This guest post from Vermont Moose is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income. Want submit your own reader story? Here’s how.
I’m less than a year into the real world and have been enjoying the ride on the personal-finance rollercoaster. After graduating from college last fall and getting a good job in my field (having chosen a difficult and demanded major), I soaked up advice from personal-finance and investing blogs and learned lots of little lessons along the way. My biggest lesson so far has come from a combination of my go-big-or-go-home attitude and J.D.’s urging that the perfect world in my head is holding me back.
I’m an optimist, which can be really painful when it comes to budgeting. I find that I’m chronically overestimating my salary, saving more than is reasonable, and feeling generally wealthier than it seems that I am. While oversaving isn’t the worst problem to have, it can lead to unnecessary financial stress. This past winter, I found myself on good footing thanks to advice from GRS; I had an emergency fund well on its way, I was going above and beyond in my 401(k) contributions, and had seriously beaten back my college debt. I was feeling great and looking for the next step, so when Betterment offered IRAs at the end of the year, I ambitiously decided to max out my 2011 Roth IRA.
Learning to Love the Roth IRA
It wasn’t hard to decide on the Roth IRA as the next PF step; it’s definitely the best thing since employer matched 401(k) contributions. I knew I needed in and since I didn’t want to screw around with my retirement saving, I wanted to go all in. My reasoning was as follows:
- I’m young and at the bottom of my corporate food chain so getting taxed now made sense.
- I expect to outgrow the Roth IRA limits in a handful of years which means that I only have a finite amount of time to make Roth IRA contributions.
- I have a solid job with enough income to dollar cost average my Roth IRA up to the limit every year.
- On average (assuming the whole world doesn’t turn upside down) long term tax advantaged investment will be more valuable than holding off on my other goals for a few months, even those pesky student loans.
It took me a couple of weeks to settle on my max out goal, which left me with ten weeks to get $5000 into my brand new account. I chose Betterment because it answered most of the questions I knew would prevent me from committing to the goal: I didn’t have to worry about choosing investments (they have a diversified portfolio of index ETFs balanced according to your risk tolerance) and I could dollar cost average $500 in each week before the April 17th deadline. I was super motivated about this plan and not at all worried about pulling $500 a week out of my existing budget.
Unrealistic Goals
Could you cut $500 a week out of your current spending? Neither could I! I wasn’t even spending that much money on things that I could cut out. Things went well for a few weeks and the arrival of my tax return kept my plan on track, but after a month, things began to slip. I was starting to worry about the balance of my checking account, which was starting to get dangerously low between paychecks and under a constant barrage of automated weekly payments to savings and investment accounts.
To get by, I started cutting out my recurring deposits. I slashed the amounts going to taxable investment accounts which lead to some worthwhile reflection on the importance of tax advantaged saving. I cut out a couple of “extra credit” percentage points from my 401(k) contribution. I dropped the amounts going to my emergency fund and targeted accounts to token levels, figuring that I could justify the reduction in savings in exchange for my long view retirement savings strategy. I dialed my student loan repayment down to the minimums. The one thing I didn’t address was my spending.
At the end of my first month, I started to get credit card bills. I’ve always spent a little more than I really want to, but I’ve always cleared the balance on my card every month. Now I was looking at a low balance on my checking account and credit card bills that I couldn’t pay in full. At first, I decided to hold off paying really far in advance of the deadline like I was used to, but then I realized that it wasn’t going to be enough. Fortunately, since I was so new in my personal finance adventure, I had brand new cards with more than a year of 0% financing left, so I decided to double down on my Roth IRA Sprint and not pay off the entire balance until I was back to my normal monthly spending. Which brings me to today…
Back to Normal
Now that the April deadline is past, I have successfully maxed out my 2011 Roth IRA and am well on my way to doing the same with my 2012 Roth IRA with each week’s successive deposit, automatic funding for my emergency fund and other savings accounts has returned to normal, my student loan payments are getting cranked back up and I am finally less stressed out about keeping my checking account above the empty line. Unfortunately, for every dollar that ended up in stocks and bonds for my distant retirement, there’s a dollar of interest-free credit debt that I have to pay off over the upcoming months.
