Muwahahaevillaughhahaha. For those of you that come here for my lame sense of humor, and not so much for the finances, prepare to be a little disappointed. I’m actually going to blog about money (well kind of) so bear with me. Do you know what a Roth IRA is? If you love finances, then you definitely do. If you don’t know anything about them, give me 5 seconds of your time to explain…
Roth IRA (noun)- an investment vehicle that will make young people filthy rich with minimal sacrifice.
Okay so now that you know what a Roth IRA is, I’m gonna share a little bit about my accounts. Last time I wrote about my Roth, I made the decision I was NOT going to max it out this year. I had $1,500 left (max contribution of $5,000) that I could have thrown at it, but decided not to for two reasons.
The first being that the markets were freakin’ me out in August. I was going to put that $1,500 in to an international mutual fund, but after a 33% gain from January to August, I was a little freaked out there was an artificial high. Stupid move on my part, as of Dec 18th, that mutual fund had gone up another 8% since. That’s a pretty awesome return considering my savings account is only paying 1.3%. I let fear determine my investing strategies, and for that I paid the price.
The second, and really the only reason, I decided to hold off on maxing out my Roth this year: I was gonna use that money to pay down my student loan instead. My loan’s interest rate at 7%, is pretty high (as far as student loans go), so I figured throwing the money there would be a good guaranteed rate of return. Like a good Ninja, I have paid down Sallie Mae $4,000 over the last four months. Although I missed the 8% growth in my mutual fund, I secured a 7% return by paying down my debt…not a bad trade off if you ask me.
Okay, so the plan was to only contribute $3,500 to my Roth this year, but guess what, SCREW THAT ‘ISH! My savings account is now $1,500 poorer. That’s right, I decided to max my Roth. I had a pretty stellar 2009, saving more money than I predicted I’d be able to, so I figured it was time to make that money work a little harder. I was 21 when I graduated college and made a commitment that I would max out my Roth every year. I can now proudly say, I have successfully done so for the last three.
I have contributed a total of $14,000 to my Roth over the years, and my current account balance is $13,500. That means I am only down $500. I started investing right before the stock market tanked, and watched my accounts plummet, but because I decided to stick to my goals and invest in a pretty scary market, I have been able to recoup virtually all that loss. I plan to be an old Ninja with a lot of money one day, and my Roth IRA is one of the best ways to make that happen.
If you are under 40 years old and haven’t thought about contributing to a Roth IRA, you NEED to explore the option. Even with two pretty crappy stock market crashes, my specific international mutual fund is up 5% over the last 10 years. There is no guarantee the market will continue to rise, but I couldn’t be called a Ninja if I wasn’t willing to take risks. It’s like Forest Gump once said “Life is like a box of mutual funds, ya never know what you’re gonna get'”. Wait, that’s not right.
Do you readers contribute to your Roth IRA’s every year? Do you let the “fear” of the market play in to your decision making? Is your account balance above or below the total contributions you’ve put in to it? If you’re from Canada, do you have a Roth IRA equivalent?
I'm thinking about this post and the post where you decided not to max it out – and frankly, I'm confused.
For someone who wants to invest and then just let it sit there – why are you afraid of the potential of some artificial "high" today when you're not going to be pulling out the money for 40 years?
Between now and then there are going to be a lot of ups and downs in the market – It just seems a bit silly to worry about something NOW when it will be negligible in 40 years.
You're right it was silly. I was not worried that my account wasn't going to grow, I was concerned that I would be purchasing at a bad time, when the market was at a peak. I more thought I was going to get a bad deal, because I thought the market was going to go back down. I was basically trying to predict the future and that strategy ended up being a bad choice. So again, I wasn't fearful that my money wouldn't grow over the next 40 years, I was just hesitant to invest because I thought I was buying overpriced stuff.
Right, but, let's say it was like $4 overpriced a share compared to a non-high price. Over 40 years of approx 8% growth the difference of $4 isn't going to be that big – especially when you have so many shares from the "high before the recession" price. =)
Sorry didn't complete the thought… the idea of not full contributing even during a small artificial high is silly because over 40 years that high (even if it was artificial) is negligible compared to not contributing at all.
Hiya DebtNinja. Just wanted to let you know that I appreciate your blog and I'm learning a lot.
baby steps…
You write elsewhere: " I own three different mutual funds: a large blend, small blend, and international fund."
Not knowing what these funds are, I would only suggest keeping your money in low-cost index funds like Vanguard's, because high expense ratios, loads, and other management charges can do a lot to erode the value of your money over time, and these are factors you can control. You might also want to have a small percentage in a bond fund for diversification and to cushion losses in the stock market, though at your age going aggressive is a pretty good strategy.
As for contributing the max to the Roth vs. paying down student debt, I can see how you'd justify the latter. Your Roth is going to grow over the decades anyway, and a thousand here or there won't make much difference at this point.
Preach Larry. All three of my funds are all Vanguard Mutual Funds. Gotta make my dollar work as hard as possible, and can't be paying the ridiculous fees some companies charge. I'm holding off on the bonds for now as I have a long time until I retire and want to be pretty aggressive in these early years.
You might want to consider reading the Bogglehead's Guide to Investing PunchDebt – There is some really great advise in there about the different types of mutual funds. They make it so painfully and excruciatingly clear how good of an investment index funds are that track the stock market. Also, it is a fantastically interesting book (though I'm sure there will be those who find it dry, when you're interested in what they have to say it is really, really well written).
Agreed, and Ninja might want to look at the Bogleheads forums online as well. There's a very interesting thread going right now on "Bonds in Your Twenties."
I love, love, LOOVE my Roth IRA. It was there for me when my employer said, GIRL, WE AIN'T GON' MATCH YO' FUNDS! I know, my employer needs to work on the grammar, huh? Anyways, I haven't maxed out my Roth because I want to save up for a house. I have steadily contributed to it since March (I totally lucked out with that). I've contributed $2,320 and as of today, my account is worth $2,781.78. I totally should save more, but I prefer having that money in cash sitting in my bank account with my 1.5% savings rate. Sarcasm aside, I'm planning on contributing way more next year.
Love Roth IRA. 🙂 I've maxed it out since 2006.
Started mine in late 2007. Maxed it in 2008 for the first time. Have $1750 to go until I max this year. Still not sure if it's going to happen or not.
The Roth IRA has been fantastic for us. This year, my company also began offering a Roth 401(k)! I am maxing both. I would love to own a chairtable trust if/when we retire with that much money 🙂
Also, it's hard to justify the diversion of retirement assets to pay off current debt. First off, your current debt at 7% isn't 7% compounding. The 8% return you are robbing is compounding returns. Not apples to apples. Each year doesn't make a large difference now because we are in our 20's and our balances are around $100,000 or under. However, when we are in our 60's, one year of 8% returns could be over $500,000! I like to think of it as, you're not contributing more money today as much as you are tacking on an additional year of investing then.
Enjoy!
FYI, JFW was already taken by the damn comment program! I am therefor regressing about 5 years into my old AIM handle:) Looking forward to more finance posts, I am a geek for numbers.
Roth IRA's are the sweet nectar of the congress gods. Drink up.