I have just started my Roth IRA and I am trying to max it out while also putting the same amount each month into additional debt payments. This means I will be saving over $800/month. On average I make $3,000 a month, which means I will be saving 27% of my salary.
I will be making almost $600/month more in September, if I end up saving that amount it would be $3,600 in income, $1,400 in saving/additional debt payment = 39% saved. My debt would go away in no time and then its house buying time.
Then again, if I ever find a girlfriend this whole post goes down to the wayside (but I should be able to save a decent amount anyway).
It might be tough saving $800/month but it can't hurt to try!
Saturday, April 12, 2008
Saving Young is Awesome
I just opened a Roth IRA in troweprice and they sent me a magazine about investing. they showed a chart showing how compound interest works. Starting early really works wonders.
Go to http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Under current principal put in what you are starting with. (I put $0)
Under annual addition you could put in any number you are putting into an account with your automatic savings plan.
Under years to grow it tells you how long your investment will grow if you dont touch this money.
Under interest rate you could put different numbers depending on what you are investing in.
Under compound interest time I put 3, but this seems pretty random.
I just started my Roth IRA and am maxing it out.
Annual addition = $5000
Years to grow = 35 (I want to retire when I am 62)
Interest Rate= I put a realistic number of 9%. (Getting 9% is key and my future posts will explain my philosophy on how to invest for the long term)
Compound interest = 3
Can you guess how much money I will have in my Roth for retirement if I keep this up?
$1,217,669.
Rediculous.
At that amount, I can reasonably take out $73,000 a year (6% of amount) and that money will never go away. And it will grow TAX FREE! This doesnt include the new tax law that will let you put in more than $5,000 a year (It will be adjusted for inflation). I think if I max it out with inflation it should be over 2 million when I retire.
The whole point of this? say I start doing this at 37 instead of 27. How much money would I have?
$468,016
Enough said
Go to http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Under current principal put in what you are starting with. (I put $0)
Under annual addition you could put in any number you are putting into an account with your automatic savings plan.
Under years to grow it tells you how long your investment will grow if you dont touch this money.
Under interest rate you could put different numbers depending on what you are investing in.
Under compound interest time I put 3, but this seems pretty random.
I just started my Roth IRA and am maxing it out.
Annual addition = $5000
Years to grow = 35 (I want to retire when I am 62)
Interest Rate= I put a realistic number of 9%. (Getting 9% is key and my future posts will explain my philosophy on how to invest for the long term)
Compound interest = 3
Can you guess how much money I will have in my Roth for retirement if I keep this up?
$1,217,669.
Rediculous.
At that amount, I can reasonably take out $73,000 a year (6% of amount) and that money will never go away. And it will grow TAX FREE! This doesnt include the new tax law that will let you put in more than $5,000 a year (It will be adjusted for inflation). I think if I max it out with inflation it should be over 2 million when I retire.
The whole point of this? say I start doing this at 37 instead of 27. How much money would I have?
$468,016
Enough said
General Philosophy on Finances
From my personal experiences I feel that the most important thing that anyone can do to improve their finances is to create a budget. Most of my friends might have a rough idea of how much they are making and saving, but when I first started writing down all of my expenses I have noticed a few things.
1) I have spent less money in general when I wrote things down
2) I was spending more than I was making even with a pretty high paying job.
3) I visually saw where my money was going.
I feel that everyone should at least spend 30 or so minutes a month and track where all of their expenses have been going.
I have an excel file that i have created which has categories for basic expenses and income, and tells you if you have saved money each month. Let me know and Ill send you a copy.
The next important thing that should be done is to have some type of automatic savings plan where you pay yourself first immediately after you receive your paycheck. A century ago the US government allowed everyone to pay everything they owed in taxes once a year. the government was smart however, and started taking payroll deductions because they know that most people do not budget their money. I feel that everyone should do the same thing and save at least 10% of their income right off the top. Many people end up spending everything they make and then have nothing left at the end of the month. By automatically investing it helps people budget their remaining money. To be honest once I started doing this I havent missed it!
After setting up a budget and automatically saving, it is important to know where to put this money you are paying yourself. Depending on your situation, I feel that in order of importance you should
1) Pay off and high interest credit card debt
2) Build an emergency fund (of at least 3 months) and leave it in a money market account.
3) Invest in a 401k up to the employee match (if available, if not go to #4)
4) Invest in a Roth IRA with low expense index funds.
5) If the Roth is maxed out and there is money left over, save for a house.
