Budget Freak

After putting it off for so long, I finally took the plunge and opened a ROTH IRA. This is in addition to my 401(k) through work (contributing 12% of my pre-tax salary), and a regular IRA thats holding rolled over 401(k) plans from previous employers. I’d been researching ROTH IRA’s for awhile now, and finally, after some helpful advice, I decided not to wait any longer. My biggest concern was that the money would be locked up until I retire, some 35 years from now. I would rather have the money in a savings account where I could access it quickly. Turns out, you can withdraw your contributions anytime without penalty. It’s only the profits you can’t touch (and actually, you can withdraw them under certain circumstances, which I won’t go into here. Go read The Motley Fool’s All About IRA’s). I don’t know how I missed that part during my research, but that solves the emergency access problem.

I decided to go with Vanguard after reading plenty of good things about them on other personal finance blogs. Pretty much any link over on the right will say good things about them. I opened the account online, and the process couldn’t have been easier. They walk you through 6 or so steps from entering personal information, banking information, and selecting funds. The whole process took about 20 minutes once I knew what funds I wanted to invest in, and I linked to my savings account so the money would be transferred quickly.

And speaking of funds, I chose their Target Retirement 2045 mutual fund. The target retirement funds base their asset allocations on when you plan to retire (2045 in my case), and then automatically adjust their holdings as that date nears. Right now, since we’re still 40 years off, the fund is around 90% stocks and 10% bonds. It’s designed for large growth, but with a higher risk. The retirement funds are great, in that I can just keep pumping money into them and not worry about allocation. They handle all the work. It’s the perfect lazy man’s fund.

Thanks to the tax laws, I was able to contribute this money towards last year’s limits. I put in the maximum yearly amount of $4,000. That means I can still contribute another $4,000 for 2007. It’s a little scary to throw a big chunk of money like that into something that I won’t be able to access for another 35 years, but consider this:

If I invest $4,000 today, and the fund earns a modest 8% annual interest over the next 35 years, that initial investment will be worth over $59,000. More realistically it’ll earn somewhere around 10%, which in 35 years will be worth $112,000.

That’s right. The power of compound interest. So yes, I’m giving up my money now, but when that $4,000 is worth $100,000 in 35 years, it doesn’t sound so bad.

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