terms of Social Security in 40 years, just like nobody knows if any one particular 25-year-old will live to retirement age. But I feel comfortable expecting something (both in terms of getting some Social Security, and living long enough for that to be a concern to me!). It’s too soon for me to incorporate estimated benefits into my planning, however. As I come closer to retirement I will take Social Security payments in account, but for right now I will continue to save as aggressively as I can for retirement.

Do you expect Social Security when you retire?

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New 2010 Financial Goals

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goal objective setting1 New 2010 Financial GoalsYou know you are a personal finance blogger when the prospect of making new retirement contributions makes you so excited you can’t stop looking over the 401K plan document.

Now that I have a new job, it’s time for revised objectives for 2010. My financial goals for 2010 are simple: I want to contribute the most I can to tax-advantaged vehicles. That means I will:

1. Max out 401K ($16,500):

I reach 401K eligibility in July, so that means I will have 6 months to contribute for 2010. That will be $2,750 per month. My total net income – including freelance earnings – will cover my expenses during that time. But I won’t have much money for anything else.

2. Max out Roth IRA ($5,000):

I currently have $2,000 for 2010 – another $3,000 and I’ll be done with this goal. I’ll concentrate on Roth IRA goal in April, May, and June so it will be taken care of by the time July comes around.

If I make all these goals, at the end of 2010 I will have over $50,000 in retirement savings. These are aggressive goals for me, but I need to take advantage of every chance I have to save for when I’m a cool old lady. In addition to the purely financial goals, I also want to do something nice for my parents. This means I will:

3. Send Mom & Dad on a weekend trip ($200-$300?):

One of my favorite presents for my parents is a night or two at a high-end hotel for weekend getaways. I put them up at the Mandalay Bay in Las Vegas (Christmas 2008) and the Omni Hotel in San Diego (Summer 2009). They would never spend that kind of money on themselves, so it makes me happy to be able to do something nice for them. Mom apparently still talks about the Vegas trip to my aunt and my family. Score in the Good Daughter category. icon wink New 2010 Financial Goals

Now that I have a job, it’s something I can resume doing. Perhaps a trip to Santa Barbara is in order. There are so many nice bed-and-breakfasts in that city… let me know if you recommend any one in particular.

image source: searchenginepeople.com

Household Finance and Gender Roles: Women Budget, Men Invest?

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A few days ago I caught an old clip of the TLC’s 19 and Counting, a reality show about the Duggar family who has 19 children. In order to run the house, everyone has a jurisdiction, a specific series of chores they are responsible for. The girls do all the cooking, laundry, and washing for the family, while the boys are in charge of outside tasks such as fixing the car, mowing the lawn, and taking out the trash.

In this episode, Trading Spaces, Duggar Style, however, the kids are switching places, a departure from their traditional gender roles. The girls learn how to do the boys’ chores, and vice versa. The goal was to teach each side to be more appreciative of what others do, and to teach them the skills to take care of themselves when the others aren’t around.

men women money Household Finance and Gender Roles: Women Budget, Men Invest?

This episode made me think of the “unofficial” jurisdictions that people take in their household finance, which is often divided by gender roles. From my experience and from what I’ve read about household finance, day-to-day budgeting and bill-paying frequently goes to the woman, while long-term investment and retirement planning job often belongs to the man. In my family, the responsibilities falls along the same gender lines – Mom is charge of daily stuff, while Dad monitors 401Ks and IRAs. They split the responsibilities for their property investments.

When I was growing up, my mom taught me a lot the importance of staying on top of household bills, knowing how much you make and spend, and getting a sustainable mortgage. But investing in stocks, bonds, large-caps, small-caps, etc. were a foreign concept to me. Although I had vague ideas that I should invest, I didn’t actually know the logistics of opening a Roth IRA until I had an old middle school teacher explain it to me in college. Then I started learning about the difference between stocks and bonds, asset allocation, different investment theories, so obviously I turned out OK even though I wasn’t exposed to investing at an early age.

