Category Archives: Savings & Retirement

Retirement Advice from an Expert (NOT Me)

I read an article today that rocked my world and I want to share it with my vast audience of literally TENS of readers. 

If you’re like me, you want to retire as early as possible.  It doesn’t matter how much I enjoy my job; there will always be a long list of other things I’d rather be doing.  Planning for retirement is intimidating, and I always feel like I’m not as far along as I should be.  My goal, and it’s a bit of a stretch, is to semi-retire at 55.  By “semi-retire”, I mean I would be perfectly content to work for, say, ten years in a low paying, low stress, part time job that helps supplement my income.  Then, at around age 65, I’d like to embrace full retirement, devoting 100% of my time to my worthy hobbies, which include traveling, drinking wine, and napping, among other things. 

*Side note:  In a perfect world, I would embrace full retirement at age 55 and earn supplemental income from passive sources like rental properties.  We’ll see how that plays out.  Thinking about how to create passive income streams is an intimidating and confusing topic for another day.

Retirement planning seems a bit simpler today after reading an interview with investment advisor William Bernstein on the CNNMoney blog.  Mr. Bernstein has managed to make retirement planning seem a lot less like rocket science and a lot more like common sense.  I’m not even going to try to summarize the main points here because I don’t think I could possibly be as clear and concise as Mr. Bernstein is in his own words.  Just click through and read the interview.

Viva la frugal!

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Filed under Savings & Retirement, Value of Time

You Say Tomato, I Say F-You Fund

Source: Federal Reserve
Credit: Lam Thuy Vo / NPR

The NPR Planet Money Blog had a recent post about Americans’ “rainy day” funds.  The post references research conducted by the Federal Reserve to determine why Americans save and how much they think they should be saving. 

At first, I was shocked by the research findings.  The research found that on average, Americans think they need only one month of salary in savings for a rainy day.  Remember, this is how much they think they should have, not how much they actually have.  I wouldn’t be at all shocked to find that most Americans have very little in their savings accounts, but I am shocked to know that they think they need so little.

As a homeowner, I always have a nagging fear in the back of my brain that I could be hit with a major, unexpected repair bill.  One month of my salary is far too little for a proper safety net if something like that happens.  I have friends who suddenly had to replace their HVAC system at a cost of nearly $10,000.  Unfortunately, one month’s salary for me isn’t anywhere near $10,000. 

I took a gander at the comments people made on the NPR post to see if I was the only one who found the research so surprising.  Interestingly, many of the comments centered around the definition of the term “rainy day fund.”  One commenter noted that he has both a rainy day fund and an emergency fund.  His emergency fund is for major unexpected expenses or liquidity if he loses his job, while his rainy day fund is just a cushion in case his regular spending ticks up one month.  Another commenter said that her rainy day fund is some cash in a jar that is literally used for rainy days, i.e. ordering pizza delivery while she stays dry watching TV or reading a book (she sounds like my kinda gal).

The comments have made me hopeful that many people responding to the Federal Reserve’s study simply misunderstood what the researchers meant when they asked about rainy day funds.  Or perhaps more likely, the researchers misunderstood how people think about and classify their savings.  After all, how likely is that the Federal Reserve asked about F-You funds

Does anyone else have a pet name for their emergency savings accounts?

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Filed under Savings & Retirement

HotFrugal Goals: Where Are They Now?

Until recently, it had been a year since I had written a HotFrugal post.  I’d say it’s time to take stock of my current financial situation and goals.  This is the type of post that is interesting if you’re nosy (I certainly am, so don’t feel bad), but it’s definitely long and detailed.  So dig in and join me, won’t you?

Savings Accounts

F@!# You Fund:  This is what I like to call my Emergency Savings Fund.  I censored it a bit since my mother reads this blog.  Basically, I want to have enough money saved so that I can say a big “F@!# You!” to any major unexpected expenses that crop up (major home repair disasters, car maintenance fiascos, etc.).  I also want to be in a solid financial position if I lose my job, and I’d even like to have the option to quit my job if it ever becomes really, unbearably horrible.  Goal:  $25,000.  Current balance:  $12,313.

