Adding more to the retirement account

In an earlier post, I talked about my salary increase. I realized two weeks later that I had not increased my 401(k) contribution. This was not a terrible thing, but with an increased paycheck comes the potential for increased taxes. Plus investing more in my retirement will likely benefit me in the future. Therefore, I increased my 401(k) contribution by 1% and saw a modest decrease in my take-home pay. With some changes to my automatic savings, I was able to cover the difference and build my retirement investment more quickly. Since this money comes out pretax, it does affect my final tax burden so I should see a modest reduction now as well as investing for the future.

Have you increased your retirement contributions?

One friend's strategy: Open an IRA to reduce taxes

My taxes and I get along quite well, usually getting a refund back more than having to pay to the government. (I do try not to get refunds, but so far, not quite there.) However, not everyone is so lucky. One of my friends found that when she figured her taxes for 2009 that she owed more than she wanted. Of course, she had waited until April 10 to calculate what she owed the various governments (she and her husband work in two different states). Currently, she and her husband rent, have one child and are resident aliens. However, when she calculated what they owed, she was not pleased with the total. In fact, she told me she was opening a traditional IRA to reduce her tax burden.

I can only speak in general terms because I do not know how much she owed or how much her tax bill was reduced by opening and contributing to an IRA. However, she reduced it enough that the refund from the state covered what she owed to the federal government with a small amount left over. I have not gotten to this point, but I know this is one strategy to reduce tax burdens rather quickly especially as in my friend's case, taxes are not figured until the last minute. This may be why people can contribute to a Roth or traditional IRA until April 15.

Our tax situations are different. I am single, have a house with a mortgage interest to deduct, contribute to charity and to my 401(k). She is married with a child, rents her home and contributes to her 401(k). To further reduce her taxes, she plans on continuing to contribute to the traditional IRA and possibly opening a 529 for her child.

Is contributing to an IRA a tax-reduction strategy you could use?

Keeping financial goals

Since I have started this blog, writing down my goals for the coming year has become increasingly important. For one, I have a place where I can reread what I am focusing on. Two, detailing the goals for someone more than myself is extra motivation to keep on task. This year is no exception and here is my progress:

1. Fully fund my 2010 Roth IRA ($5,000) in a calendar year.
Accomplished! I funded the balance not covered by my automatic monthly contributions using 2009 tax refund. Assuming I keep making my contributions, my Roth IRA will be maxed out by December 31, 2010.

2. Save $3,000 for purchase of a newer vehicle.
Going into 2010, I thought this was a stretch goal and my savings account reflected I was not track to reach the goal. However, my merit increase + promotion increase has increased the amount of my automatic transfers plus there are two more "extra" pay periods this year so I have hope I can reach this number.

3. Have $2,000 in my farm savings account at the end of 2010.
As with my car savings, I was pushing myself to make this number. However, this looks to be within reach now that I have a larger paycheck from which to save money. Depending on how it goes this year, I might increase this goal.

4. Save $700 by the end of August 2010 for a potential vacation.
This goal was on track from the beginning of the year as it was based on what I had been saving. Since I have now committed to the trip, I plan to keep on my budget.

I am also hoping to turn my furnace off permanently on April 15, but weather determines if this is a realistic goal. Despite a run of unseasonably warm weather, my region was also hit by colder weather that resulted in my house becoming cooler than 54 degrees Farenheit, an uncomfortable level for me. Therefore, after having turned off my furnace for a week, I resorted to turning it back on.

What progress have you made on your goals?

How I fully funded my Roth IRA

For the past three years, contributing the maximum to my Roth IRA has been one of my financial goals. This is one half of my annual retirement investments, which also includes my work-sponsored 401(k) with a 3% match. My Roth IRA account resides with T. Rowe Price and is comprised of three index funds. Not only have I given the full contribution for the last three years, I am looking to fully fund my Roth IRA within the same calendar year rather than using the grace period until tax day the following year. How did I do this?

I do my taxes at the beginning of February so I can quickly get any money I am owed back from the government. This year, due to my itemized deductions as well as tax credit for four energy-efficient window replacements, I received a larger-than-expected refund from the federal government and approximately the same amount back from the state as I have for the last two years. Combined, this money was able to finish funding my 2009 Roth IRA, fully contribute to my 2010 Roth IRA (based on the amounts automatically invested each month) and still have a bit left to fund other savings goals. This is not a typical situation for me, but meant that I did not have to increase my monthly Roth IRA contributions to fully fund the account for 2010. This is the first time since I opened my Roth IRA that I was able to contribute the maximum amount in a calendar year.

As a result, I opened a third bond index fund to complement my extended market index and my international index funds. I want to keep a diversified portfolio and feel that adding a small amount of bonds to my investment choices would be beneficial. This is less than 10% of my Roth IRA and and even smaller fraction of my total retirement investments so for someone in her late 30s, I am not going too conservative.

At this point, I am looking forward to my 2011 Roth IRA which hopefully, will have an increase in the maximum contribution amount. It has been stuck at $5,000 for the last two years. If my tax refund is similar to this year's amount, I should also be able to fully fund my Roth IRA and contribute to my savings goals as well.