I don’t have a brother, so I don’t know if a son would have received different financial education during his upbringing. But in the future, if my husband and I decide to combine finances, I think it’d be really fun to do a household finance trading spaces deal. Even though we might each have our areas that we enjoy being in charge more, both partners need to understand household finance, which include the budget and long-term investments.

For example, I like making investment plans and studying asset allocation. I do. But even if I am in charge of the investment portion of my household finance, I still need to understand the ins and outs of daily money matter. The reverse holds true. A true partnership might not mean that both partners do 50% of everything, but each individual should have a basic understanding of what’s happening with the household finances.

How did you decide who is in charge of the investment vs. budget in your household? Do you follow gender roles listed above? Have you ever tried to trade spaces with regards to household finance?

image source: http://www.flickr.com/photos/mahalie/416934091/ via Wisebread.com

Why Saving for Retirement is My Biggest Financial Priority

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piggy bank 325 Why Saving for Retirement is My Biggest Financial PriorityPerhaps the title is a little misleading – saving for retirement is by no means my only financial priority, nor am I dismissive of the fact that I might never reach retirement (only the guy upstairs knows for sure, right?). But given the choice between saving for retirement in 4o1Ks and IRAs, and saving money in taxable investment accounts or cash accounts, I will almost always choose to save more for retirement.

Even though money is fungible (i.e. you can use money you’ve saved for X and spend it on Y – there’s no difference. The value of that money is still the same), the psychological impact of retirement savings and everything else is very different.

Because retirement is so far away for me, a twenty something – it’s easy and sometimes tempting to put it off. A 25-year-old may tell himself, “I can start saving when I’m 30, right now I am paying student loans.” A 35-year-old might say, “I’ll start after I’m 40, right now I have to save for a down payment.”

Every time you save for retirement, you’re making a choice to give up something now (a nicer car, a fancier apartment, a vacation to Paris) for an uncertain payoff decades down the road. That’s exactly why I stretch myself to put more in retirement. Because if I save for retirement first, the hard part would be done.

As an example, let’s say in a year I can comfortably save $10,000. I want to start saving for $40,000 down payment in 4 years. I could put the $10,000 towards the down payment, then try to scrape together some savings for the Roth IRA. Or I can put $5,000 in retirement, $5,000 in the down payment, then try really hard to save another $5,000 for the down payment.

If I really want a house, it would be much easier to forgo meals out and cute clothes if I see that the payoff is an extra $5,000 in a down payment. I might be able to push myself and save $15,000 instead. That payoff is more immediate than a retirement 40 years away. On the other hand, if I save for the down payment first, I might  not be motivated enough to put another $5,000 in retirement funds. Saving for retirement is my biggest financial priority, because it’s always difficult to make immediate sacrifices for a far-off reward. But it must be done.

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Small Steps Will Lead To Lifestyle Change

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I don’t look unhealthy from the outside, but I’ve never been good about exercise. Every New Year – even though I’ve stopped making New Year’s resolutions – I think, this will be the year I really get in shape. But I never sustained my efforts past a few days, because for some reason I saw “getting in shape” as this grand undertaking that requires me to run 5 miles a day, subsist on lettuce, reject beef, and swear off butter. FOREVER. And I’d try to do that, but after 3 days I am so sick and tired of salads and running, and that would be the end of that until the next year.

Now I understand why some people are so reluctant to save, or exercise – even though we know – we know! – it’s good for us. Because the big goals – Financial Independence, or Retirement, or Sailing Around The World, or Getting In Shape, can seem so far-off and impossible, or they seem to require an unrealistic level of discipline and structure. If you see route to Financial Independence as making your own toilet paper or buying clothes once every 10 years, then of course you couldn’t – and wouldn’t – do it.

