Early Retirement Planning: An Emergency?

I took the plunge last night. I tapped my entire emergency fund of $1,000 and deposited it into my Fidelity Roth IRA for 2007. I now have $1,500 in there and I'm shooting to squeeze in $500 more before April 15th to total $2000 for 2007 contributions. This would be huge for me. Already I'm happy with what I've managed to put in there, considering I started in January.

But the nagging question: Was it wise to empty my emergency fund to do this?

I think so, after much deliberation. There are a few reasons for this. For one, were a true emergency to arise, I could access those IRA funds (which are off-limits in practically all circumstances; I'm talking about major disaster like war, nuclear winter, etc.). I've also got some other money saved in my TD Ameritrade account, and my ING checking and savings accounts to cover any minor money problems. Weighing the importance of losing some short-term cushion over getting a nice chunk of money invested and starting to work for me for retirement, I think I made the right choice.

I'm relatively young - soon to be 28 - but I still feel like I've gotten started late in my retirement planning. I know that I'm in much better shape than many people, so that's reassuring, but I nevertheless feel like I need to play catch-up. After all, the best time to start planning for retirement is yesterday, but the second best time is now. Because I started building my financial house in January, I had a fairly short four-month window in which to try to maximize my contributions for the 2007 tax year. Because of the time limit, I feel that this was essentially a money emergency of sorts, and I am justified in using the EF for that purpose. If I can reach that 50% of the contribution limit of $4,000, then I will feel great about moving forward.

Now my priorities are as follows: I need to start rebuilding my emergency fund while contributing to my Europe travel fund and making sure that I keep making healthy monthly IRA contributions for 2008. I want to maximize my 2008 IRA contributions, and the total has increased to $5,000 for 2008. That works out to $416.67 per month if I start in April. Doable, but it will require serious discipline.

Time to reset that Emergency Fund NCN Network chart. I feel good about this decision, though. Very optimistic right now, which feels odd in this time of economic hardship.

Building One's Financial House

J.D. over at the fantastic Get Rich Slowly is most responsible for the exponential acceleration of my self-education in financial matters and the main inspiration for this enormous positive life change and The Impecunious Investor blog. If you go to the About page on J.D.'s blog, he links to his first-ever post summarizing what he read from several finance books. This post spawned Get Rich Slowly. It also serves as a great introduction to people who wish to take control of their finances and work on putting their "financial house" in order. Read J.D.'s post, but I wanted to summarize here to outline where I am and where I am headed. The steps for building one's financial house:

1. Prepare the Foundation: Eliminate debt, reduce spending, and increase income.
2. Build the Framework: Establish an emergency fund, maximize retirement investments, and begin acquiring income-producing assets.
3. Finish Construction: Be patient and disciplined. Resist incurring new debt, maintain good spending and saving habits, and simply wait.
4. Move Into the House: Financial independence - when your passive income equals or exceeds your monthly needs.

At present I am actually doing a combination of steps one and two. Debt is actually not a big problem for me at the moment. A significant portion of my debt is interest-free (credit card collections and money owed to friends and family). This is also "feel-bad" debt, though, because I feel guilty about owing money to people I love, and I feel frustrated and annoyed at how I got myself into credit card debt. Nevertheless, it isn't a big negative on my bottom line (with the exception of needing to pay off my CC debt to increase my credit score). Most of my debt is my student loans, which is "feel-good" debt. Debt happens when you go to an Ivy League college and you aren't a blue blood. At the moment I have a standard automatic payment plan which is set to pay off my debt in about 14 years. I definitely want to accelerate this when possible to avoid paying all the interest over that period, but at the same time I want to take advantage of my relative youth and start saving. I have not incurred and plan not to incur any additional debt for the foreseeable future, and I have taken significant steps to reduce my spending, including establishing a monthly budget. As far as my personal income, I am looking to get a better job with much better pay, and at the same time I am looking into various additional income stream possibilities.

Concurrent with this first step is Step Two. I have already started building an emergency fund and investing in my new Roth IRA, both of which have automatic contributions. Instead of looking to see what I can spend my paycheck on, I am trying to see how I can save extra money here and there. And this is really what I want and need to focus on now: building my short-term and retirement investment assets.

The key is that the best time to start is NOW. No matter your age, income, or financial status, take stock of your personal situation and start walking down the road to financial independence. One day I was a spender; the next a saver. It happens just like that.