$5,000

I did it! I contributed the full $5,000 limit to my Roth IRA for 2008. I didn't think I would be able to pull it off after the disaster of my layoff, but I managed to scrimp and save and it all worked out. A priority for this year is to again max out my IRA for '09 - after this the limit will be increased by $500/year according to inflation, which is excellent.

I now have more assets, specifically retirement assets, than I've ever had before!

I Am an Investor

As of this morning I am the proud owner of 92.034 shares of Fidelity's Four-in-one Index (FFNOX) purchased at $27.18 per share. I finally reached the $2,500 minimum necessary for a retirement account to buy into this fund, which I decided upon after some lengthy research. I wanted to go after an index fund that tracked the S&P but unfortunately the one I really want, the Spartan 500 Index Fund (FSMKX), has a minimum buy-in of $10,000 (with a gorgeous 0.10% expense ratio!).

So I put my $2,501.72 into FFNOX for now, and I plan on this being my sole IRA investment vehicle until I can sell out and buy into FSMKX. The cool thing about FFNOX is that it is comprised of four funds: FSMKX, the Spartan Extended Market Index Fund (FSEMX - with at least 80% of assets in the Dow Jones Wilshire 4500 Completion Index), the Spartan International Index Fund (FSIIX - tracks the performance of foreign stock market indices), and the U.S. Bond Index Fund (FBIDX - tracks a mix of U.S. bonds).

FFNOX has a nice expense ratio of 0.23%, which works for me for now. It's also got me diversified within a single fund, with 70.30% of the fund in U.S. equities, 15.40% in international equities, and 14.30% in investment grade bonds. While I don't think these asset allocations are exactly right for me at this point (too heavy on bonds, which should be minimal considering my age and investment horizon) they are fairly diverse within this fund, and should help temper the volatility of the fund over time - right?

The main thing is that now is the first time I can actually say: I am an investor! An impecunious one, for sure, but an investor nonetheless. I own a piece of American (and international) business! This is very exciting for me.

Now...the boring part. Keep investing every month for the next 30 years, don't touch my investments aside from tweaking asset allocations and watch my retirement nest egg grow (hopefully).

Snowflaking Through Sobriety

One of the biggest money drains for me is in the area of what I call casual booze. You know, buying a six-pack of good beer to drink while watching the ballgame or a $10 bottle of wine to have with dinner on a random weekday evening. While I definitely enjoy this and still do it, I have cut back quite a bit from my spending in months past. However, it's still difficult to fight that urge sometimes. Yesterday after work all I wanted to do was kick back and watch some TV with a few beers, but I decided to forgo stopping at the local grocery store and save my money instead (a decent six-pack is about $9.30). So what did I do when I got home?

To reward myself I put the $10 I would have spent right into my IRA. A tiny contribution to be sure, but everything counts. More importantly, it made me feel a lot better psychologically about making the right decision. I plan on trying to use more tricks like this in the future.

Anyone out there have any similar tricks to save money by "rewarding" yourself with savings?

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.

$1,000 Emergency Fund Goal Reached!

You'll notice that my Emergency Fund pie chart is at 100%! Through a combination of a few snowflakes I was able to get the fund over $900, and then at the end of February I made up the difference with some extra cash I had on hand (due to successful budgeting). It feels great to have this $1,000 cushion in place - it's already come in handy - so that I can rest a bit easier and concentrate on more interesting and rewarding goals. I'm going to leave that up for motivational purposes while I come up with another goal for the NCN Network to track.

Moving forward I plan to prioritize my saving as such:

1. Retirement
2. Savings
3. Debt reduction

I've currently put $500 toward my 2007 Roth IRA. I've got until April 15th to put as much in for 2007 as I can. I'd like to do this for a few reasons: I got started late for 2007 (this past January) and I'd like to make the most of this opportunity to maximize my retirement savings. I plan on trying to fully fund my IRA for 2008, which will require $5,000. There's little chance barring a miracle that I can find $3,500 to shove in my IRA over the next two months, but I should be able to make a significant total contribution for 2007. Every dollar I can get in there now will pay off in the long run. It's likely that a majority of my automatic savings, previously having gone to my emergency fund, will now go toward my IRA. And I'm considering tapping the fund for a contribution - not a technical emergency, but again I'd like to get as much in there as possible.

After this I'd like to build up my cash savings including growing my emergency fund to accommodate 3-6 months of expenses, saving for specific funds (i.e. vacation), and general savings which I can perhaps use to look at some other cash vehicles like CDs.

Once I'm comfortable with my retirement and savings goals then I will consider a more aggressive debt reduction strategy. There are a couple loans to friends and family that I would like to pay off soon because they affect me in a morally negative way, but aside from that my debt is relatively "good." My only interest-bearing loan is my student loan at 7.25%, but of course that has tax deduction benefits. Still, I would like to be able to put more money toward that each month as well.

This is my plan for the next few months, and it will likely remain the same over the next year or so barring any major changes.

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.

Snowflaking

My Dollar Plan has a nice post up about applying the snowflaking strategy for debt reduction to investing. Snowflaking is a corollary of snowballing. With debt snowballing, instead of paying off the debt with the highest interest rate first (which is the mathematically and financially correct way to do it), one attacks the debt with the smallest balance first. Pay the minimum on the other debts and put everything extra toward the smallest balance. Once that is paid off, apply whatever monthly payment one would have made toward that to the next smallest balance. Instead of following the most financially sound path, this method appeals to psychology, allowing the debtor to quickly win victories, keeping morale up and staying on track until the entirety of the debt is paid.

This method has gotten many positive reviews across the financial Blogosphere, and I think that if it does help people stay on task until they pay off all their debt then it is worth the extra they will pay in interest over the course of repayment.

Using snowflaking for investing is a great idea, I think. Any little bit here and there over the course of a month - stick that in your savings, or use it to help max out your IRA contribution for the year - will add up into an investment snowball, eventually creating a veritable avalanche of wealth for you as you sit by the pool sipping on fruity drinks in your golden years.