I’m pleased to announce that I have a buyer for my house and we will be closing at the end of June! The terms of sale have been negotiated and agreed upon, so nothing should go wrong between now and closing. That means it’s time to start making plans for the money I’ll be getting after the sale.
Yep, I am one of the lucky few who have been able to sell a house in this market and make a small profit. It was great luck that I bought my house in 2004 before the market went crazy and housing prices shot up. Even though the bubble has burst and prices have fallen, they are still a bit above what I paid. After my mortgage and HELOC are paid off and the closing costs are covered, I should clear about $12,000.
I don’t plan to spend any of that money, but I still feel like a kid at Christmas! When the sale goes through, I am going to have the $24,000 emergency fund I’ve been working so hard to accumulate. By the end of June, I will have grown my emergency savings to $12,000. I’ll add the $12,000 from the sale and be done. Why am I so excited about that? Because it means that all of the savings I do from that point on will be for something much more rewarding than a cash cushion I can never touch.
I plan to go right on saving like a fiend. I will open a Roth IRA with the next $5,000 I save, which is the maximum allowable annual contribution (to learn more about IRAs, check out RothIRA.com). I’ve always contributed to my 401(k) at work, but this feels like the first time I’ll be taking really proactive steps to achieve my goal of early retirement. It’s a great feeling.
A sidebar on the wonders of compounding:
There’s a great tool at Moneychimp.com that allows you to calculate the value of an investment that compounds over time. Withdrawals from a Roth IRA are allowed at age 59½. I am currently 30½ years old. That means I can make 30 annual contributions and earn compounding returns for 29 years before I’m eligible to make withdrawals. I plan to contribute the maximum amount allowed each year, which is $5,000.
I’m assuming that I will achieve a 5% rate of return. This is conservative, but I want to err on the side of caution. Also, I’m a little more risk averse than many people when it comes to investing. I’m likely to switch to lower risk / lower return funds earlier than most people would.
I entered all of these variables into the calculator at Moneychimp and it revealed that my IRA will be worth approximately $347,775 when I’m eligible to begin making withdrawals at age 59½. My total investment of $150,000 will generate $197,775 in earnings over 29 years. Sweet!
But since I occasionally like to torture myself with regrets… I used the calculator to see how much money I would have if I had contributed $5,000 per year beginning at age 22 when I started working. By age 59½, my IRA would have been worth $563,955. My total investment of $190,000 would have generated $373,955 in earnings. By spending money throughout my twenties on a bunch of crap I didn’t need, I basically threw away $176,000. Aaaarrrrggghh!!
Lesson learned: When you have the opportunity to earn compounding returns, invest as much as you can as early as you can!
After this year’s IRA contribution is covered, savings from that point on will go toward the purchase of a new car and a new house. I have to say, those savings goals are a little daunting… Actually, they’re a lot daunting. I’m going to need around $20,000 to purchase a reliable but modest new car when the time comes (probably in five or six years if I can stand to wait that long). I’ll need another $50,000 in order to purchase a $225,000 home with a 20% down payment and enough cash to cover closing costs. So basically, my next savings goal is $70,000. VERY daunting.
But I’m not going to freeze like a deer caught in the headlights of my savings goals. As always, I’m going to maintain my motivation by focusing on the big picture and by feeling proud of what I’ve accomplished so far. The truth is, I should be able to achieve my new savings goals within six years (while still making my annual IRA contributions). In the grand scheme of things, six years isn’t that long. At 36 years old, I will be in great financial shape. It’s difficult to predict what my financial goals and priorities will be in six years, but I love knowing that I will have options.