Woohoo! I fully funded my 2009 Roth IRA yesterday after taking $3,000 out of savings and sticking it in my Vanguard account. The great thing about that is that I now am eligible for many more funds. Until today, I’ve been using their STAR fund, which is basically a mutual fund of mutual funds. I’m willing to take more risk and will be researching some of the other options. Any suggestions?

I’m not worried about my emergency fund dwindling (It’s at about 1 month’s expenses right now) because the next 6 weeks will be the best ever. Not only does my pay raise go into effect then, and not only will I be getting $868 back from the federal and state governments, but there are 3 pay periods in April this year! The calendar just happens to work out that way, but it will be a nice boost for my savings plan and it’s going to put everything back in its place and then some.

Here are some of the mutual fund options I’m considering:

Vanguard Target Retirement 2050 (VFIFX): This life-cycle fund includes several other index funds and will change its allocation by reducing stocks and increasing bonds around 2026. It’s the least involved options I have because it will automatically change its investments as I age. There is a 0.20% acquired fund fees for this fund.

Vanguard 500 Index Fund Investor Shares (VFINX): This domestic stock fund invests in stocks in the S&P 500 index. The expense ration is 0.18%, meaning that for every $1,000 I have invested, Vanguard takes $1.80.

Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX): There are higher fees for this fund (0.40% expense ratio, 0.25% redemption fee, and 0.50% purchase fee) and it has a higher risk level that the other funds, which also could mean more of a reward. The international stock fund invests in stocks in emerging markets around the world, such as Brazil, Russia, China, Korea, and Taiwan.

Finally, I have the option of investing in Berkshire Hathaway Class B stock through my employer, which is owned by Berkshire Hathaway and the amazing Warren Buffett. It has done extremely well this year (24.71% YTD returns, while none of the other options I listed have gained more than 5%), but will it continue to rise?

There are many other options, such as the growth index funds, mid- and small-cap funds, and others, but I wanted to highlight these specifically.

Given my time horizon (age 22), which of these investing options should I take? I’ll share my thoughts later in the day. Keep in mind that this isn’t the only time I will be putting money in my retirement account!

I am completely obsessed with these Olympics. When I get home, I plop myself on the couch and sit for house watching whatever is on. I like sports where I can yell at the TV rooting for my team.

On Sunday, I was able to do that in the Nordic Combined, as an American, Johnny Spillane, and two others raced for the finish line, with Spillane winning the silver medal by 0.4 seconds and missing out on gold by the same amount.

Short track speed skating is another fun sport to watch, and watching Shaun White snowboarding last night was nothing short of fantastic. And hockey should be fun this this next week.

I don’t consider myself a big snowboarding fan, but watching the men’s finals on Monday may have changed my mind. Unlike the luge and ice skating, the final consisted of just four athletes, who started from the top at the same time and raced down the hill for the medals.

I watched two Americans try to get medals, but when Seth Wescott fell behind by a considerable margin, I considered him out. There was just no way. But to my surprise, he began a furious comeback, cut corners, passed two competitors in the air, and climbed all the way back to take the lead and held on at the end to take home the gold.

What does this have to do with personal finance?

A lot of people don’t bother funding their retirement when they are 22. Many don’t when they are 25, either. And some put it off until they are 30 or 35, too. After all, why put away money for something 30 years away? That’s a long time from now, and there is a lot of time to catch up, you know, when we earn more money.

The point is that it’s never too late. You may be behind, but there are always opportunities to make a comeback and if you try hard enough, reach your goals.

It starts with getting the company match on 401(k) contributions, continues by opening an IRA, and finishes by fully funding both plans for many years.

So if you’re behind, don’t give up hope. Renew your investing intensity. It may not be easy, but it is definitely possible and with enough effort, you can achieve even your wildest dreams.

Please head over to Free Money Finance and vote for me in the current games of the March Money Madness contest. My post is “How to Save Money on Wireless Carriers”. Thanks!