Have you opened a Roth IRA and have you made the maximum contribution?

Second quarterly update for my 2009 financial goals

Net worth: Since I last reported in April, I have seen my net worth increase each month. My focus on saving and consistently contributing to both my 401(k) and Roth IRA have given me a 12.6% increase in my net worth since April 1. This is much better than I ever expected especially in the face of losses in late 2008.

1. Fully fund my 2009 Roth IRA with $5,000.
I am 47.7% to my goal. With the 1.9% merit increase in my pay check, I placed most of this new money toward my Roth IRA. With a little help from my regular savings account, I am on track to nearly fully fund my account by the end of the year. Plus it is nice to see the balance this account back above five digits and moving fund worth closer to amount I contributed (although still lagging).

2. Save $2,500 for purchase of a newer vehicle.
I am pleased about my progress towards this goal. To date, I have an additional $1,454 in this account. Much of this increase is due to systematic contributions but leftover money from my gasoline spending category has helped. This month, I will have additional savings from my extra paycheck. With more than halfway to my goal, I am confident I will reach this goal.

3. End the year with $1,500 in my farm savings account.
With monthly transfers to this account, my savings has reached just over $807. I plan to contribute some money from my extra check (three pay periods instead of the usual two this month) so this should push me closer to my goal. This goal seems to be within my reach.

4. Accumulate $800 toward buying a new computer.
Unfortunately, I was unable to hit this goal. With my trusty iBook G4 losing its cooling fan and me being addicted to Apple laptops and surfing the Web, I purchased a refurbished 15" MacBook Pro for $1528.70 with a $262.67 AppleCare Plan, and had to use $1,100 from my regular savings account to fund the purchase. This meant I did have just under $700 saved for the computer purchase. Because I owe myself money, the money I get from selling my iBook G4 and the final installment of my internet funding award in 2010 will go toward mitigating the raid on my savings account.

4. Save $600 by August 2010 for a potential vacation.
This is my replacement goal and one I should be able to fulfill. My monthly contributions will get me to $533 and I had a few dollars extra from my FSA account that I had subtracted from my spending plan. With at least two more pay periods before August that have a bonus check, I should be able to reach my goal with little stress.

Overall, I am doing better than I thought I could be. While a positive trend is nice in the stock market, good old-fashioned savings is also boosting my bottom line. How are you doing financially?

Retirement investing: A cautionary tale

I have discussed rolling over your IRA, for example, when you have left a place of employment. In fact, I have rolled over my 403(b) into a traditional IRA. Hindsight being what it is, I wish I would have done things differently.

When I was looking to rollover my 403(b), I had to wait over six years for the amount of money I put in and the value of the account to equalize. This was made more difficult by the fact I make my contributions from 1999-2001 and then left for a new employer. The tech stock crash of 2000-2001 left me with almost 50% of the value of my pretax contributions gone. It was not a pretty sight and I ignored the account for the better part of five years.

However, I received a call from a new financial advisor in late 2006 to ask me to come in and evaluate my accounts. I had not talked with anyone for a while since my previous advisor had left the credit union of which I am a member. So I came in with my statements and we discussed my options. He recommended rolling over my 403(b) into an IRA account. Since the value was near my contribution values, I was interested in doing something different. The financial advisor suggested a growth investment portfolio with TransAmerica, and said he was invested with them as well. I thought that was a good recommendation.

He explained that the account was a front-load fee and was actively managed with shares of stocks and other mutual funds changing as the managers saw more opportunities for growth. My advisor told me that even though a 5% fee would take money from my initial investment, I would likely make it up the money in a year or two.

What does this all mean? Well, a front-load fund basically means that the mutual fund firm takes my money, removes 5% from the money and then invests the remainder for me as I specified. In the case of the fund I invested in, no fees would be charged to take out the money when I would want it in the future. I basically paid a fee up front for the company to take my money and invest it. I made this decision based on two flawed ideas:
1. My financial advisor liked the fund enough to invest in it himself so it has to be good.
2. As long as my money continued to grow, I did not think much about the 5% front-load fee.

Why are these ideas flawed? I never asked if the financial advisor received any benefit from me investing with the company. The second, why give up more of my precious money than I had to? I started out with a small amount of money, $5,400, to invest. Removing 5% then putting it in a market starting in 2007 was not an ideal move. I lost money to start with and my last statement had me with a value of just over $3,100. And that was after nearly gaining back my 5% fee off the top. If I was going to lose over 40% of my portfolio, I would rather have lost less of my money to fees.

If I had to do this over again, I would invest only in no-load funds (those with no fees), most likely index funds like those of Vanguard, Fidelity and T. Rowe Price. Yes, the value would still be down but I would still have more than if I invested in loaded funds. Now I know to check not only what fees are charged for investing, but the maintenance and management fees which can easily add up to 2% or more of the value of the fund. For the future, I plan on keeping more of my money for my investments and both asking more questions and reading the fine print more closely.

