10 Reasons to Save in a Roth IRA

10 Reasons to Save in a Roth IRA

I’m a millennial, so I’m no stranger to my fair share of think pieces on self-love and self-care.  While I’m not wont to pair financial products with words like “love,” and especially not with the word “radical,” I do want to think for a moment about “radical” and its use to mean far-reaching and affecting the fundamental nature of something.  When we use radical to mean an act that will fundamentally change the course of your life, opening a Roth IRA is one of the most radical ways you can love yourself.

Before I dive into what makes these accounts so special, a few basics.

One, I’m not your financial planner, and this isn’t financial advice.  Got it?  Good.  Two, I know well that there are millions upon millions of Americans who are unable to meet their day to day needs.  If you’re in that situation, I don’t fault you for a moment for prioritizing the costs of the moment rather than the needs of the distant future.  Survival is the most fundamental act of self-care. If you have any ability to save at all, though, if you have any small voice in the back of your mind that says this could be possible for you, I’d ask you to please love your future self enough to invest in her.

Three, well… what’s a Roth IRA?  A Roth IRA is a retirement savings account that (almost) anyone can open, offers tax-free growth on your money, and allows you to withdraw your money tax-free after age 59 1/2.  

Roth IRA accounts aren’t tied to your job.  There isn’t a complicated process involved to open the account.  To contribute to a Roth IRA, you’ll need to have earned at least as much income as you put into the account each year, and you can’t contribute more than $5,500 a year unless you’re nearing retirement age – those 50+ can contribute $6,500 to catch up on their savings.  There are a few other restrictions tied to exactly how much income you can earn to take advantage of this great deal (though even then, there’s flexibility), but don’t get bogged down in them.  For the most part, the average American can utilize this incredible savings vehicle quickly and easily and might just change the course of her life in the process.

Here are 10 reasons why saving in a Roth IRA is jaw-droppingly awesome:

  1. Roth IRA’s are easy to open.  If there’s one thing I’d like you to take away from this piece, it’s that investing in the stock market doesn’t have as many barriers as you think.  Setting up my Roth IRA took me a total of 10 minutes, and I did it from the comfort of my home, i.e. in my pajamas.  If you have the computer skills to complete an online shopping order, you can open a Roth IRA online.  My venue of choice was Vanguard for their low fees.
  2. Roth IRA’s let you own a share of the market.  Roth IRA’s allow you to put your money into index funds.  An index fund is a portfolio designed to track or match sections of the market or the market as a whole. For example, the S&P 500 index is one of the most common, and investing in this index fund gives you a small piece of the 500 largest American companies. With index funds, you’re not actively trading different stocks, you’re matching the market. Since 86% of actively managed funds didn’t beat the market in 2014, and we see that pattern time and time again, I’d much rather put my money in index funds, trust the strength of the market through any storm, and enjoy the longterm gains.
  3. Roth IRA’s allow you to access your principle.  This might be my favorite perk of a Roth IRA.  When you place your money in a Roth, it’s. still. your. money.  You can withdraw the principle (the amount you yourself put in) at any time without penalty.  There are even some situations (like being a first time homebuyer) that qualify you to access your interest before retirement as well.  While I don’t recommend that you use a Roth as an emergency fund – it’s much better for your future to allow the money to grow – I personally take an enormous amount of comfort in the fact my money is still there for me if I need it.
  4. Roth IRA’s give you tax free growth. This is why you put your money in a Roth IRA.  You were already taxed on your cash when you earned it.  The government does not come for it again AND you aren’t taxed on your money’s growth within the Roth IRA account.  You’ll be able to withdraw with ease in retirement and enjoy all the fruits of your labor… plus its tax-free interest.
  5. Roth IRA’s require just a small initial investment.  I cannot stress enough that a Roth IRA is an incredible option for those who think that retirement savings isn’t for them. You can, and deserve, to retire with dignity.

    I’m most familiar with Vanguard, so to speak to their process first, Vanguard allows you to open a Roth IRA with a $1,000 contribution.  While $1,000 is decidedly large sum to save for many Americans, you don’t need to have that $1000 today.  What you do need to do is prioritize having $1,000 on a timeline that’s manageable for you.  For some, that’ll be a few months, for some a year, for some longer.   Making the decision to set aside that money for yourself is frightening and overwhelming, but it’s love. Anything as powerful as love is terrifying.

