Dude, I Totaled My Car (Update 3):

I have been living the past 5 and a half weeks without a vehicle.  I have updated the status of my search for its replacement once, shortly after my initial post about my accident and my carless situation.  At this point I have foolishly put all my eggs into two vastly different baskets, and I am waiting until the end of August to see which one hatches the most chicks.

• Basket One: A friend of mine is selling her 99 Nissan Pathfinder.  It has 106,000 miles on it which is mostly highway miles.  She is the original owner and has driven it for every one of those miles.  The car is priced reasonably, however the initial cost of the vehicle is about the same figure the insurance company gave me for my total loss.  After registration, tags, etc.  I will have likely lost a little bit of money on the deal.  However, I feel I will be able to sleep at night driving a car that I know has been taken care of instead of some car that I bought randomly off of Craigslist (that piece of mind may be worth an extra thousand dollars to some; it could be priceless to others)  Furthermore, she has made me agree that if I buy her car, I have to pet it before driving it on road trips (what is that about?!?).  Deeper Analysis: Buying a car from a friend is risky, but it has some rewards.  I am not thrilled about the price tag, but at the price I am looking to spend I am not thrilled with a lot of the cars.  I may have to up the amount I am willing to pay for my next ride.  Also, the MPG on a Pathfinder is a concern, then again, with as often as I drive, is it worth stressing over an extra $100 a year in gas when I haven’t really slept the past month because I have been carless?  This is my best option and if it still presents itself in late August when I get back from vacation, I will write her a check.

• Basket Two: Go to a dealer in late August and say, “How much are you giving car’s away for today?”  Now really is the best time to buy a new car.  In a month from now, when 2010 models start to show up on lots, the timing will be even better.  The price I wanted to spend on a new car was $14,000.  It is a possibility (albeit not a fantastic one) that I can go into a car dealership and walk out with a brand new Honda Civic LX for $14,500 with 0% financing for 3-5 years.  If that is the case I can afford to put $7000, finance $7500 and have a car that I know will last me 15 years.  Deeper Analysis: This is my last resort, but if the numbers work in a way I think they could, I have no reason not to consider this option as it represents the difference between value and cost.

I Gave Myself a 10% Raise This Week:

I started to contributed to my 401(K) this pay period.  I have mentioned it before, but the reason I hadn’t been contributing prior was because I my employer didn’t match until you’ve been employed there for six months.  This is the first pay cycle that fell after that six months, hence today is my first payday where I have my 401(K) contributions withheld.  You may ask, how did I give myself a 10 percent raise? Well this is it:

Employer match ($0.50 on the dollar with no limit) x Personal contribution of 20% of salary = 10% raise from employer

That’s right, 20% of my salary is being dumped into my 401(K) a month.  All of those part time jobs are starting to seem worthwhile now, huh?  Should I mention that this is just one more reason I am going to be a millionaire some day?

My Six Month Disposable Headphones:

Hopefully I have found a new pair of headphones that will last me a while.  I purchased the Zagg Z-buds.  I was very close to purchasing them through their online store for $80 + S&H.  I even started to shop for a coupon code.  Then I quickly scanned e-bay and saw the same pair I wanted, with iPhone compatibility for $46.50 Buy It Now with free shipping. I was about to click the “Buy” button when I saw the “Make an Offer” tab on the eBay page.  I needed to get that order placed that day, but I said I may as well try.  Instead of typing in something ridiculous like $25 or something, I typed in the reasonable price of $40 (a $6.50 discount).  A half second later, my offer was accepted, making me feel like I should have offered a lot less, because they always could have said no and I could have paid the higher price, but, they also could have said yes and saved me more money.

I really like the new earbuds.  They sound great, look durable, even have a funky bud piece that looks like, well, I don’t know how to describe it, but look to the right and you will see a picture.  They are very comfortable and because of how they are designed to be worn, you don’t the occasional pull on the front of your earphone chord that will pluck your buds from your ears.  So far, I would recommend these to anyone, however, we will see in six months if I am back in the market for another pair. Time will tell the story on Zagg’s Z-buds.

Alright, I am going to beat up on an innocent man today, but Ron Leiber’s article in the NY Times last week about Roth IRAs sent me over the edge.  I am a huge proponent of the Roth IRA, as are a lot of other personal finance bloggers (see my post on turning $5000 into $110,000).  However, there have been a lot of articles lately that have been scaring people away from a Roth IRA because of some completely unfounded ideas.  If there is one thing I cannot stand, it is media driven hysteria and this hysteria has surely breeched its way into the world of retirement accounts.

What people are saying:

With a democrat in office, people are fearful of having their taxes raised or of having new taxes levied upon them.  A lot of people view the Roth IRA as an investment vehicle that is too good to be true (tax-free growth).  Because of this, people have started to assume that Roth IRAs are a potential target for new taxes (this could be capital gains taxes or having your withdrawals taxed as income similar to a traditional IRA).  This obviously has Roth IRA contributor’s up in arms and has scared away people from taking advantage of the Roth as their investment vehicle of choice (way to go media hysteria!)

Why I think this is dumb (a policy analysis):

I am not a policy expert, but I have studied public policy extensively, and in particular, tax policy.  This notion, that Roth IRAs may be taxed in the near future is just plain dumb.  The primary reason for a new tax in this economic environment is to create revenue and to help shrink the deficit.