To educate yourself about investing, visit the following resources:
CNN Money 101
Balance Track overview
Fidelity basics

Brief overview of Roth IRAs

As you can tell, I am a big advocate of investing in the Roth IRA retirement vehicle. Recently, I was talking with a friend of mine and she mentioned that she should finally invest in one. However, until we were talking for a few minutes about Roth IRAs and when contributions could be made and how to invest, I did not realize she thought that all retirement vehicles meant that the money was tied up until at least 59.5 years of age. When she realized there were ways to withdraw money from the Roth IRA prior to retirement, she became greatly interested in what a Roth IRA could do for her.

Accounts like 401(k)s, 403(b)s and traditional IRA (individual retirement accounts) are tax-deferred. That means money iscontributed to the account before taxes are paid. That is why your end of the year tax statement, your W2, can show less money than your gross income because the money was put directly into the tax-deferred retirement account before taxes were calculated. Using tax-deferred accounts is one way to reduce your AIG, adjusted gross income, on which your federal and state taxes are based.

Roth IRAs are different; they are tax-exempt. While the money put into the account has already been taxed and does not decrease your taxable income, when withdrawn after retirement, no taxes are paid on the earnings. Furthermore, if you are not retirement age, you can withdraw your contributions without penalty. I believe the five-tax-year rule applies to contribution withdrawals, but this is one way to help fund schooling or a buying a first home. Leaving all your money in the Roth IRA account earns more dividends; however, this account type is flexible enough to give you options for pulling out the money if needed sooner than 59.5 years of age.

Roth IRAs are subject to contributions limits ($5,000 for 2009), income limits for single and married taxpayers, and do have penalties when contributions and earnings are taken out without following the allowed withdrawals terms. However, you can put in money for 2008 and 2009 years right now until April 15 to get one year closer to the five-tax-year "magic" number without waiting five calendar years. For more information on Roth IRAs, visit the Motley Fool. I have given a brief overview and the Web site has more details and examples to explain the various points.

Roth IRAs can be invested in anything from mutual funds to money market accounts and certificates of deposit. My Roth IRA is through T. Rowe Price and is composed of two index funds. My investment strategy is risky but I am hoping for greater rewards when I need the money. In the end, I contribute to both tax-deferred and tax-exempt retirement accounts. I put more than enough to get my employer's match for the 401(k)--I love free money!--and have made it a priority to fully fund my Roth IRA even if it takes me 14 months instead of the 12 calendar months. Consider the best strategy for you and weigh how each of these account types (tax-exempt and tax-deferred) will work for your retirement.

My 2008 Roth IRA is fully funded!

For the second year in a row, I get to cheer "I fully funded my Roth IRA!" One of my five goals for 2008 was to fully fund my Roth IRA. As I noted earlier this year, I fell short of funding during the calendar year. I believed my tax refund would cover most of the remaining amount and I was right. When I completed my federal and state taxes, I was looking at a refund of $1,040. With a contribution of $126 in savings, I would fund the last portion of my 2008 Roth IRA.

I was thrilled to get my money so quickly. Since I filed electronically, I received my state refund six days later and my federal refund seven days later although the amount was noted as nine days after filing. Then I transferred the money from my savings account to my checking, chose to make 2008 contributions to my Roth IRA index funds and waited for the transaction to go through.

My T. Rowe Price Account has two index funds. I allocated $718 to the Extended Equity Market Index Fund (PEXMX) and $448 to the International Equity Index Fund (PIEQX). Hopefully, I will buy my shares on a day without a market rally but volatility is the nature of the stock market.

Now I can focus on my 2009 contributions and how I will achieve fully funding my Roth IRA for a third year.

Analyzing my net worth for August 2008

I am still surprised we have reached September already. It just seems like summer slipped by me although my garden would tell me otherwise. Where does the time go? The same place my money seems to go--in the wind. Actually, August was not that bad, but I realized I have not checked in with my yearly goals so that will be the next post after this. After two months where my assets decreased, I have a positive month. I am reservedly cheering my 2.3% gain and hope that the trend continues.

That crazy 401(k) (and Roth IRA)
In August, both the Fidelity 401(k) and T. Rowe Price Roth IRA were up. While the Roth IRA gained almost $100 of value over my monthly contribution, the 401(k) was up but no where near the amount contributed. However, I will take a few hundred dollars more than last month especially with the markets closing more down than up. The very modest gains seen with the mutual funds prevented these stock-driven values from decreasing my total assets, contributing to a gain for the month.

The extra paycheck month
Being paid biweekly means twice a year, I receive an extra paycheck. Since I calculate all my expenses based on 24 paychecks rather than 26, I carefully plan how to save the extra month I receive. While a good portion is taken by the automatic transfers set up for each pay period, the extra $1,000 means I can pad my emergency savings account or open a new account or CD. This month I chose to split the money from my extra paycheck among emergency savings, car savings, found money account and opened a farm account. The farm account is for accumulating money for my long-term goal of owning and operating a small farm in the country. The extra check also means a boost to my overall cash situation, substantially helping August end on positive note.

Lack of activity on other accounts
Some of my assets are updated yearly, biannually or quarterly. Without new statements, these numbers remain unchanged. With half of my assets remaining unchanged and the others moving into positive territory, I came out with a gain for August.