While I never did get a great handle on my spending (it stayed within my regularly sustainable levels), life eventually threw me a couple of curveballs with a minor car accident and some unbudgeted spending on things that are hard to pass up (lots of live music and the annual ski pass sale). Those are things that the emergency fund and targeted savings should go towards, but I’ve found that once you allow yourself the guilty pleasure of 0% interest credit it is hard to not want to float those expense as long as possible and keep your cash stash growing. I have the cash sitting in my savings accounts to pay off most of my interest free debt, but I really don’t want to return to the insecurity of having nothing in the bank and partial payoffs with savings doesn’t seem worth it.
A Lesson Learned
Ultimately, I have discovered that each incremental dollar that you throw at your savings gets less exciting; at the end of my Roth IRA Sprint I could barely feel the elation that the first deposit brought. Would I do it again? Probably not, but that may be the side of me that has been subjected to completely unnecessary financial strain and has to pay off a credit card before the interest kicks in at the end of the year. Fortunately, I’m willing to bet that the 59-1/2 year old me will be pretty thankful.
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I think the bottom line is that you are very, very smart to be doing anything about retirement saving having just graduated from college. Your 59 1/2-year-old self will indeed be eternally grateful, and your years leading up to retirement will be far less stressful, financially speaking.
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Exactly. 10 or 20 years down the line you will be thankful to your younger self for all the hard work he put in! Young people rarely have much understanding of finance and even those who do usually lack the self-control and foresight to put their knowledge into action. Well done and keep up the good work!
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Kudos to you for doing all the right things…it is indeed easier and more profitable to start off with a bang like you are doing (you have to love compound interest and a whole life ahead of you). Just be careful in your quest that you don’t missing any payments or racking up credit card debt to save. Sounds like you’ve figured that out on your own but don’t create a problem where there is none. Continued success on your pf journey!
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“…once you allow yourself the guilty pleasure of 0% interest credit it is hard to not want to float those expense as long as possible.”
I agree totally, and whilst it’s a great idea rationally speaking to float a balance at 0% on a credit card in order to earn interest else where in the form of savings, it isn’t half hard to stay strict with it and not start purchasing “wants” at whim.
Even more so if you start justifying it because you’ve been so sensible/clever to have set that situation up in the first place!
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I have a really hard time not funding our IRAs even when we shouldn’t ( http://nicoleandmaggie.wordpress.com/2012/01/09/we-may-not-contribute-to-the-ira-this-year/ … we did anyway.). Somehow it always works out with cutting spending or getting windfalls (like a tax return, or being forced to sell a taxable stock). I’d feel really weird about carrying a balance even on 0% interest cards without at least that amount saved in cash.
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Maybe it’s just me, but dumping expenses onto a credit card in order to “afford” funding a Roth IRA doesn’t sound like such a great plan.
And the author mentions now paying off the credit cards while at the same time ramping up his other savings and continuing to fund the Roth for 2012. But I’m not clear that it’s all happening within the current budget, and if there were any lifestyle cuts now in order to afford paying the bills in addition to adding a monthly Roth contribution to the budget.
One note of caution – when you get close enough to the limits of contributing to the Roth, you might consider not making monthly contributions. My husband and I are right on the edge – some years we qualify, some years we don’t, and some years we are in the phaseout zone. There are fees for over-contributing that we want to avoid.
So we wait until we run the numbers with our accountant and make a lump sum contribution at our maximum amount (if we are under the income limits for that year).
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I agree with Jennifer.
There’s a lot of reasons behind why we set aside money each month in a separate holding account to fund our IRAs at the end of the year and one of them is that I got hit with fees for accidentally depositing too much during a high earning year when I was single. We haven’t hit it yet as a couple, but we’re pretty likely to if not this year then probably next year.
If your income is variable at all, or if you are in an industry where bonuses or commissions accelerate at the end of the year, it can make a lot of sense to hold back the payments to make a single lump sum once you know what your MAGI will be.