In conclusion
1) Make a budget
2) Create an automatic savings plan
3) With the automatic savings plan, pay off credit card debt, invest in a 401k or Roth, save for a house.
If you follow these steps you are well on your way to financial independence.
Many of my future blogs will explain why I believe in these steps.
1) I have spent less money in general when I wrote things down
2) I was spending more than I was making even with a pretty high paying job.
3) I visually saw where my money was going.
I feel that everyone should at least spend 30 or so minutes a month and track where all of their expenses have been going.
I have an excel file that i have created which has categories for basic expenses and income, and tells you if you have saved money each month. Let me know and Ill send you a copy.
The next important thing that should be done is to have some type of automatic savings plan where you pay yourself first immediately after you receive your paycheck. A century ago the US government allowed everyone to pay everything they owed in taxes once a year. the government was smart however, and started taking payroll deductions because they know that most people do not budget their money. I feel that everyone should do the same thing and save at least 10% of their income right off the top. Many people end up spending everything they make and then have nothing left at the end of the month. By automatically investing it helps people budget their remaining money. To be honest once I started doing this I havent missed it!
After setting up a budget and automatically saving, it is important to know where to put this money you are paying yourself. Depending on your situation, I feel that in order of importance you should
1) Pay off and high interest credit card debt
2) Build an emergency fund (of at least 3 months) and leave it in a money market account.
3) Invest in a 401k up to the employee match (if available, if not go to #4)
4) Invest in a Roth IRA with low expense index funds.
5) If the Roth is maxed out and there is money left over, save for a house.
In conclusion
1) Make a budget
2) Create an automatic savings plan
3) With the automatic savings plan, pay off credit card debt, invest in a 401k or Roth, save for a house.
If you follow these steps you are well on your way to financial independence.
Many of my future blogs will explain why I believe in these steps.
What this blog is all about
I would like to write my first post explaining my financial situation, what I will be blogging about, and how it might help your situation.
When I first graduated college I was a teacher making $21,000/yr but had no rent, food, car and credit card payments. In hindsight it was the best financial situation I was in in my life. I could have saved nearly $1000 a month and as I will be blogging about, it is all about how much you save.
After college with a modest savings I decided to move to Miami with no job. I ended up spending most of my savings to build a tutoring business which started with 1 music client and grew to teach chess to over 30 kids a week. I did well financially but I tried to run many businesses with little thoughts into my finances.
Almost 2 years ago I moved to Austin, again with no job. I decided to be a financial planner tring to make a living trying to help others with their finances. Unfortunately I did not agree with many of the recommendations that I should be selling to potential clients because they were not in their best interests. Oddly enough during my time as a financial planner I ended up with a ton of credit card debt and street smarts in how to handle finances. After leaving the financial planning career I decided that I wanted to go back into teaching. It might have been for the happiness in teaching others, but it also could be due to the stability of income that teaching gives. It took me many months to get the required education and training to be a teacher, and I am about to finish my first year and will continue teaching next year.
I want this blog to accomplish a few things.
1) It is a journal of my finances for the future and how I handle situations that come up.
2) It is my philosophy of budgeting and investing for young adults.
3) I will be giving common sense information and solutions for young adults in different situations.
When I first graduated college I was a teacher making $21,000/yr but had no rent, food, car and credit card payments. In hindsight it was the best financial situation I was in in my life. I could have saved nearly $1000 a month and as I will be blogging about, it is all about how much you save.
After college with a modest savings I decided to move to Miami with no job. I ended up spending most of my savings to build a tutoring business which started with 1 music client and grew to teach chess to over 30 kids a week. I did well financially but I tried to run many businesses with little thoughts into my finances.
Almost 2 years ago I moved to Austin, again with no job. I decided to be a financial planner tring to make a living trying to help others with their finances. Unfortunately I did not agree with many of the recommendations that I should be selling to potential clients because they were not in their best interests. Oddly enough during my time as a financial planner I ended up with a ton of credit card debt and street smarts in how to handle finances. After leaving the financial planning career I decided that I wanted to go back into teaching. It might have been for the happiness in teaching others, but it also could be due to the stability of income that teaching gives. It took me many months to get the required education and training to be a teacher, and I am about to finish my first year and will continue teaching next year.
I want this blog to accomplish a few things.
1) It is a journal of my finances for the future and how I handle situations that come up.
2) It is my philosophy of budgeting and investing for young adults.
3) I will be giving common sense information and solutions for young adults in different situations.
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