While I am glad my mortgage is moving glacially downward and my assets are increasing, the gain is not moving as quickly as I like. I really need to buckle down and determine what means I can use to generate more income. I still have plenty of items to sell, but need something more sustainable for the long term to really get me closer to my goals. In looking at my finances, I need an extra $150 per month to get me closer to my dream of self-sufficient living on a farm.

How to rollover (or move) your IRA

The ease of rolling over your money from a 401(k), 403(b) or other pretax retirement benefit from an previous job depends on the company holding your money. Let me use my experience as an example.

My first job after graduate school was working in a laboratory at the same university from which I graduated. This new job doubled my income from my graduate stipend and offered me the opportunity to invest in retirement funds via a 403(b), which is a pretax retirement plan for nonprofits or universities. I started investing in 1999 and then 2000-2001 came along, blithely wiping out the value of my account. When I left the university position in late 2001, the retirement account value was ~50% of my contributions.

The company I am with now hired me seven months after I left my university position. While I was fairly pleased with the 401(k) plan my new employer offered, in January 2007, I consulted with a financial advisor about my 403(b) from the university job. I had let the money (and the plan choices I made) sit for six years. In that time, with no new contributions, I had finally gained all the value I had lost in the 2001 stock drop. I was ready to move on and wondered what to do with this money.

My financial advisor recommended Transamerica, which invests in several mutual funds, buying and selling funds to maximize returns. He was invested in the plan, explained it was a front-load fund and I thought the philosophy meshed well with my future goals. Now I realize funds that charge a load really are stealing my money, but I did not really think about it so I paid to join the mutual fund. Actually, I almost broke even for the first year in the fund so that was a plus.

However, it was not easy to retrieve the retirement money from my current 403(b) custodian to rollover into the IRA mutual fund I wanted. First, I had to sign lots of paperwork stating "Yes, I would like all the money invested in Wells Fargo Funds to be liquidated and transfer custody to Transamerica, where it will be invested in new mutual funds." The paperwork did not take long to fill out, but required I identify myself, list the custodian of my current funds including its address and phone number, my account numbers and indicate that all the money would be rolled over. Since I was conducting this rollover with the assistance of a financial advisor, I needed a witness as I signed my papers and noted the amount being transferred. The paperwork was then sent to the current account custodian for processing and transfer to Transamerica.

Despite a phone call from my financial advisor to Wells Fargo, it took two or three more phone calls and second round of paperwork to finally get my money transfered to Transamerica. Depending on the customer service agent my advisor spoke with, the paperwork was either adequate, inadequate or unable to be found. However, by April 2007, my 403(b) money was moved to its new custodian, Transamerica and earning back the 5% front-load fee for me.

There are a few options for rolling over money from retirement accounts into IRAs.

Visit a financial advisor.
As my story above illustrates, a financial advisor can help you chose an appropriate mutual fund family for your goals and assist you in taking your money from a retirement benefit plan and placing it into a rollover IRA.

Rollover the money into the new employer's retirement plan.
Many 401(k) plans including my own through Fidelity allow you to take money from a previous job and add it into the new retirement plan. This is not necessary. Money can be left in the previous account until you decide you want to move it, but being able to add it to the new 401(k) or other retirement benefit plan minimizes the accounts you need to keep track of as well as reducing the number of plan statements to review.

Rollover the money yourself.
Many companies like Fidelity, T. Rowe Price and Vanguard would be happy to receive your business (and your money) with a rollover IRA. You can call them via phone or sign up online to open an account. As long as you meet the minimum investment amounts for each fund and fill out the appropriate paperwork for the rollover, you can set up the new IRA yourself. These companies have no-load funds, allowing you to keep more of the money you saved and invested.

Regardless of how you choose to rollover your money, be aware that some custodial companies are more reluctant to release your money than others. Wells Fargo seemed quite tight fisted and required several follow up calls and a second round of paperwork to get my money. Oppenheimer, my Roth IRA custodian, just needed the paperwork I filled out to move my money to T. Rowe Price. If you tackle this job yourself, you may need to spend time coaching the money through the system. However, once the money is in your new IRA account, you can watch it grow (hopefully) and be happy with its new investment home.

Analyzing my net worth for April 2008

I was surprised that my net worth goes up with all the volatility in the stock market and the rumblings in the economy. Still, I was pleased to find in April, I increased my net worth by 1.5% from the previous month. This was greater than I expected with the various pressures on my money.

An unexpected car repair
Emergency funds are for just such an event and I was glad I could pay for this without issue. Still, losing over $1,400 in my liquid assets is no fun--and not the direction I want my savings to go.

Revised home assessment
Yes, I received one of these in the mail and the number went down 1.5%. The assessed value did not go down as much as it could have since I did do a window replacement, but it was not enough to counterbalance the market trends.

The stock market and its effects on my retirement funds
While my 401k and Roth IRA gained in value above the contributions made, my rollover IRA lost value. Since the rollover IRA was a front-load fund, I was not happy to see the low numbers. Since this news was from the first quarter of 2008, the loss may moderate and I may end the year ahead. Time will tell.