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Duly noted. The bonuses in my industry aren’t enormous, but I’ll probably need to start taking that into account next year to make sure a bonus doesn’t dump me over the limit.
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I think that it’s interesting how you identified your optimism as one of the major factors of your financial planning. I also consider myself an optimist and think that I would have done the exact same thing in your situation – unnecessary financial stress and all. I can say, however, that right out of college I would not have thought to leverage a 0% interest card to make it all happen. Good for you for working the system. Hopefully you’ll find you never have to do it again.
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“I expect to outgrow the Roth IRA limits in a handful of years which means that I only have a finite amount of time to make Roth IRA contributions.”
Technically there are no income limits, since 2010, which would limit contributions to a Roth IRA (whether those contributions are deductible is another story). If you are above the Roth IRA income limits, you can contribute to a traditional IRA with after tax income and then convert to Roth.
You may also, since it sounds like you have 401k match, find out if your plan offers a Roth 401k. Since it sounds like you may not be maxing out your 401k, if your plan has a Roth option, you may figure out that you can get more match and still get the benefits of the Roth. My company doesn’t match, but Mr. Sam’s does and we both have our 401k set up 2/3 regular and 1/3 Roth. Obviously the Roth is after tax money so you need to take that into consideration as well.
It sounds like you have a good handle on your personal finances for one so young. But, as others have mentioned utilizing debt to permit investments sounds like a bad idea to me. I would work on coming up with a more sustainable spending plan or budget such that you have are putting those tax advantaged savings as a priority in your savings plan.
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So this is inaccurate?
http://en.wikipedia.org/wiki/Roth_IRA#Income_limits
Seems unlikely. Can you reference something from the IRS that states there is no income limit?
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See where it says “conversion limit” in that wikipedia article? That’s what Sam is talking about.
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So you technically need to open a new IRA every year and then convert the 5,000 to a Roth? Can someone confirm they did this multiple years in a row? What happens the 100k conversion limit is reinstated?
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I’m very fortunate to have the Roth 401(k) option on my workplace plan, so I’ve been throwing a few token percentage points at that as well. Otherwise, going through the conversion process every year sounds exactly like the unnecessary financial stress that I’ve been learning about. It’s probably worth it, since Roth is awesome, but sounds like a pretty big hassle to me.
On the budgeting note, I’ve definitely been getting better, but many of my endeavors have involved the same spending to save theme. For example, my biggest budget overflow is usually dining out, so I bought a CSA share to incentivize myself to cook, which has been mostly successful. So much kale, but at $25 a week, it costs as much as an unplanned meal with friends at a local brewpub.
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Kale chips are delicious. Really!
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divorce is of course one of the worst thing that you could experience but you could get over it~
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ANY contributions is amazing at your current place in life. And double-contributing (401k AND IRA) is way ahead of the curve.
The wife and I are currently at the point of weighing our spending-power/life-enjoyment vs. bumping up our set-asides. We’re not anywhere near trying to “sprint” to max out our IRA contributions this year, but we’ve started bumping up our savings rates 1% each month and will make adjustments on the fly until it just becomes unacceptably “tight.”
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I love the idea of monthly increments! I keep thinking about the boiling frog anecdote, but instead of being cooked, you end up hitting the maximum without missing your extra budget. For a while I was toying with the idea of a weekly $1 increment (because who would really miss that?) for all sorts of debt payments/savings/investments. That really adds up after a while! Unfortunately, there’s no way to automate that (probably for the best).
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It seems like you have learned the credit card lesson at a great time when you had 0% interest and doubt you’ll charge it up again so that is a good thing.
The other awesome thing is that you reached your Roth IRA goal and now have a longer time period to max out your 2012 Roth IRA so you shouldn’t be in such a financial pinch.
Keep it up! I now max out my Roth IRA in calendar years and that is a nice feeling as well. Maybe shoot for that in 2013?