    If $1,000 dollars is an insurmountable obstacle, and for some it will be, there are other options.  A little internet sleuthing led me to T. Rowe Price, which allows you to open a Roth IRA with a $50 a month contribution rather than Vanguard’s initial investment.  I can’t speak to T. Rowe Price’s fees, and as a Vanguard fan I’m prone to prefer saving $1,000 to start a Vanguard account, but the plan proves there are options out there that make retirement savings possible with the smallest of initial investments .

  6. Roth IRA’s benefit your heirs.  Let’s jump from money to everyone’s second favorite topic: death.  While it might not be polite to talk about, we will all die someday, and we all want our loved ones to be as taken care of as possible when we do.  A Roth IRA will allow your heirs to withdraw funds without tax.
  7. Roth IRA’s offer the chance to diversify.  The next two points are more critical for those who already have their feet wet in the world of personal finance and investing.  Because Roth IRA’s aren’t tied to your job, you’re able to take your investment into your own hands and diversify your retirement strategy.  Whether that be by choosing different funds than in a plan you have through work or by adding an account to your portfolio that uses after-tax money rather than your pre-tax work contributions, a Roth IRA gives you autonomy and options.
  8. Roth IRA’s allow spousal contributions.  This is another benefit that may seem niche but is hugely impactful (and a personal favorite.)  If you’re married, a Roth IRA allows your spouse to contribute to a Roth IRA in your name with their earned income, even if you don’t work yourself.  Why’s this important?  Because currently women are twice as likely as men to be in poverty in retirement.  There’s a host of factors behind the trend, but the fact that women work on average 12 fewer years than men in their lifetime, often due to childrearing duties at home, is largely at play.  Roth IRA’s allow your family to recognize a stay at home parent’s contributions to the family by investing in their retirement.
  9. Roth IRA’s might just make you a millionaire.  Let’s get back to the fun stuff.  Let’s imagine that you’re a 25 year old reading this piece.  You have your first salaried job, and you’re ready to make one of the biggest adult decisions of your life.  You decide to open a Roth IRA today, and from here on out, you contribute $5,000 a year until age 65, and you average an 8% return each year.  My friend, you’re going to retire with $1.4 million, and you’re not going to pay an additional cent of taxes on it.
  10. Roth IRA’s are not intimidating.  It all comes back to this.  The vast majority of us do not have anyone to invest in ourselves but ourselves.  You’ll need to figure this out, and the sooner you do, the more the magic of compound interest will work in your favor.  Roth IRA’s allow you to quickly set up an account online, begin to fund your account with a manageable initial investment, and passively invest your money into index funds that match the market.  You don’t need to know anything more about stocks themselves; even the people who are paid to manage stocks for a living don’t often beat the market.  What you need is the bravery and self-love to take this step forward.  You are in charge of your future, and you can act to make it as secure for yourself as possible.

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Finding Freedom Through Joy and Happiness

Finding Freedom Through Joy and Happiness

If you woke up tomorrow with enough in the bank to comfortably withdraw a salary for the rest of your life, how would you spend your time?  Can you articulate what your actual “dream” life would look like?

I spend too much of my time thinking about the purpose of life, how I want to use the finite number of hours I have, and recently, how to use money to fuse purpose and happiness. For a current example, I turned to my husband at the end of a date night last week, and apropos of nothing asked, “Do you know what the biggest tragedy of being human is?”  He just laughed– it was impressive that I’d made it all the way back to our apartment without touching on the human condition. (For anyone wondering, that evening, I thought the fact that humans can conceptualize our own deaths was the greatest tragedy.  Our greatest boon is the ability to feel love, but our cat can feel love and doesn’t spend her time evaluating whether she’s spending her time well enough.  Catch me with a new answer next week.)

I focus too much on something I’ll never understand, and like everyone else, I’ve got pretty much nothing in answers to show for it.  That’s a real problem when you’re trying to live your life in a way that maximizes your freedom, sense of purpose, and happiness.

