The one in which Present Me kowtows to Future Me

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.

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Moving into the automatic finance camp

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?

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So excited I can’t sleep

*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!

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The good, the bad, and the ugly

My finances have fallen by the wayside.

The Good: *cricket chirps* I am not living above my means (just, er, very close to it). I also finally set up automatic payments to my student loan.

The Bad: Between all the costs for the apartment and the copious amounts of shopping and dining I’ve been doing, my emergency cash fund has been growing… rather slowly. For most of April and all of May I haven’t been able to save much at all.

The Ugly: Too ugly for words. Only numbers can tell the story.

Double rent for June: ~$1,700 (later I expect ~$300 back, but still!)
GMAT registration: $250
Hotel reservation for parents: $200+
Memorial weekend massage & shopping: $350
Dining out: I don’t want to look!

Conclusion: I’ve been a rather bad PF blogger, haven’t I?

The exciting news is that I will have access to a 401(k) come July. I am debating if I should aim to contribute the full $15,500 the 401(k) for 2009 – that’d be $2,583 a month, a very significant chunk of my paycheck. I probably won’t be able to save for anything else for the rest of the year.

However, given that I expect to return to school in the next few years, it behooves me to save as much as I can in an employer-sponsored retirement vehicle while I can. One year of maxed out 401(k) is $15,000+ in contributions… that can make a ton of difference later on in my life.

Maxing out the 401(k) in 6 months = a lot of money! But maybe this enforced savings is just what I’ll need to whip my finances back into shape.

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Will you have to support your parents financially?

If you’ve ever wondered that, you should read this MSN article (via Escape Brooklyn).

I think I got lucky. My mom is a pretty savvy lady when it comes to money. Though my parents had a relatively late start to retirement planning and investing, they’ve done okay for themselves and are continuing to amass a little nest egg.

Sometimes I’m surprised at how progressive Mom is – she has never said “promise you won’t put us in a home,” instead, it’s “we want to prepare financially so that if/when we have to go to a retirement community, we can go to a nice one, or we can hire in-home aid.”

When family friends and relatives joke that when I become financially stable I will take care of my parents, Mom always interject, “the responsibility of children, when they grow up, is first to their family and kids.” She also said to me many times that the greatest gift she can leave me is peace of mind.

After reading this article, I come away with greater gratitude for Mom’s wise choices. I hope that if/when I become a mom, I can be as wise as she is.

To my readers:

Do you think you will have to support your parents in their retirement?

If you are a parent, would you expect your children to support you in your retirement? Either way, (how) do you make your expectations known?

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Me vs. the market: Do I know what I’m doing?

One reader, CD, left this comment on my previous post on the market:

Hey smart alec,

Stay away from stocks, funds, bonds, unlesss you know what you are doing. In the sense spending at least 20 hours/week on investing and constantly monitoring the markets.

Otherwise, this is not your ordinary market, and believe me it will suck your money out of your little purse, faster than you would think.

Sell every freaking fund and put them into money market account, preferably a t-bill only.

Having said that if you still would like to go long and invest, here is my advice for you:

– Never ever buy a single stock, especially nowadays. It is simply too risky.

– Always be a trend investor on indexes. Think about what will happen in the next two to six months. For instance, bank stocks may go up a little due to more “free” money thrown at them.

– Understand put/call options and how they work. How you can utilize them to set your selling and buying points.

– Understand the bond market. It is ten times larger than the stock market and usually a good indicator of the overall economy.

– Watch CNBC, Bloomberg, even Cramer. But never ever buy or sell based on their advice. They are always providing you what is already priced into the market and usually do not give you the full picture.

Good luck.

I disagreed with certain points of this comment, namely, that I would need to spend 20 hours a week monitoring the market before I put money in stocks or funds. However, CD’s words gave me a lot of food for thought… in that, do I really know what I’m doing?

I have an understanding of general macroeconomic conditions and the workings of stocks and bonds. I also have an academic knowledge of calls and puts, but I certainly don’t’ follow the market as closely as CD suggests, nor do I engage in call or put options.

So, given all of the above, am I ready to invest in this market?

I think so.

There are two types of investors that should do well:

1. Investors who can sucessfully market-time over long periods of time (and there ARE those who can do this), or
2. Investors who acknowledge that they do not have the skills to select high-performing stocks or funds consistently, over the long-term, and instead engage in a buy-and-hold / index strategy.

I think some of CD’s advice works for Investor Type #1. I, however, am Investor Type #2. I am a buy-and-holder. I DON’T have 20 hours a week to study the markets. And even if I did, I don’t think I can select the winners, year in, year out. This means that I am content with market returns.

So, I invest in index funds with very low expenses, and I intend to hold these funds for a VERY long time. My time horizon is 40+ years, so I think it IS okay (in fact, it might be beneficial) not to follow the market every single day (even though I do, though I never act on it). I don’t want to be an emotional investor.