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Agreed, spreading those contributions out over the remaining 8 months of the year feels much better, and I’m really looking forward to next year when those payments are spread out over the whole year. Betterment has an awesome check box that sets your contribution amount to max out over the remainder of the year at the contribution frequency you choose. (as an aside, since there are no transaction fees and money gets invested immediately, I still trickle that into the account weekly to take advantage of superior DCA granularity, which also syncs up better with my fortnightly paychecks)
I’m definitely going to keep it up!
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another sprinter here cheering from the sidelines. go go go!
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I think I deal with big pushes better than slow grinds, which is probably why I’m addicted to climbing mountains.
The view from the top is AWESOME and it’s even better because you pushed your limits getting there!
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You are taking a very mature and reasoned approach to saving. I only wish I had been as far sighted at your age. I dabbled with retirement savings since I was twenty or so but didn’t really go whole hog until twenty years later. My budgeting didn’t start until I was 40. Now at 50 I am well off now, no debt and saving a great deal, but my retirement prospects are looking a bit dim, considering the economy. Good luck to you in the future.
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First and foremost, as others have already said, great job getting started with retirement contributions so early on in your career. Keep up the strong work!
Beyond that, I’d just caution you that not all 401k plans are created equal. Keep a close eye on expense ratios and hidden fees and loads inside the funds offered by your company’s 401k plan. As a general rule I think it makes sense to contribute into a 401k up to the employer match (free money, baby!!), then fully fund your Roth, then consider increasing your 401k contributions depending on which funds your company’s 401k plan offers (assuming high interest debt is paid down and a 3-6 month emergency fund is in place). I know with my employer’s 457 plan the fund options aren’t that great, but a 457 has the big advantage of not having the 59.5 age requirement. So I hedge and contribute to both my 457 and my Roth, with my defined benefit pension acting as the 3rd leg of my retirement stool.
Thanks for sharing your story.
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For a long time now, I’ve felt as if something wasn’t quite right with GRS. As if it had lost some sort of magic it had before. And this user article has finally made me realize what it was.
When I started reading GRS, JD was still in the middle of his personal finance journey, and there was a sense that everyone who visited this site was on the journey with him. Now he’s made a ton of money from blogging, doesn’t write much anymore, and has a bunch of new people writing in his place. To top it off, many of the writers I like or had grown to like, such as Adam Baker, April Dykman, and Tim Sullivan, have all gone on to greener pastures.
Reading articles like this about people whose lives are going great and their only problem is how to manage all the money they’re making, well, they just don’t interest me as much. And it seems as if they’re becoming more and more common. I don’t blame JD or the site; it’s my own problem. Along those lines, does anyone know of any personal finance sites that are more like how GRS was back in 2008 or so?
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Try looking at Plutus Award winners and runners-up for 2012 (or even 2011). They give blogging awards in several catagories.
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Yes, it’s one of the reasons I like Honey. Everyone is down on her, but at least I can learn something.
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I have the exact opposite reaction to a story like this.
This reply isn’t meant to sound braggy or to discount George’s point. I’d just like VT Moose to know that I enjoyed reading his article and wish there were more young voices like his in the PF world.
I’m in much the same boat as VT, a year into a well-paying career in my field and just beginning to form an understanding of Personal Finance. I graduated from college debt-free by learning from my parents’ mistakes, avoiding consumer credit and serving eight (mostly part-time) years in the US Army.
I won’t apologize for the fact that debt repayment and foreclosure articles offer nothing more to me than cautionary tales and reassurance that I’ve made the right financial decisions from a young age.
This is the type of article that I, and many other young professionals, can relate to. Personal Finance can be a confusing and overwhelming topic and there is a lot of poor, and even misleading, information out there. It’s nice to hear from a peer who is struggling with the same issues as I am.
VT’s financial decisions may not be as dire as others on this site, but they are in no way less important.
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Every sprint I’ve done has caused major reorganizing (or not organizing and just guessing) which always ended up messing with a credit card (sometimes including extra costs). Its frustrating, but somewhat nice to see I’m not the only one jockeying snd making mistakes. Even though I’m not to the debt free point yet I can really relate to this post.