In addition, I received a statement from a university pension fund. Since I worked for a state university for 2.5 years, there is money invested in my name. I have let the money sit in the account as the fund is well-managed. In fact, I gained nearly $1,000 in value from the year before. This was as of January 1, 2008, the date of the statement, but an impressive number since the account gained 11.6% in value.

I am happy to see my net worth go up, but I expect May will not look as good. I have spent a lot on gardening supplies and home improvement, and the bill comes due this month. However, I will likely stay on a positive trend unless the stock market heads on a downward trend.

My Roth IRA is fully funded

For the first time since I opened my Roth IRA in March 2001 as a contribution for 2000, I have contributed the maximum to the account. Granted it is $4,000 for 2007, but I am proud of making it to this point. I managed to get to this point by making monthly contributions as well as using lump sums from tax refunds and the term life insurance cash out.

When my Roth IRA was first opened, it was during the tech stock bust, and my financial advisor suggested a Oppenheimer blend fund. I contributed $500 followed by a $200 contribution in 2001 and promptly lost half the value of the mutual fund. One of the finance seminars I attended at my credit union explained the various retirement vehicles including a Roth IRA. I considered it a way to get me closer to buying my own home as well as a retirement fund. However, $700 does not go far and I neglected my Roth IRA after the two contributions. By the time the fund came near the value I initially contributed (@ mid year 2006), I was tired of the small gains the fund made and the fees that would mitigate the gain.

In looking at my options, I read about index funds, what they are and why financial experts of various stripes recommended them. This sounded interesting and I decided I wanted to move my Roth IRA money into an index fund. Oppenheimer did not have any index funds so I had to look for a new option. My new financial advisor said I had to pursue the index fund option myself rather than having him take care of the money transfer. My 401(k) plan was with Fidelity, but I wanted to have some variety so I looked for other fund family options. Vanguard had a steep initial investment of $3,000. Since my Roth IRA was only worth $700, this was a problem. I chose T. Rowe Price since I could open with $1,000 as long as I invested at least $50 a month. So I rolled my Oppenheimer blend fund into the T. Rowe Price Equity Index 500. I managed to break even December 31, 2007. This meant my shares purchased over nine months were worth what I had contributed over the year.

With my lump-sum contributions to my Roth IRA giving me my first maximum contribution year, I have crossed the threshold of over $5,000 in my T. Rowe Price account. This means I can shed half the fees being charged to my account because my balance was less than $5,000. This means more of my money can grow.

I also wanted have a broader portfolio so I decided to convert my T. Rowe Price Equity Index 500 to the T. Rowe Price Extended Equity Market Index , a new index fund. It was probably not the best move to make after two lump sum investments and a 0.5% penalty for shares owned less than 90 days, but it is done. The new fund has an expense ratio of 0.4%, less than managed funds but a bit more than similar Vanguard funds. However, the difference was not enough to drive me to Vanguard so I will likely keep my Roth IRA with T. Rowe Price.

My next Roth IRA goals are to 1) contribute the maximum for 2008, which is $5,000, and 2) consider broadening my market exposure even further by purchasing an international index fund. The first goal will need more contributions than I am currently making and the second will require some research for the best plan. I will have to see how things go this year and what sort of tax refund I get as that is a substantial share of the money that funds my Roth IRA. I am confident that since I fully funded my Roth IRA once, I can do it again!

Contemplating life changes (or the five-year plan)

Various thoughts and ideas have been floating around my head and involve reconsidering my career path, reviewing my financial goals, deciding where I see myself in five years and how I might get there. These are heady changes and need plenty of time to contemplate how to accomplish them. Here is how they have been breaking down.

I have been considering where I want to live. My forties are not too far away and I would like to return to my roots in the country. I do not intend to be a farmer like my father, but there is something about living my own life that appeals to the independent part of me I put away after deciding a Ph.D. and my own research lab were not part of my career path. However, to get to the point of truly changing my life situation, I would need to save more money and plan for this change. I have a few years and sitting down to make a plan would help me determine if this is feasible in five years or not.

I know what I do not like. My two years in a small city of 12,000 people have pointed out that the friendliness and small-town feel are just talk. No one has gone out of their way to introduce themselves and rather than helping neighbors, some would rather complain about the state of the sidewalk after a winter with record snowfall. There are some very lovely people as my neighbors but my experience has been neutral to negative in my suburban neighborhood and I would rather live somewhere else.

In addition, I have been reconsidering my current career but it is difficult. I am at a good company with a great supervisor but my motivation is lacking. Since I have no idea what I can replace my job with, it behooves me to find the best ways to use my current skills and learn new skills in my position. After ten years in my company, I do get rewarded with $1,000 gift certificate and I am thinking to stay with the company for ten years, reach this goal and leave shortly after. This timeframe would coincide with intention to leave for the country. My job and a new living situation are not mutually exclusive, but I think I will be ready for a big life change at this point.

How do I get to this point? I have to consider my income, my savings and what I want do with a new life in the country. I have ideas, everything from a pick-your-own-strawberry patch to a restful country retreat, a native tree nursery or even being self-sufficient. These ideas are still more vague and I need to figure out what I want to do before I execute my plan. These ideas also will take time to build to a business and therefore, I need to have money to carry me through until I am established.

