An introduction to the crossover point
Trent at The Simple Dollar recently wrote about the Crossover Point, a notion popularized by the book Your Money or Your Life. The Crossover Point is simply that point in time at which your investment income exceeds your monthly expenses. For most people, this never occurs.
YMoYL is about getting readers to the Crossover Point. The authors want people to achieve Financial Independence, which they define as "having enough — and then some". They ask readers to track income, expenses, and investment income, plotting each of these on a wall chart. The entire book is about finding ways to get the investment income line (low on the graph) to meet (and then cross over) the expenses line.
This is esoteric, I know, but it's important. Reaching the Crossover Point means that, if you wanted, you could stop working for money. You could retire. You could work for self-fulfillment. You could travel the world or write a book. If YMoYL were a novel, this would be the climax of the story:
Questions and answers about Roth IRAs (Updated!)
The series on Roth Individual Retirement Arrangements (Roth IRAs) has covered a number of topics -- what they are, how (and where) to open one, and which investments are best. Now, in the final part, we turn to some of your questions. Remember: I am not a financial adviser. I'm just a regular guy trying to gather information to help you. If you need more specific answers, please consult a CPA or an investment professional.
All of the questions below were submitted by Get Rich Slowly readers via comment or email. If your question isn't here, please drop us a line so we can research an answer and add it to the list. If you are new to Roth IRAs, this article is not the place to begin. Start here, instead.
Which investments are best for Roth IRAs?
So you are in the market for a Roth IRA, that popular, flexible, tax-advantaged vehicle that can be used to save for retirement -- smart choice -- but here comes the next question: which investments are best for a Roth IRA?
Roth IRA Mutual Fund Options For Investment
There are three basic options for your Roth IRA investments:
How to open a Roth IRA
You've heard how awesome Roth IRAs are and how starting one now can mean big bucks when you're older. You've even done some research so you have a vague idea of how a Roth IRA works. Now what? How do you actually open a Roth IRA for yourself?
The good news is that it's surprisingly easy to set up a retirement account and begin investing in your future. Here's what to do...
How to open a Roth IRA
- Decide where to open your Roth IRA account. Financial services providers such as Vanguard or Fidelity will have IRA products.
- Gather your information.
- Transfer money into your account.
- Set up an automatic investment plan.
1. Where to Open a Roth IRA
One of the reasons people fret about opening a Roth IRA is because there are so many financial institutions offering IRA products. It's important to search for a company that suits your needs, but how do you evaluate each company's strengths and weaknesses?
What is a Roth IRA and why should you care?
IRAs are tax-advantaged accounts that can hold your retirement investments. It's easy to get intimidated by IRAs.
Here is an example of a common email we receive on the subject of IRAs:
Real-life choices: Retirement savings vs. debt reduction
I've accumulated $3500 and I don't know what to do with it.
As you may recall, I am carrying the remainder of my credit card debt in the form of a home-equity loan (or HELOC). The current balance on this debt is $15,000 and I'm paying a 9.25% finance charge. I intend to have this debt eliminated by March 2008. It's an ambitious goal.
In order to make this happen, I've had to forego investing in my Roth IRA. I established this retirement account last spring, but only put $650 into it before focusing on the HELOC. Now I have the money to fully fund it, but don't know whether to do so, or to continue attacking the debt aggressively. There's a time-pressure to this decision: Roth IRA contributions for 2006 must be completed by April 17th.
Book Review: Time is Money
One of the most puzzling things about money is knowing where to begin. You get out of college and suddenly find yourself in the real world, with a job, with rent, with student loans, and wonder how you're going to make ends meet, let alone save for retirement. Retirement seems so far away. It's easy to just forget about it.
Ignoring retirement could be one of the biggest financial mistakes you'll ever make. Compound returns favor the young. Time is money. Invest now and your 40-year-old self will be grateful. But where do you start?
Frances Leonard's 1995 book, Time is Money, is an excellent introduction to retirement for people in their twenties and early thirties. Leonard preaches the important message: start now.
How compound returns favor the young
In an earlier entry about the cost of waiting one year to begin investing for retirement, I posted a chart from AllFinancialMatters that demonstrated the power of compound returns. Vintek posted a math exercise related to the subject.
I got this from a book called The Random Walk Guide to Investing by Burton Malkiel. It's a book I recommend, and I'll eventually talk about it in the forum. Here's the exercise:
William and James are twin brothers who are 65 years old. 45 years ago (at the end of the year when he reached 20), William started an IRA and put $2K in the account at the end of each year. After 20 years of contributions, William stopped making new deposits but left the accumulated contributions in the IRA fund. The fund produced returns of 10% per year tax-free. James started his own IRA when he reached the age of 40 (just after William quit) and contributed $2K per year for 25 years, making his last contribution today. James invested 25% more money in total than William. James also earned 10% on his investments tax-free. What are the values of William's and James's IRA funds today?