This market has scared me, because I AM afraid that “this time it’s different,” that all the things we’ve learned from the past no longer holds true. This is my first real bear market, and it’s not fun watching my “little purse” shrink even further.

But to sell everything and put all my money into T-bills would be a reaction motivated by FEAR – and truth be told, I am just NOT that afraid right now. It might be naivete, or the lack of responsiblity for anyone but myself, but I’m feeling okay about the current market right now. (I probably won’t be if the Dow is still at 8,000 in ten years… but for now? I’m good).

And my purse might be little now, but I believe that with a diversified portfolio and consistent savings (and a couple pieces of cash-flow positive real estate holdings in the future), I will have a good chance of achieving my financial goals. I might be petite, but don’t be fooled – one day, I’m going to carry a big purse.

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Are you feeling lucky? Or scared?

Goal #1 accomplished. 🙂

Now, for the really fun part… let’s see how fast and how far the $5K falls! Muahahahah <evil laughter>

Some questions for everyone out there:

(a) do you feel lucky that the stock market drop has made stocks so much cheaper, thereby making increasing the chances you’ll get a sizeable gain when you sell in a couple of decades? Or,

(b) are you scared off by volatility and have stopped investing in stocks (but have kept your stock holdings relatively constant)? Or,

(c) are you pulling out of the stock market faster than a bankrobber’s getaway car after the big heist? Or,

(d) are you like me, crossing your fingers and keeping the faith (scared but still investing)?

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Shares, not dollars

Shares, not dollars: this is my way mantra to cope with Mr. Market’s relentless assault on my retirement portfolio.

Looking at the value of my retirement holdings is an exercise in self-inflicted pain. I don’t plan to decrease my investments OR to adjust my overall fairly aggressive asset allocation, but that doesn’t mean I don’t grimace a little over a 30% drop in the value of my contributions.

But – if I just change my perspective a bit, and turn my focus from dollars to number of shares, this downturn has been great! I’m picking up shares at all kinds of discounts. At the beginning of 2008, $5,000 bought maybe ~170 shares in my funds. Now, $5,000 can buy ~240 shares. 170 vs. 240 = HUGE difference.

The expectation, of course, is that these shares will (over the long run) grow in value. Capitalism is the essential exercise in optimism – the optimism that things will keep getting better, that productivity will increase, that people will prosper. That’s why I buy into America (literally, I buy America – well, the U.S. market index, anyway).

Of course, shares can lose most -or all- of its value (exhibits A, B, and C). But I don’t hold any individual stocks. In addition to the U.S. market index, I hold an international index and a bond index.

So, if my shares become worthless, the world has probably gone to hell in a hand basket. At that point, retirement will be the least of my worries. I’ll probably be foraging for berries and hunting small rodents for sustenance.

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One of my biggest personal finance pet peeves

Here’s one of my biggest personal finance pet peeves: one of the biggest source of tax deferral for the middle class, the 401(K), is utterly dependent on the employer.

Doesn’t this arrangement feel a little anachronistic in an age where careers may be characterized by frequent job changes and/or stints at self-employment?

I didn’t have a 401K for 2008. My company is talking about starting a 401K in the next several months, so I’m hoping that will work out. All that TAXES that’s being taken out of every paycheck is enough to make me see red. I know, I know, public goods and all that jazz… but please.

Why can’t the government set up a portable tax-deferal vehicle that allows an individual to defer W2 earnings? It’d just look like the IRA, with the contribution limits as a 401K. Let’s call it a “private 401K” here.

In essense, instead of the company administering the 401K plan, the individual can choose any provider such as Fidelity, Vanguard, Scottrade, ING, etc. Then, if the employer decides to do so, it can contribute a “match” in the private 401K.

Under this scenario, ANYONE with an earned income would be eligible to contribute $21,500 in tax-advantaged accounts for 2009: $16,500 in a private 401K, and $5,000 in an IRA. The government is worried about people saving adequately for retirement. Wouldn’t this be a step in the right direction?

I can’t imagine that this idea hasn’t been proposed before. On another note, I really think that healthcare insurance should be de-coupled from employers as well.

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$17,500 Roth contributions = $12,800 current value

Goal #1 of 2009 is right on schedule. I am on track to max out the Roth IRA by the end of next week with $500 fom the upcoming paycheck. Currently, my contribution stands at $4,500, partially thanks a small bonus I received at work.

Maxing out the Roth every year is probably one of my proudest financial achievements. Since I’ve started a Roth IRA, I’ve contributed $17,500. $4,000 in 2006 and 2007, $5,000 in 2008, and $4,500 (soon to be $5,000) in 2009.

But is the current value of the Roth IRA anywhere near that figure? Noooooo. Nope. Not a chance in hell. My Roth is worth about 70% of what I put in.  That’s all money I saved, dollar by dollar. So, OUCH.

At least the shares are cheap right now.

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