Many financial bloggers impress me with their fantastic savings rate. I live on about 70% of my income, thereby saving 30%. Simplicity in Kansas regularly saves over 50% and others have noted saving nearly 70%. My fixed expenses as a percent of my income are higher than many recommend, nearly 60%. Being able to live on 50% of my income or less would be better if I found myself in a tight financial situation. A roommate would free up some money but I like my personal space so this option is not ideal. I need to explore alternative income streams but am still trying to figure out what they could be.

Regardless of the plan I pursue, I cannot skimp on saving for retirement. If I do get a raise this year, the money will go to my Roth IRA. While I am on track to max out my 2007 contributions, 2008 looks more challenging. I will likely need any 2008 tax refunds to help max out my 2008 contributions, but that is all a year away. I am still debating whether I will follow my financial advisor's suggestion and decrease my 401k contribution and increase my Roth IRA funding. I will need to evaluate this idea after I receive any boost in income. My found money may help fund the Roth IRA or go to another use (e.g., vacation or new computer).

This all means I really need a plan and ideas on how to save more. There is room in my spending plan. I do not spend much on clothing or entertainment and have let the money carry in the category. I am considering how to treat the excess: get to a total (e.g., $75) and then save the balance or start saving the money every other month when not spent. I plan on tracking the unexpected money put into my savings like my extra paychecks (I live on 24 paychecks even though I receive 26 in a year), bonuses and excess money in a spending category. This will let me know how much I really am saving in addition to my automatic transfers. It may also help me readjust my spending plan. With a goal in mind for the future (getting a farmette in the country), my incentive to save will only increase.

Tax refunds and what I will do with them

Yesterday, I did my federal tax return using the web-based TaxAct, submitting my taxes for free, and today I filed my state return also for free. I was taken aback by the amount of the refunds I was owed by the federal and state government. When I increased my withholding last year after filing my 2006 tax returns, I figured that I would just about break even with the feds and receive a similar state refund. Well, I was wrong. Although my income increased from 2006, I had additional deductions I could take including an energy credit and I ended up with the same federal refund amount for 2006 and 2007. In addition, my state refund had increased compared to 2006! So what are my plans for the money?

2007 Federal tax refund
As I did last year, I calculated out how much I would have received each pay period if the money had stayed in my pocket. I divided my pending refund by 26 and then decided how I would have used the money if I could distribute it over my many spending categories. Here is the breakdown:
40% will be a 2007 contribution to my Roth IRA
20% will be additional principle paid on my 30-year mortgage
20% will be saved
20% will be spent

2007 state tax refund
My intention was to put this refund toward my Roth IRA. However, this was when the number was a bit lower. Here is the revised breakdown:
11% will be spent
89% will be a 2007 contribution to my Roth IRA

Between the federal and state refunds on top of my monthly deposits to my T. Rowe Price account, the total contribution to my 2007 Roth IRA are 69% of the maximum $4,000. With the cash value of the term life insurance (assuming it arrives soon enough), I will be able to max out my Roth IRA for 2007 and add a bit more to the 2008 monthly contributions.

I am in the third year of my 30-year mortgage so the payment will not make much of a dent in the principle. However, I do like to contribute a bit extra to my mortgage payment and a small decrease in principle will save some on taxes in the long run. Tying up my money in my home is not the best idea so boosting my savings is only to my benefit.

Spending some of the windfall is fine as long as other financial necessities have been taken care of. Since I have purchased a bicycle, I need a helmet. The extra money would encourage me to finally do it. I also have made much of the Pet Poo Converter to help cut down on my plastic bag usage. I will definitely be buying this item!

Both tax returns I requested be deposited electronically. This early in the tax season, I can expect to see my state refund in a few days and the federal refund in a week to ten days. I have not filled the latter electronically before so it may even be quicker than that. Regardless, I should have the refunds in hand for me to make my contributions, savings and buying decisions within the next month.

Reevaluating my fiscal policies

My mind has been preoccupied with fiscal matters. My recent health diagnosis has been a shock to my system and is motivation for getting my finances in order. In addition, I need to consider the next steps. That is, not only have a list of my savings, checking and retirement accounts, but ensure my beneficiaries are named and everything is organized in one location. Right now, a divided accordian file is my collection tool.

However, I am also thinking of more than the immediate future and this affects some of the fiscal choices I have made. What exactly has my mind been churning over?

My Roth IRA
While I indicated for my financial goals for 2008 that I would add $3,000 to the account this year, I may be able to add more. I plan to do my taxes today and therefore, will learn exactly how much I may have to pay to the feds and what I will get back from the state. Generally I do get a state refund and that was intended for my Roth IRA plus my monthly contributions. In addition, most of my tax rebate, slated to arrive May 2008, will also fund my Roth IRA.

