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.
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.
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.