Every morning, from as far back as I can remember until I left for college, my parents would have a cup of coffee in the morning. Occasionally they would have a cup in the evening as well, and I can only imagine how many cups they drank at work (My mother is a fourth-grade teacher, my father occasionally deals with insane criminals).

I hate the smell of coffee. I’ve never had a cup in my life. Out of the four sips I’ve ever taken, I’ve wanted to vomit after each one. I don’t support Starbucks. In fact, I boycott Starbucks as much as possible. It’s not hard considering that I don’t drink coffee, but it gave me a great excuse when my mother asked me to go out and get her a cup.

Dropping the Habit

I tried everything to get my parents to get rid of the awful stench at home. I told them it would ruin their teeth, I told them it was a gateway to opium, and I told them they wouldn’t be able to retire because of it.

Clearly none of my efforts worked, but recently my mother started drinking instant coffee exclusively and it made me think about that third excuse I gave them: how much drinking coffee really cost them.

Calculating it Out

My conservative estimate was two cups of coffee a day. Every single day. For 20 years. I’m sure they drank more than two cups sometimes, and I know they did it for more than 20 years. But we have to start somewhere, and I don’t want to be the guy who completely blows things out of proportion to try and prove a point. This is not a scientific study. Actually, I haven’t done the calculations yet, but here we go:

A few more assumptions:

• Each week consisted of 11 home-brewed cups and 3 cups at Starbucks (or Dunkin Donuts, or wherever).
• The average cost of a pound of coffee is $10 and provides 32 cups of coffee.
• The average cost of a cup of coffee is $2. My parents would laugh at people who got the “tall.”

So the average week was 22 cups of home-brewed coffee and 6 cups of store-bought coffee. That comes out to $6.87 for home brewed per week and $12 for store bought, for a total of $18.87.

My first thoughts are WOW, that’s a lot of money for 6 cups of coffee. The home-brewed stuff was a bargain!

Their coffee habit was costing them about over $75 a month, or about $985 per year, or $19,683 over 20 years. Damn.

But how much would it have been for the instant stuff? It costs about $7 for a can, which makes 21 cups. So $0.33 per cup. Slightly more than home brewed. Still, it comes out to $486 per year, or $9,733 over 20 years.

After all of this, it looks like $486 per year for coffee is rather insignificant. If you do anything for 20 years, the costs are going to look high, but I honestly expected the costs to be higher.

Early Retirement? Not Quite

My conclusion is that my parents’ drinking habit didn’t cost them an early retirement. My focus should have been on them brewing their own coffee instead of buying it 3 times a week, but the trade-off of having that stench in the house more often may have been too much for me.

The main takeaway is that people are getting ripped off every morning when they drink coffee. There is barely any difference between home-brewed and instant coffee (home-brewed is actually cheaper!), but there’s a HUGE difference between home-brewed and store-bought!

Brew it yourself! Why pay $2 per cup when you could pay $0.33? Is the convenience worth the 500% markup?

I spoke to my grandmother last week (she reads the blog on her snazzy new computer she just got) and she told me the advice her boss gave to her many years ago.

He said that before you pay the bills and before you go spending your paycheck, pay yourself first. Put 10% aside and then go pay the rent, utilities, etc.

I’ve heard this advice a million times on various blogs, but as much as people come up with creative ways to save a few bucks on taxes or search the weekly circular to save a few cents on pasta, nothing can replace the best way of saving and making sure we have enough money in the future.

Sure, you may make more in the future as you get a better job and more opportunities open up, but saving now can have a lasting impact. There is always enough to put a little something away. Even if you think that money won’t make much of a difference, it definitely will.

I’ve seen this graph several times, but for those who haven’t seen it, look at how much of a different putting money aside now is compared to waiting.

Taking a look at the numbers, it’s astounding how much of a difference paying yourself first makes. Consider this example:

Alex is 25 and saves $5,000 a year for 10 years, and after 10 years, has a cool $73,000 in his bank account from his $50,000 in contributions. Then he doesn’t contribute another cent until retirement.

John is 25 but decides that he’ll be able to make up the difference later. he waits 10 years, then contributes $5,000 a year for the next 30 years, for a total of $150,000 in contributions.

