Taking Stock of the Past Year

This October marks the one year anniversary of my full time employment at my current job. This is my first full time permanent job, so when I started, I knew I had to buckle down and start getting serious with my paycheck.

Now that I've been getting those biweekly checks for a year, I figured it's about time to take stock of where all my money went. When I did take a look at where my money went, I was pleasantly surprised.

When you look at your past year, how do you feel you've done? Has the economy wrecked your well-laid plans, or have you been frugal and kept up your debt payments/savings? What are your goals for the next year?

Cash Buffer / Emergency Fund

Over the course of a year, I have been making regular contributions to a high interest checking account that serves as my cash buffer and emergency fund. Currently I have a few thousand dollars in this account. I would have had more, but when we moved to our new apartment, we used some of it to aid our cash flow (one security deposit came due before the other was returned to us). This is not a step I plan to repeat, but at the time it was the best option.

The peace of mind that comes along with having this cash buffer is incredible. My fiance changed jobs in the past year, from a full time but exhausting and unfulfilling job, to several part time jobs that are much more flexible and enjoyable. Despite the uncertainty of unemployment with the current recession, we were able to continue paying down debt and saving money without tapping into our emergency fund. But just knowing it was there if we needed it made the stress of the situation much, much less. I think many couples' money fights could be avoided if they can create similar financial priorities. We did cut back on going out to eat and our 'fun fund', because to us, saving money and reducing debt is much more important than splurging on restaurants and travel.

Paying Down Debt
This is one area that my fiance and I both know is crucial. We both have student loans from college, and we make regular monthly payments in excess of the minimum payment amount. Even though I am still in school, so my loans are technically in deferment (I don't have to start paying until I am no longer a full time student), I am paying them monthly anyway.

This pre-payment serves two purposes. First, it helps to decrease the amount of interest I will be charged over the life of the loan by decreasing the balance. My rates right now are currently very low (between 3.75% and 6.76%), but when I took out the loans the rates were very high (8-9%). Since a large amount of interest accrued at the higher rates, my payments go toward reducing this accumulated interest. Once I graduate, the interest will be added to the principal and will earn interest on top of interest. This is something I want to avoid as much as possible.

The second purpose of paying my loans before I absolutely have to is to prevent myself from getting used to having that extra spending money. Lets say for example, I pay $800 per month on my loans. If I weren't putting this toward loans, I could be living a much different lifestyle than I am now - fancy restaurants, travel, shopping, etc. But since I started putting this money toward loans as soon as I started getting a paycheck, I don't miss it. It would be much harder to change from that high-flying lifestyle and cut back to afford debt payments after graduation.

Retirement Savings
This is the area where I am most proud of how far I've come. This time last year, I knew absolutely nothing about saving for retirement. I had no idea how much people had to save to retire 'comfortably'. Nobody my age that I knew was saving - most were still looking for jobs. I did tons and tons of research online, and decided it would be dumb of me to not take advantage of the tax benefits provided for retirement savings.

Since my company was in the middle of a merger, and the 401k plan was not yet set up, I opened a Roth IRA for myself and started contributing. Once my company offered a 401k, I set up a Roth 401k with them (with a regular 401k for the employer's 3% safe harbor contribution) and started contributing 10% of my income. This 10% comes out of my paycheck before it even reaches my bank account - so I never miss it. I still contribute to my Roth IRA. Since any gains made in these accounts will never be taxed, starting early is critical.

Goals for the Next Year
Here's roughly what I accomplished in the last 12 months:
$10,000 in debt payments
$6,000 in retirement savings
$3,000 in cash buffer/emergency fund

Here's what I want to accomplish in the next 12 months:
-max out my Roth IRA ($5,000 per year)
-continue contributing 10% (plus 3% employer safe harbor) to 401k
-reach 3 months expenses (including minimum debt payments) in the emergency fund (another $5k to go)
-pay down $15,000 in debt

Wednesday Websites #4: Retirement Accounts

Since this is National Save for Retirement Week, today's websites will feature online companies that allow you to create and maintain retirement savings accounts.

despair.com

Before I launch into a list of links, I'll give a quick background of the different types of accounts. I'll go into each in more detail later this week, but for now, lets say there are two major types of retirement accounts.

The first is the 401k. This is a tax advantaged account that is generally an 'employer-sponsored' plan. That means, when you leave one job for another, you have to transfer your 401k account to your new employer. Many employers also offer matching contributions, say for 3% of salary. Employer contributions are free money - make sure you are taking advantage of it!

The second type of account is the IRA, or Individual Retirement Account. Like it's name implies, this account is tied to you, not your employer. You can change jobs every week if you'd like, but you don't have to change your account information for an IRA. You do not get employer matching for this type of account.

There are limits as to how much money you can put in each account during the year, since they are "tax advantaged" accounts. That means that there are tax benefits associated with saving for retirement.

If you choose the 'traditional' IRA or 401k, you put money in pre-tax, and are only taxed when you make withdrawals in retirement. This type of account is good if you think your tax bracket is higher now than it will be when you retire. It also serves to decrease your current taxable income, so you will pay fewer taxes in the present.

If you choose the "Roth" IRA or 401k, your money is put in after taxes have already been taken out, but you never have to pay tax on the gains that investment makes. So if you manage to turn $10,000 into $100,000 by the time you retire, you will have been taxed on the original $10,000 at your current tax rate, but you will not be taxed on the $90,000 your money earned. This type of account is best if you think your tax rate now is lower than what it will be when you retire. So if you are starting out at an entry level job in one of the lower tax brackets, this may be the best account for you currently.

You can also have both. I currently do - I put money into both a Roth IRA and Roth 401k, but my employer's contribution gets directed to a Traditional 401k.

Now that you get the basic idea of what types of accounts there are, here is a listing of websites that allow you to create and fund your own account.

Etrade
ING Direct
Fidelity
Bank of America
Scottrade

Note: You should check out the list of potential fees before opening any account. Some of these sites will charge an annual fee, but not charge for trades, while others will charge for trading but not have an annual fee. You need to determine how you will most likely handle your money, and pick the one that suits your personal investment style.