This year, something clicked and my perspective on “getting in shape” changed. A few months ago, I seriously got into tango. It gave me some much needed exercise, but also made me realize that if I can’t dance for an hour without feeling exhausted, I really should kick my lifestyle from “sedentary” to “active”. Tango is such a joy – and it will be even more fun if I were in better shape and can dance for two hours straight (or maybe even 3! – imagine the possibilities!).

Then it’s as if a light bulb went off - life will be much more fun if I were in better shape. Just as personal finance shouldn’t make you miserable, a healthy lifestyle isn’t about deprivation. It’s not about saying “no” to delicious foods or relaxing days, it’s saying “yes” to taking good care of the only body you’ll ever have.

Some people spend beyond their means and don’t save for the future because they say, “you only live once”. But eventually, hopefully, they will realize that life will be much more fun if your finances were in order. If I am too unhealthy, I won’t enjoy my life, even if I can eat strawberry shortcakes every day. If I am too in debt and have creditors calling me every day, I won’t enjoy my life, even if I buy expensive cars or go on luxurious vacations.

A few days ago I took my first “small financial step” of 2010 – contributing $250 to my Roth IRA. On Monday, I will take my first (and very painful) “small exercise step” of 2010 – doing Day 1 of the 30 Day Shred. Small steps are worth celebrating, because if you maintain enough small steps, over a long enough period, you may be surprised to find yourself with a changed lifestyle, a changed outlook.

And the best part is, this lifestyle will be sustainable. Financial responsibility (or frugality, if you will), is not fad. Eating right and exercising are not fads. I know that now. And I’m willing to take enough small steps to make “getting in shape” happen.

What small steps have you taken to achieve your lifestyle goals?

(This is not a health or fitness blog, but I want to write more about this aspect of my life because there are so many parallels between fitness and finance, and they are both cornerstones of a healthy, happy life – how do you guys feel about that?)

First Roth IRA Contribution of 2010 – Even Small Steps Are Worth Celebrating

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I expect to have some freelance earnings this month. So, I’ve decided to put $250 into 2010 Roth IRA. It feels good to be still contributing to retirement – albeit a much reduced amount - even when I’m laid off. It’s a small (but still significant!) step towards the $5,000 2010 Roth IRA limit.

There are thousands of articles out there on why you have a Roth IRA (and I have written extensively on my love of the Roth) – all I can say is, it really does become a habit. Now one of the best things about a new year is the fact that I can contribute more to my Roth IRA.   

It’s easy to start and fund a Roth IRA and begin saving for your future. In fact, you can do it with as low as $50 a month. That’s less than $2 a day. You can do it. Every little bit you can save counts.

In 2009, I maxed out the Roth IRA on the first day of the year. I knew this year was going to be different, but that doesn’t mean I shouldn’t make the effort. It might take me 20 small steps $250 to get to $5,000. But that’s okay. Even small steps are worth celebrating, because those small steps are going to get you to where you need to go. 

Thinking about 2010 Retirement Contributions

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It’s rather difficult to plan for 2010 because I really have no idea how my finances will be. If I get a job in the States, then of course I will max out my Roth IRA and try to come as close to maxing out my 401K as I can’t. But if I work in China, then I’ll need a Plan B.

I am aiming for $500 in freelance income (earned from U.S. sources) a month. I still need to research the finer points of our tax system, but if I can I will put all my freelance income into Roth IRA (or start a self-employed retirement fund, such as the Sep IRA, Simple Plan, or solo 401K).

According to an article by Cash Money Life, a self-employed person can contribute the first $15,500 (2008 limit) to a single-participant 401K plan. 401K plans also come in the Roth flavor. The solo 401K seems like the most appealing plan to me – I will have to see if my current retirement firm offers this option.

At the very least, I should be able to put $5,000 away in retirement funds for 2010.

Question On Roth IRA and Foreign Income

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Looking ahead (as I am wont to do), I’ve been thinking about the problem of continuing my retirement savings if I were to move abroad next year.

While abroad, I will be paid in foreign currency. I will not contribute the foreign income I receive to retirement funds. However, I will continue to freelance with US-based entities and be paid for those assignments in dollars.