Who do you think has more money at age 65?

Despite contributing 3 times as much as Alex, John has about $55,000 less at retirement, assuming a 7% return on investment.

And what happens when Alex doesn’t stop saving at age 35, but keeps investing $5,000 a year for 30 more years? He ends up having over twice as much as John. Can you believe that those ten years delaying cost John over $600,000?

There really is no replacement for saving. As you get older and make more money, you will also have more responsibilities and saving will be just as hard. So do yourself a favor: start saving TODAY by making your “pay yourself first” bill more important than than the rest, and you’ll be doing yourself a half a million dollar favor.

I decided several months ago that I wanted to start investing, so I signed up with Schwab and started contributing automatically each month. It made sense, and I wanted to do SOMETHING, even if it wasn’t perfect.

Well, now I realize that it wasn’t perfect and I want to tweak my plan. I currently contribute to a Roth 401(k) through work but until Sunday, I hadn’t created a Roth IRA.

So my brilliant idea is to use the Roth IRA as an investing account! I can withdraw my contributions at any time (but not the earnings!) and if I want to withdraw the earnings, I’ll be able to take money from other places (reduce my 401(k) contributions for a few paychecks, dip into one of my sub-savings accounts) to make up for the interest I won’t withdraw from the Roth IRA. Essentially, I would keep my investing in a Roth IRA, earn tax free interest there, and withdraw that interest by making smaller 401(k) contributions equivalent to the amount of interest I earned but didn’t withdraw.

I think this is definitely the way to go. Why invest and pay taxes when I can invest and not pay taxes?? It seems like a no-brainer now, why didn’t I consider this as an option earlier?

So I set out to open my Roth IRA. Opening with Vanguard was so easy. It took less than 5 minutes. I had to start with $1,000 in a STAR fund, and I’m going to contribute as much as possible (after making my regular contributions to the emergency fund) until April 15, which is the cutoff date for 2009 contributions. Also, I’m stopping my Roth 401(k) contributions for the time being and using all that money to go toward the Roth IRA. That way I’ll be able to take full advantage of all my Roth options for the 2009 year. After my 2009 contribution window closes, I’ll contribute my regular 401(k) amounts to my 2010 Roth IRA plus the amount of any additional investing I want to do. Once I reach $5,000 of Roth IRA contributions in 2010, I’ll go back to contributing to my Roth 401(k) through work.

So why not just change my investments from Schwab brokerage to Roth IRA and leave the 401(k) alone? For flexibility. No matter what, I’ll always have my Roth IRA contributions to withdraw, penalty-free at any time. With a 401(k), there are rules for when I can withdraw, even the contributions, without penalty, and I wouldn’t qualify. So I’ll max out my Roth IRA contributions first because I see no reason not to.

My goal this year was to contribute $5,000 to my retirement funds, and that is a goal I will keep in mind. Anything above $5,000 will be my investing money, and at the end of the year, will just be my total contributions minus $5,000. Although it will seem like I am putting a lot of money away in retirement accounts this year, I will still have to remember that some of that money, while in a retirement account, will not be used for retirement purposes. But if I’m lucky, I won’t be tempted to withdraw it at all and will continue to take advantage of the tax-free interest I’ll be earning.

We hear a lot about retirement accounts, but I wanted to spend today’s post explaining the different types of accounts.

Traditional IRA – Individual Retirement Account

Individuals can set up these accounts and invest for their retirement. Individuals put away pre-tax income in these accounts so that when they retire, they’ll have income saved up.

Advantages

The big advantage of putting money away in an IRA is that all money deposited into the IRA is tax deductible, so instead of paying taxes and then investing, as you do with regular investments, the money goes straight into the account without being taxed first.

Distributions

That doesn’t mean that tax is never paid on that money. When it is time to take distributions in retirement, all the investments and all interest earned is taxed as ordinary income at your normal tax rate.