However, as a single person, I do not need life insurance other than the policy through my workplace. My parents took out a term life insurance policy when I was young and I have been contributing to it for the last few years. I have decided to cash it out and will receive $1,800 from it. Depending on when I am mailed the check, I intend on adding this money as a 2007 Roth IRA contribution. I can do this as long as the money is added to my Roth IRA before taxes are due in 2008. This means more money in my account and I will consider either a more aggressive mutual fund or moving my money to Vanguard since it will meet the $3,000 threshold. I need to explore the returns and the fees between Vanguard and T. Rowe Price, my current Roth IRA custodian.

My found money account
I noted in my goals post that I wanted to keep adding money to this fund to open a nonretirement Vanguard account. Since my financial advisor encouraged me to max out my Roth IRA before considering such an account, I will continue to add to this account but not earmark it for risky stock investments. I have no specific goal for the Vanguard investment other than I wanted to create an account where I could potentially have greater returns than my online savings accounts. However, I am considering that this money might go toward the purchase of my next computer. My technology is more than adequate right now, but I might feel differently in a year or two. Since it is an irregular savings account, I will also have to consider when would be the right time for me to buy and if it is important enough to use standard savings for the purchase

My mortgage
An earlier post about the Fed rate cuts had me musing that I would consider refinancing if the rate dropped to 5% for a 30-year mortgage. I have been reconsidering that position as I am not sure how long I would stay in my home. If I would be staying another four to five years, a refinance would likely make sense. I could not only recoup the cost of refinancing but also make a bit of headway into my mortgage. However, if I consider selling my house in two or three years, this would not be fiscally prudent. I am reconsidering for a number of reasons including this record-snowfall winter, wanting to be in the country, owning only half of a duplex and where my thoughts on what I want to do in my career take me. This will require additional thought on my part and I may end up refinancing regardless.

Early retirement
This is a thought I have considered and dismissed many times. I do not have the savings or investment portfolio for this. However, there is a part of me that is drawn to this idea, to being able to explore as I want without a 8-5 job pulling at me. The feasability study still has to be done and I would need to really bulk up my savings, but I am attracted to the idea and am more willing to explore what I might need to do to get to this point. This goal may be incompatible with my previous items but I will have to examine this more closely.

Alternative income streams
Right now, this income stream is only a few droplets. I have sold a few items I no longer need, but then I purchased a bike and that took away the gain. I have posted a few items to craigslist and if they do not sell there, they may only be charitable writeoffs. I have other items that I intend to sell on eBay, but am uncertain how much money I will make on those transactions. I have not sold anything on eBay for years so this will be interesting. I have another idea in the back of my mind, but this is the wrong time of year to consider offering my services. Other than selling my clutter, I am not sure how to generate additional income so this may be a difficult goal.

This is where my mind has been for the last week. A busy little place and I still need to explore and make some decisions.

My annual meeting with my financial advisor

My credit union offers many benefits to its members including investment services. Of course, the credit union makes no guarantee about the rate of return, but does host the third party investment company right in the credit union building. Last year, I made the decision to rollover my 403b. In addition, I was not happy with the performance of my Roth IRA, a mutual fund I had stared with the previous investment firm hosted by my credit union. To make sure I was on the right track financially and to find out my options, I called my credit union and made an appointment with an investment representative. He laid out some options, gave me a recommendation and told me if I wanted to invest in index funds for my Roth IRA, I would have to do that myself.

He did recommend the TransAmerica IDEX Growth Asset Allocation Portfolio for my 403b rollover as I am young and have many years for the stock market to grow my money. My 403b was quite modest as it was my first retirement investment and I invested my money in 1999-2001, buying in when the prices were high and then the market took a downturn. I lost nearly half the value of the portfolio and since I moved to a different job in 2001, watched it grow over the next six years back to its original value. The portfolio I bought into was a front-load mutual fund. As my reading has shown me, maybe that was not the best choice, but I liked how the portfolio worked.

As it turns out, my advisor showed me that my net gain was
-0.5% on the TransAmerica fund. Considering the front load was 5.5%, I nearly broke even the first year. Not too bad really so I am pleased. I wonder what this year will look like?

We discussed my current situation (cash, 401k, other retirement accounts) and he recommended that I fully fund my Roth IRA. I have funded half my Roth IRA in 2007 and was hoping to make it to $3,000 this year. I am contributing 10% pretax to my 401k and the company matches to 6%. Since the money in the Roth IRA grows tax free and can be withdrawn in retirement tax free, my advisor suggested I max out the Roth IRA.

I am a bit squeamish about not putting money into my 401k, but I have heard that recommendation before. Suze Orman recommends the same strategy but I have not fully absorbed it. After my discussion with the financial advisor, I am considering dropping my 401k contribution to 8% and applying the extra money to the Roth IRA. I would not max it out but I would be contributing more into the index fund I have chosen.

Otherwise, my financial advisor said my situation looked good with my cash reserves, not buying too much house, having term life insurance (just the policy through work) and my contribution of 16% of my income to retirement funds. He indicated anything over 10% is excellent but not to contribute so much it makes me feel constrained. That I do not feel therefore, I am on the right track for me. I was glad to meet with my advisor and I will see what next year brings for me!

Financial goals for 2008

As I mentioned in my earlier post, I wanted to see where my financial situation was at the end of December 2007 before considering what I should do for 2008. I first calculated my net worth (including home and car) in mid October 2007. Therefore, my 2007 numbers do not include a year's worth of financial data. To calculate my debt, I also created a simple mortgage calculator to keep track of how each payment decreases what I owe.