Mad Money Fund:  This is a phrase I’ve borrowed from my mother.  Mad Money is fun money that can be spent on any kind of Want.  Typically, I use this fund for vacations, though more recently, I tapped it for a tattoo (!!).  There is no specific amount I try to keep in this fund; it just depends on the timing and types of vacations I have planned.  Current balance: $995.

Triumph Motorcycle Fund:  No, I don’t know how to ride yet.  But I know I want to!  I’m saving as though I’d buy a new bike and all necessary accessories (helmet, saddlebags, etc.).  Goal:  $11,000.  Current balance:  $568.

Roth IRA Starter Fund (formerly known as iPad Fund):  It’s time to kick this one into high gear.  Once I have enough saved, I will open an account with Vanguard and then track future contributions and growth in the Retirement section (see below).  Goal:  $3,500.  Current balance:  $40.

Retirement Accounts (Vested Balances)

Old 401(k) from Former Job:  (At some point I need to roll this over to an IRA.)  $43,750

401(k) from Current Job:  $9,003

TOTAL:  $52,753

Debt

Mortgage:  My house is worth $165,000.  I’m not working to pay down my mortgage more quickly because I’m not sure how long I’ll live in this house.  Remaining balance:  $128,096.

Car:  Yup, I bought a new car at the beginning of the year.  The old one needed more costly repairs, and I was able to get 0% financing.  I won’t make any effort to pay this off early since I’m not being charged any interest.  Remaining balance:  $13,964.

Net Worth

A rough calculation based on the above info puts me at $104,609.

So there you have it.  My number one priorities are the F@!# You Fund and the Roth IRA Starter Fund.  It’s going to take a long, long time before I’m able to buy a motorcycle, but I’ll get there eventually. 

Viva la frugal!

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Filed under Monthly Updates, Savings & Retirement

The iPad: Meh…

Obviously, it’s been a looooong time since I last posted here.  There’s no real reason why I stopped writing on HotFrugal…  Life just kinda happened and I got busy with a new house, new job, new involvement with several local organizations, etc.  Things have calmed down a bit, and I really miss writing, so I’m going to start up again.  I’ll just go ahead and dive right in…

 

Used with permission from Debbie Ridpath Ohi at Inkygirl.com

For a long time, I have been absolutely green with iPad envy.  Two of my coworkers have iPads with fancy keyboard cases, and they (my coworkers) always make me jealous by showing off all the fun things they can do.  Even my mother has an iPad, and she’s not exactly someone I would consider to be an early adopter of new technologies.

So, a few months ago, I started an iPad savings account in true HotFrugal fashion.  I have an online checking account with ING Direct, and I also have several targeted savings accounts with ING.  My emergency fund is kept totally separate with another online bank.  I love ING because it literally takes about 30 seconds to open a new savings account, and you can have dozens of accounts at any one time.  With a few clicks, I had a savings account named “iPad” with the goal to save $800 for the mid-range model and the keyboard case.

But then a funny thing happened… Over the past five months since I opened the account, I’ve only put $40 in it.  Whenever I have extra money to save, I never seem to want to put it in the iPad account.  Instead, I find myself wanting to put the money toward my general savings fund or toward one of my other “just for fun” funds.  Today, it finally occurred to me that maybe I don’t really want an iPad all that badly, or rather, there are other things that I want more. 

There’s a good lesson in this experience that I hope I will remember in the future.  If I had just gone ahead and bought an iPad without deliberately saving for it, I never would have realized that I didn’t even want it that much in the first place.  Fortunately, ING makes it easy to change the nicknames for savings accounts, so the iPad account is now called “Roth IRA Starter Fund.” 

Viva la frugal!

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Filed under Frugal, Savings & Retirement, Shopping

Save, baby, Save!

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.

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Filed under Motivation, Savings & Retirement