My question is: Can I contribute the income earned under US assignments to the Roth IRA? So, for example, if I made $5,000 in 2010 from freelancing assignments with US-based companies, can I contribute that amount to the Roth IRA even though I was physically in another country?

Personal Finance Is Sexy

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Recently CB opened a Roth IRA. Never doubt that personal finance knowledge is very attractive. (I wonder if my money nerdism has rubbed off on him).

I am so proud of him for taking this step. icon smile Personal Finance Is Sexy

So next time you are trying to interject some romance into your relationship, why not give your partner a card and say, “honey, I started saving for retirement!” Oh, the personal finance sparks will fly!

The one in which Present Me kowtows to Future Me

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The one in which I care about Future Me’s money

Tomorrow’s paycheck is the first of my $1,500 contribution to 401(K). If all goes according to plan, as of December 15, 2009 I should have $16,500 in contributions.

If I can do this I’ll be very proud of myself … on so many levels, beyond just the financial commitment.

To date, I’ve contributed ~$28,000 to retirement funds, beginning in 2006 when I first started working (and nope, I’m not looking at the current value). 

Maxing out the 401(K) would be absolutely fabulous (I do not usually use the word fabulous – but an additional $16,500 in retirement accounts would, indeed, be fabulous).

It would also ease the pressure on retirement contributions for 2010 (the year, I hope, I begin grad school). I also hope to squeeze in some travel before school starts – planning a mother-daughter trip to China, and would really like to go to the Galapagos (from my “big-ticket dreams travel” list).

The one in which I care about Future Me’s memories

The problem is, I don’t know if I can find a travel companion to Galapagos. But I really want to go. So maybe I can get paired up with another single lady for a double room and avoid paying the singles supplement fee.

Maybe I should just go for it – say that if I can max out the 401(K) for 2009, and save $10,000 for retirement for 2010, then I’m just going to take off and head to the Galapagos islands for a week?

That’d be motivation…

I’m being pretty good to Future Me, eh? I hope she appreciates it when she’s an 80-year-old rocking out in her rocking chair, listening to oldies such as Brad Paisley and Maroon 5, and NOT eating cat food.

Moving Into the Automatic Finance Camp

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I didn’t used to automate savings, but slowly, I am taking the steps toward a simpler financial system.

My system is set up thusly: net pay (minus 401K, taxes, insurance premiums, etc.) is deposited into my savings account. I then manually move X amount into my checking account, usually twice a month.

Irregular income (blog revenue, bonuses, gift money, etc.) aren’t designated for anything, per se. I usually save 75% of the money, with the rest going to fun things.

Right now, the 3 biggies that I automate are:

  1. 401K. The easiest of them all. I don’t even see the money, it just goes away to the magical happy place that is Retirement Land.
  2. Car insurance. I’ve had an automatic debit from my checking account for a couple of years now. It works great.
  3. Student loan. Again with the automatic debit. I used to manually pay this bill online, but have overpaid by a couple of months because I forgot that I had made a previous payment that month. Because my loan is interest-free, there’s no point for me to pay ahead of schedule.

I don’t get any other recurring bills (utilities and internet are included in rent). I manually pay my credit card bill online because it fluctuates month-to-month, and I want to have the opportunity to take a look before I pay.

To what extent do you automate your finances?

So Excited I Can't Sleep

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*sung to tone of Britney Spears’ “(You Drive Me) Crazy”*

401(K), I’m so into you
You got that tax deferral, what can I do
401(K), for you I waited a year
Now I know that my tax vehicle is here

You drive me to savings
I just can’t sleep
I’m so excited, I’m in too deep

Ohh…crazy, but it feels alright
Asset allocation keeps me up all night

Tell me, you’re so into me
That my account is safe from Uncle Sam’s reach
Tell me stock appreciation is true
That I’m not wasting my money on you

401(K) you mean so much more
More than any tax deferral I’ve had before!

T-14 days until 401(K) kicks in!