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About this quote:
>>>Ultimately, I have discovered that each incremental dollar that you throw at your savings gets less exciting; at the end of my Roth IRA Sprint I could barely feel the elation that the first deposit brought. Would I do it again? Probably not, but that may be the side of me that has been subjected to completely unnecessary financial strain and has to pay off a credit card before the interest kicks in at the end of the year. Fortunately, I’m willing to bet that the 59-1/2 year old me will be pretty thankful.<<<
I think that reaction, probably a very natural reaction, to 'additional' money in the Roth as "barely…" and combined with thinking ahead to
59-1/2" exemplifies all that is wrong with current PF thinking.
IMHO, we should not expect nor preach to recent graduates to fund their retirement. It is almost impossible for someone in their twenties to think that far ahead without losing perspective.
What SHOULD be taught and emphasized to everyone, especially those at that age is to save and invest in order to BUILD WEALTH. I think the concept of building wealth can be grasped by anyone at any age. And it could be much more embraced by younger people than focusing on retirement.
A young person who focuses on saving and investing to build wealth will end up with a much broader world view than one that focuses on saving and investing for retirement.
And those who focus on building wealth will be wealthier when they get to retirement age than those who focused on saving for retirement.
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I agree with this. 59.5 is difficult for me to even imagine… and therefore I never found 401(k) or Roth IRA goals incredibly motivating.
But what about the financial actions I can take NOW that will have an impact on my life NOW? For example, what could the author have done to avoid the stress he subjected himself to because of his decisions? What does he need to do to get his spending down to a level where he doesn’t need to float any credit card charges?
Furthermore, if you do enough digging into your relationship with money, you’ll probably find goals that really do speak to you. For me, that is early retirement. For others, that may be putting a ridiculous down payment on a house. For still others, it may just be having things under control to the point where they don’t worry about finances or even really spend too much thinking about finances. All amazing stuff.
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I totally disagree. The sprint isn’t for everyone, but the habit of setting aside for retirement is a good, solid step that is a great wealthbuilder for a lifetime.
It’s not like that Roth money disappears – if everything changes in the writer’s life as expected, with a high income, lots of extra money to sock away, maybe a partnership to build, the early Roth contributions can be an opportunity fund or just a reason to not invest as heavily in the future and use that future cash flow for some other investment.
But if things don’t go as expected, and there are bad/lean years in there, the money might be necessary for retirement and will definitely be appreciated by that future 59 1/2 year old.
It’s a win-win situation. It’s not like the writer dropped out of law school to put the tuition money aside for retirement.
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I agree with this whole thread. Obviously there is a lot of life in between now and that 59.5 year old that I may not even recognize, but this definitely qualifies as wealth building for all of those years in between. One of the nice things about the Roth IRA is that my money isn’t necessarily gone forever, maybe I’ll use the exceptions to help pay for a house or need the money in terrible medical emergency. I love the comment about having this money set aside so future income can be used for other investments, which to me would eventually be a business.
One of the reasons it was difficult to run the Roth Sprint was that I do have lots of other goals which I am trickling money into. I have to admit that it was hard putting that ridiculous dim view of the future ahead of targeted savings for much more tangible things. Honestly, I’m not even that interested in retirement in the traditional sense, but it seems like a good idea to have that taken care of regardless. I’ve always assumed that this is something that I can do alongside my other goals (remember that part about optimism?)
I definitely agree with the NOW approach, but I also don’t want to be constantly thinking about improving my financial situation. I no longer need to check Mint everyday, which is definitely a step in the right direction.
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I’m recently out of school and in to the “real world” as well.
While I’m not in a position to max out my Roth IRA at the moment, this article DID inspire me to increase my contributions from $100 to $150 a month.
I’ve got to agree with the seemingly overwhelming sentiment in the comments… the fact that we’re young and even conscious of long-term investing is a good sign for how secure we’ll be in the far future, regardless of the details of how we’re doing it. At least, that’s the feedback I constantly get from older mentors when I bounce my investing strategies off them.