• Firstly, for those that have been paying attention, the government has already found a way to raise revenues with regards to the Roth IRA; by allowing anyone, regardless of how high their income is, to transfer their Traditional IRA funds into a Roth IRA.  If you make this conversion, you are required to pay the subsequent income tax on the transfer (this is the government raising its revenue in the short-term, by offering you tax-free growth over the long-term).
• Secondly, taxing the withdrawals from a Roth IRA isn’t going to raise much revenue because so few people have begun to withdraw money from this type or retirement account.  Roth IRAs are such a new investment vehicle; the majority of people taking advantage of them are in their 20s, 30s, 40s and young 50s.  The government would get no immediate revenue from these people.
• Thirdly, if they taxed the capital gains of a Roth IRA, the government still wouldn’t see much revenue in the immediate future as no one has done well in the market over the past year or so.  If the economy was to turn around tomorrow, maybe this would make sense, but let the government tax your Roth capital gains, and they aren’t likely to see a dime next April.
• Fourthly, if the rules of the Roth were changed, you will have a lot of pissed off voters on all ends of the political spectrum that expected the government to stick by their word when they created the Roth as a tax-free growth vehicle.  If there is one thing politicians don’t like to do often is pissing off voters.

Why you shouldn’t care:

Don’t believe the hype! You shouldn’t change your opinion of the Roth IRA because of speculative discussions in the media about potential changes in the tax laws.  Right now, a Roth IRA is the best place for you to save for your retirement.  Don’t let the speculation of the media dupe you into thinking that in 5, 10, 15 years they may change the rules behind the Roth and thus make it not worth your effort to use a Roth as an investment vehicle now!  We are not fortune tellers and we can’t foresee the future.  However, we, as individuals, see the present and the rules as they are currently written.  As it stands now, the Roth IRA is the best way to get tax-free growth over a long period of time when saving for retirement.  Focus on how the game is set up today, and play it accordingly.

Living in fear of what the government “might” do in the future is no way to live at all.  Its unlikely the rules of the Roth IRA will change in the near future, please ignore the media hype as the media attempts to make you fearful of the government; the government that is coming for your money that was supposed to be tax-free.

Yes, you can easily turn $5,000 into $110,000.  No, it’s not a scam and no, you can’t do it overnight.  Today I will be going through the ins and outs of a Roth IRA.  A Roth IRA is a retirement account that has significant tax advantages compared to other retirement accounts.

A Traditional IRA and a Roth IRA are similar.  The primary difference between the two is that a Traditional IRA allows for people to invest pre-tax dollars (meaning you get to deduct your contributions from your taxable income) while a Roth IRA allows for you to deposit post-tax dollars.  It would seem that the Traditional IRA is the way to go, but it’s not about how the money goes in, it’s about how it comes out.  With a Traditional IRA you are taxed accordingly when you withdraw the money during your retirement.  The Roth IRA allows you to withdraw your money without paying tax on it (you already paid the taxes when you earned it via income tax).  It’s this tax advantage that makes a Roth IRA a very smart investment choice for everyone, especially young people.

So you are in your early 20s and asking yourself, why should you worry about retirement, it’s 40+ years away?  It’s these years that are the most important for investing for your retirement.  I have two examples for you and then I will explain a bit more about the benefits of a Roth IRA.

Example 1: If you invest $5000 into a Roth IRA at the age of 25, and you let your money sit in that account and compound interest for 40 years until you retire you will have $108,000 in the account when you retire.  That’s right, $5000 today can equal $108,000 in the future assuming an annual growth rate of 8% (this percentage is the historical annual growth rate of the market).

Example 1 – Contribute $5000 at age 25 and watch it become $108,000 40 years from now

Example 2: In this example, person A (the blue line) contributes $5000 a year into their Roth IRA starting when they are 25 years old. They contribute for ten consecutive years ($50,000 in total).  Assuming the same 8% returns as above they will have a nest-egg of $837,000.   Person B starts contributing to their Roth IRA at age 35.  They put $5000 a year into their Roth for the next 30 years ($150,000 in total).  That individual ends up with around  a $617,000 nest egg.

Example 2 – Person A Contributes $50,000 from age 25-35, Person B contributes $150,000 from age 35-65. Person A ends up with over $800,000. Person B ends up with around $600,000. The Power of Investing Early!

Person B isn’t in bad shape by contributing to their Roth IRA starting at age 35, but Person A has the upper hand by starting 10 years earlier.  Person A contributed $100,000 less in after-tax money, and has an additional $200,000 to show for it, solely because they started earlier.  If you have the means, starting to contribute to your Roth IRA at a young age should be a priority.  (Head to Dinkytown’s Roth IRA Calculator to play with these numbers further)

Facts about Roth IRAs:

• You can contribute up to $5000 if you file your taxes as a single adult and make less than $105,000.  (The income limits will be steadily increasing over time to keep up with inflation).
• People over the age of 50 can contribute an extra $1000 into their Roth each year, meaning they can contribute $6000 a year.
• You can withdraw your Roth IRA contributions at any time without fear of penalties or fees.  However, you will be required to pay a hefty percentage if you withdraw Roth IRA earnings before you are 59 ½.   This money is for your retirement!
• You will not pay capital gains taxes on your earnings (your money is only taxed once with a Roth IRA, and that is from income tax).

With the uncertainty of Social Security being around for my generation, it is important to look towards retirement, and make sure we can enjoy our later years in style.  Person A in Example 2shows us why investing early is so important.  Our twenties and early thirties are the most valuable time to invest and will give you a head start on saving for your retirement and accumulating wealth.  To think, $5000 today could be $110,000 years from now.  This is the classic characterization of having your money work for you.

To find out more information about a Roth IRA, please click here.  To learn about where I set up my Roth IRA and how it is invested, please take a look at my post on Optimizing My Own Accounts – Making My Money Work for Me.  If you have any questions about Roth IRAs or other retirement vehicles, feel free to contact me or leave a comment.