In 2007, assets increased 1.16% , debts decreased 0.44% and my net worth increased 3.34% to $85,360. I have enough liquid assets to cover 5.5 months worth of expenses. My debt-to-income ratio is 23% of my gross monthly income (below the 30% or less target), and I save 28.5% of my gross income (covers liquid and retirement savings).

My 2008 financial goals (to be fulfilled by December 31, 2008):

1. To reach a net worth of six figures ($100,000).
I will have to work hard on this one. I do not think it is out of my reach on my current income but I will need to keep assessing where I am. My monthly calculation of net worth will help me keep on track for this target and allow me to adjust my savings to reach this goal.

2. To have $15,000 in liquid savings for emergency expenses.
My liquid savings includes what I am saving for a car, a small amount for fun items which I am discontinuing and my "found money" account. Excluding these and my planned window replacement expenses means this is a challenging goal for me. I have just over $9,000 now and my current savings rate should get me to this number. However, being an emergency expense fund, I cannot count on current numbers getting me to this point.

3. To have $500 in my "found money" account.
This account is funded by rebates, bonuses, gifts or other irregular and unexpected amounts of money. I do not put all of a bonus in this account, just the odd dollar amount (e.g., $8.37 from $38.37). I currently have $81 in this account and my final goal is $3,000 to open a Vanguard account. It is difficult to predict how much I can put in there in one year as I have only started it in October 2007.

4. To increase my contributions to my Roth IRA to $3,000.
I opened a Roth IRA in 2001, contributed twice, watched my money lose half its value and promptly ignored it. In 2007, I rolled it into a T Rowe Price index fund, contributed monthly and threw my state income tax refund at it. My contributions fell just short of $2,000. In 2008, I will be contributing for the entire year and adding my state income tax refund. I anticipate I should be able to get to this amount.

5. To generate $2,000 from an alternative income source.
This goal is more nebulous because while I know I want to make money other than through my job, I have yet to figure out what my alternative income source will be. My track record finding a retail job speaks for itself (they do not even call me back), and I am not sure what skill to use on behalf of others. This will be a challenging goal for me for these reasons but I want to limit my dependence on a single job and income. I believe in having back ups and I need to have another income source.

I expect that my percent saved (28.5%) will fall a bit but not below 27%. This will change depending on my raise and alternative income stream. I am looking forward to learning if I can meet these goals. To exceed them would be fantastic. What are your goals?

Reevaluating my 401k

My company decided to take their current 401k plan to the next level--bring in a financial firm to help them choose great funds and design portfolios to get the best return for various investment strategies. The firm recommended funds currently in the company's core group be removed and added some better performers to the core funds. There were several meetings to explain these changes and why they were being made. In addition, employees could also meet with one of the financial associates fora 30 minute individual session so I signed up.

I have six funds in my portfolio: a large cap, a mid cap, a small cap, international, government bond and a lifecycle. Some of funds I really did not want to give up to match the aggressive growth portfolio designed by the financial firm--Fidelity Contrafund and Fidelity Overseas fund. Both had been performing well for me and I liked them. The person I consulted with basically recommended I get rid of the bond fund and lifecycle fund. Since my retirement horizon is 30 years, she said a bond fund was not really necessary as its yield is generally less than stocks and only there to tame volatility. Since I want to maximize growth, more stocks, the better. Here is the portfolio I walked into the meeting with:

Selected Fund	Contribution
Fidelity Contrafund (large cap growth)	20%
Fidelity Overseas (international)	20%
Fidelity Low Price Stock (mid cap blend)	20%
Wells Fargo Small Cap Value CL Z	20%
Fidelity Freedom 2040	15%
Fidelity Institutional Short-Intermediate Government	5%

As of 11/28/2007, the YTD return was 12.2%.

The woman I spoke with did say I did a good job of covering all the bases. Still, getting better returns and doubling my money sooner is nothing to dismiss. Therefore, I walked out with this more aggressive portfolio:

Selected Fund	Contribution
Fidelity Contrafund (large cap growth)	20%
Allianz NFJ Dividend Value Inst CL (large cap value)	10%
Fidelity Overseas (international)	24%
Fidelity Low Price Stock (mid cap blend)	20%
Wells Fargo Small Cap Value CL Z	16%
Columbia Mid Cap Value Fund Class Z	10%

Hopefully, I will get a better return for this new portfolio. I really want to maximize growth of the dollars I put into the 401k. Right now, I contribute 10% of my income to this pretax shelter and my company matches 50 cents on the dollar up to 6%. I have never left this money on the table and never will as long as I work there. I am also contributing to a Roth IRA in an index fund and slowly growing that. Between my 401k and my Roth IRA, I am contributing 16% of my gross income to retirement funds (19% if I include the company match). My goal is 20% into retirement funds in the next five years along with maxing out the Roth IRA contribution.

I want to ensure my comfortable retirement and financial independence. I will take advice I believe is sound to help me on this path and hopefully, end up in a good situation for the future.