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It’s definitely nice to find kindred spirits among our generation. Maxing out the contribution is really just a silly metric (like they have at my company, from which I’m posting discretely.) I always love referring to the perfect is the enemy of the good philosophy or the 85% solution in these situations; any action at all is amazing and proves that you care!
Like anything, you have to start somewhere and chances are that you’ll get better as you continue. Overcoming the fear of starting is the hardest part, after that, the rest is practice. (which reminds me of SO MANY THINGS I’ve gone through in life, but I’m well on my way to becoming a more dynamic and confident person)
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As someone who used to be you (well, probably not as well paid, but I started my retirement savings at 24), I want to tell you: it really is worth it. Really really.
We get a lot of snark from our age cohort. One time a friend asked me “Were you raised during the Depression?”
But now in our mid-30s, it’s made everything so much easier. We don’t have debts to worry over, our house will be paid off before my husband turns 40, our son’s college education is on track to be fully funded before he starts high school.
We have friends who are stuck in jobs they hate, or in underwater houses, or unable to start/expand their families or pursue their dream careers because of lack of money. Many of them started out with more than us, or come from richer families.
I think about money, frugality, investing, because I like to and I have unmet goals, like giving more to charity – but I *never* have to worry about there being enough to pay the bills, or fill a prescription, or choose the highest-quality child care, or quit my job to get my child through a rough patch. The peace of mind is something I think most people have a hard time even imagining, but it is really wonderful.
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What Rosa said exactly. Having freedom from worrying about the important things makes life a lot easier in our 30s. DH can even quit his job to explore other options (while still putting the kids in top quality schooling/child care) because we’ve been good about money.
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Kudos to you. I wish I had done the same early in my career instead of concentrating on paying off my 20 year mortgage in 7 years. I would have been money ahead now, in my mid 50′s. I’m still doing better than ok but I could have been doing awesome.
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Uh, you paid off a house in 7 years, that’s incredible! We never chose the “optimal path” through life since it doesn’t exist until we’ve past it. Instead, we do the best we can do at the moment and hope for the best. No regrets: they just aren’t that helpful. Maybe you’ve discovered the need to accumulate more invested savings in the time since your house sprint, but the fact that accomplished such a feat should make you feel pretty rich on its own.
I have complete faith that you will be doing awesome before too long.
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“We never choose the optimal path through life since it doesn’t exist until we’ve past it” I love that. I hope you don’t mind but I’m going to use it sometime. It’s a great perspective. Thanks!
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Thanks for sharing your story! I try to do what Ramit says
and find the points in each article which I could broadly apply to my own life. So even though I’m 30 and have just started contributing 50$ a pay period to my Roth IRA, and am terribly jealous that you maxed yours out, I appreciate your candor about the sacrifices you made in order to do so. I think many of us financial optimists have put too much in savings one month, only to have to buy groceries on credit right before our next check!
Thanks again.
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What a great philosophy! It’s nice to be able to learn from all sorts of different perspectives. I completely hear you on the dangers of automating borderline realistic savings amounts, it feels so good but can be so stressful!
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While you may be expecting to make more money as your career progresses, that doesn’t actually make a Roth IRA always advantageous. What you really should be looking at is how much money you plan to spend each year in retirement from your IRA (your “income”). This “income” is often significantly less than what you are making now. In which case it would make more sense to pay the taxes when you pull the money out in retirement, not now when you are in a higher tax bracket. Most places that offer an IRA have calculators to help you determine if Roth or Traditional is the way to go.
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You definitely have more guts than I do. not paying my credit card balance off every month gives me the sweats.
Some of the other comments are talking about how it makes sense to have a regular IRA and pay taxes when you take distributions. That only makes sense if you plan on your income being significantly less in your retirement than in your working years… I for one plan on making lots of money during retirement. thanks for posting your story! great read.
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I completely agree; who wants to make less money in retirement, that just doesn’t sound like a lot of fun. If I’m going to have more spare time, I’m going to need more money to keep up with all of my adventures!
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