Limits

For 2009 and 2010, the contribution limit on IRAs is $5,000 each year, although depending on your filing status and job status, the limits are phased out beginning at an income of $55,000 for individuals and $89,000 for couples. In addition, those who are 50 or older can make an additional catch-up contribution of $1,000.

401(k)

These accounts are similar to IRAs in that contributions are pre-tax. These plans are usually employer sponsored plans where employees have a portion of his or her wages paid directly to the 401(k) account.

Advantages

401(k)s have similar tax advantages to IRA in that all contributions are pre-tax. Additionally, some employers choose to “match” part or all of the employee’s contribution. (This ranges, but employers often give a 50% match on employee contributions, of up to 6% of his or her salary.)

Distributions

Distributions work in similar ways to IRAs, and all distributions of contributions and interest income are taxed. There are heavy penalties for withdrawing funds before the permitted age of 59 1/2.

Limits

Another advantage of 401(k) accounts is that the contribution limits for 2009 and 2010 are $16,500, over 3 times that of traditional IRAs. In addition, employees who are 50 years old or over are allowed to make additional pre-tax catch-up contributions of up to $5,500 in 2009.

Roth IRA

This retirement savings plan consists of after-tax contributions.

Advantages

Contributions are made after taxes, so all earnings made over the life of the IRA are tax free upon disbursement. In addition, contributions may be withdrawn at any time without any penalties, something that can’t be done with traditional IRAs.

Distributions

Direct contributions can be withdrawn at any time. However, there are restrictions on when earnings can be withdrawn without tax or penalty. First, 5 years must have elapsed since the opening of the Roth IRA. In addition, the individual must be 59 1/2 years old.

Limits

The contribution limits are similar to that for traditional IRAs, $5,000 for 2009 and 2010. Single filers earning up to $105,000 qualify for a full contribution, while joint filers earning up to $166,000 qualify for a full contribution. After that, the contribution limits are phased out.

Roth 401(k)

This employee-sponsored option combines the features of the Roth IRA and tradition 401(k) plans. This is typically the best options for those who are eligible.

Advantages

Contributions are made after-tax, and all contributions and earnings can be withdrawn at any time tax and penalty-free. These plans are best for younger workers who are currently taxed in a lower tax bracket but expect ot be taxe din a higher bracket upon reaching retirement age.

Distributions

Required distributions begin at age 70. All contributions and earnings can be withdrawn at any time tax and penalty-free after they meet the two restrictions: they must be open for 5 years and the individual must be 59 1/2.

Limits

Contribution limits are the same as for traditional 401(k) plans.

Next week, I’ll go over which plans are best for individuals in different situations. Plus, we’ll talk about options for those who have 401(k) accounts when they leave their employers. Send in your questions, I’ll try my best to answer yours!

There are a lot of retirement calculators out there offering to calculate how much you’ll need in retirement. I don’t think too much about retirement, but I am saving about 15% of my take-home pay (10% pre-tax) in a Roth 401(k). I got to thinking how much additional money I would need to invest this year in order to retire one day early.

I’m making several assumptions. The first is that at the current rate, I would be saving enough to retire at age 65. Additionally, I’m assuming I would need $75,000 a year in retirement, which seems reasonable, if not high. Finally, I would earn 8% on my investments until I reached retirement. I do not account for inflation. Based on this, it seems that in order to take out $75,000 a year, I’d need about $205 a day.

That means that I would be able to retire a day early if I saved another $205 for my 65 year old self, right? Well, at age 22, I have 43 years ahead of me. So, by plugging that into to a time value of money calculator, assuming a rate of 8% earnings, I’d have to put away $7.50 today in order to retire one day early.

Not terrible, but what if I only needed $50,000 a year in retirement? It drops to just $5 (I’m not sure why it comes out to 1/1000th of my needed income, but that only for my 22 year old self. At ages 25, 30, etc, the numbers aren’t quite as predictable.)

So how much do you have to save to retire a day early?

I have 4 easy steps to help you find out how much extra you’ll need to save:

If you bring your lunch to work every day this year instead of going out to lunch…that $5 a day could mean you’ll be golfing one day earlier!