Monday, June 12, 2006

 

Planning now for saving next year

I like to plan ahead. That's why even though I won't be credit card debt free until next February, I'm planning what to do with the extra money right now, in fact I'm working on a five year plan at the end of which I'd like to be able to buy some type of house.  I have several things I want to do with the money, max out my IRA contribution yearly,  get an emergency fund all saved up, save for a house, and save for retirement. Thats a lot of saving to do! I will have an extra $1000/month starting in March and then when my car is paid off in November that will go up to $1243.
 
Today I've been trolling the web looking for information on not only how much of an emergency fund I should have, but how much should I be setting aside each month right now.  Based on the comments at this post about savings goals from NCN I've pretty much decided on an emergency fund of 5 months rent, plus 3 months of expenses which came to $6900, but I rounded it up to a nice even 10k. That way my emergency fund is covered in case of emergency. I'm only saving 6% of my take home pay every month, better than 5%  but I would like to get it up to 10%. And I have a confession: I haven't contributed anything to my Roth IRA since last May. I was doing monthly contributions, but I stopped them in order to put that money towards the debt. sigh...
 
Question: emergency fund first or max out IRA? Or does the money in the IRA count as part of the emergency fund? I'm thinking the IRA money should count towards retirement and not the emergency fund.
 
Right now I have 3k in savings, next March when the 5 year plan starts, that should be up to $4560 barring any emergencies between now and then. So if my year one plan is to max out the IRA and emergency fund I will need to save $9440 next year. I should be able to do that in 9.5 months, which means I should have money left to blow in Vegas!!! ahhhh, Vegas! Of course this is all wishful dreaming for now, the scariest part about saving for an emergency fund is that you are contingent on an emergency not happening while you are saving!
 
Whilst I was surfing today, I found this site called Choose to Save. its sponsored by the Employee Benefit Research Institute and is full of calculators, savings tips, and a retirement planning worksheet.
 
 

5 Comments:

Anonymous Anonymous said...

I'd definitely start putting money into that IRA. You don't even have to max it out. Just put something into it. I think the max is $4000 per year now? For every $1000 you put into your IRA you save $250 - $300 in taxes (depending on what tax bracket you're in - my example is the 25% and 30% tax bracket). That's a guaranteed rate of return of 25-30% depending on your tax bracket - nothing beats that. Not a CD, not the stock market, money-market et al.

At the same time you can also add to your emergency fund - just put something, anything into your IRA so you can take advantage of the tax savings when you file your Form 1040.

Perfect world you'd want to max out your IRA to take advantage of all those tax savings, but at the same time for piece of mind you need a healthy emergency fund. The good thing about an IRA is you don't have to put it in all at once you've got all year (actually through April 15th of the following year) to put that tax year's IRA contributions in. Good Luck.

Joe W

9:09 AM  
Anonymous Anonymous said...

I'm asuming the IRA you have is a regular IRA, if it is a Roth IRA then disregard my tax savings info above.

Your other question: The IRA (regardless which type) is NOT a part of your emergency fund as you need the cash in the emergency fund to get to quickly, plus it defeats the purpose of an IRA: to save for retirement, and save bookoo bucks on taxes. You lose all these benefits if you keep tapping your IRA to pay for emergencies. You will never get ahead if you do this.

Joe W

9:21 AM  
Blogger Tiredbuthappy said...

Sounds like good planning.

I would say E-fund first, then IRA. IRA does not form part of the E-fund.

We should get a meme going. Jane Dough did her five year plan, I did one, Dual Income No Kids did one. I'd like to see other people's. They're very interesting.

6:54 PM  
Blogger kassy said...

Goodness, I need to check my comments more often.

Joe, thanks for the info, it is a Roth IRA and I've definitely decided its not part of the emergency fund.

Claire, hey there thanks for stopping by, I love your blog. We should get a meme going, I don't know how to do it, but it has been interesting reading about everyone's 5-year plans. And it proves that great minds think alike since we've all posted about them recently.

2:06 PM  
Anonymous Anonymous said...

If it's a Roth IRA, there isn't any reason why you can't keep your emergency money in there. You can withdraw what you have put into a Roth at any time without penalty, and if an emergency doesn't happen, that money is in there multiplying itself tax free all the time. A real win/win situation.

You can easily, in your own mind, recognize what part of your Roth is long term retirement savings and what part is your "needed if an emergency comes up" part.

Good for you that you are saving. So few do.

5:04 PM  

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