When I started this blog, I said my objective was to live in a way that gives me possibilities, and right now, that is the number one goal.  I can’t shake the nagging question, though: what will I do with freedom when I get it?  And, what can I do, where I am now, that makes me more free?

I once read a definition of happiness that said we can only experience happiness in reflection.  Happiness is the timeless feeling of complete engrossment in a task or a person.  I believe it.

After writing lists and lists of things that make me happiest, I’ve seen two patterns emerge; I need joy, and I need satisfaction. Things that cause me joy are effortless–spending time with my husband and our pets, reading fluffy novels, traveling and living in the moment of a new situation and new thought patterns, laughing with friends.  Satisfaction, which is almost more interesting, comes from tackling things that are difficult and working through them–writing and managing to distill the idea I’m searching for, planning the trip that will let me lose myself in the moment without losing my nest egg in the process, learning a new skill, solving a tough problem, doing something physical that makes me sweat.

If you couldn’t tell from the constant existential crises, I’m a tightly wound person, and pushing myself can sometimes be easier for me than letting myself bathe in joy.  I know that in my best life, though, I would balance and embrace both.

Joy and satisfaction.  No matter what else comes up in this journey, I know those are what I’m working for when I dream of financial independence.

What are you working towards?

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Stop Answering Personal Finance’s Biggest Questions Automatically

Stop Answering Personal Finance’s Biggest Questions Automatically

Before I start this post, I want to thank all of your for the incredible response to the Life as a Hat launch and to extend a hello to any new readers who came from my Apple Announcement series (Part 1 and Part 2.)  I’ll turn an eye back to cell phones and personal finance soon, I promise, but today, let’s take a break from everything Apple to talk about an even more vital “A-word” in our lives: Automation.  That’s right, we’re doing vocabulary today.  It’ll almost be useful enough to make up for the headline.

Automation, or rote behavior, is one of the biggest factors at play in your financial success or failure.  As a former middle school teacher, I know how important repetition is, so let me just say again–

Automation, or rote behavior, is one of the biggest factors at play in your financial success or failure.

And for those in the back of the room doodling–

AUTOMATION, or rote behavior, is one of the biggest factors at play in your financial success or failure.

So, what’s automation?

When I say automation, I mean the purchases you make throughout your month without any thought.  We all understand that the gym subscription that takes $70 from you account every month is automation in action; I’m not here to waste your time with what you already know (you should really cancel your gym subscription if it isn’t bring you joy, though.) I want to expand the definition of automation until it includes the four biggest expenses of most of our months: housing, transportation, utilities, and food.

All of us have the big four, but most of us don’t think about them beyond our month to month defaults.  We live where we live, it costs what it costs.  It’s these choices, though, that define the flow of your monthly income.  We grow our wealth by either earning more or saving more, and the big four are the places where savings pack the most punch.  By putting more thought into our big four, we can change the course of our financial future.

So how can you stop seeing housing, transportation, utility, and food costs as automatic, and unchangeable, expenses?  The best method I’ve found is active interrogation–sitting down with your big four expenses and making them justify their cost.

Put your brain where your money is:

  •  First, take out a paper and pencil and write your four expenses in columns across the page.  A digital spreadsheet would work just as well if you prefer, but I personally value the weight of the pen in my hand when I’m dealing with weighty ideas.  The four expenses you’re about to investigate constitute some of your biggest budget hits, and they deserve the deliberation the analog world offers.
  • Calculate the monthly cost for each category and note it below its name–don’t cheat yourself when it comes to your own money.  When you calculate transportation, for example, include your car bill, your insurance, your gas, your toll costs, any figures that play into the ways you move from place to place.  When you calculate your food costs, take an honest look at your grocery bills, your morning coffees, your dinners out.  If you’re not tracking these expenses yet, there are posts coming soon to help, but I highly recommend adopting a habit of logging and reviewing all purchases ASAP.
  • Write out the underlying assumptions that go into the amount you spend.  If you need a model, you might consider something like this…Rent:  I assume that I need to live within 10 miles of work.  I assume that a large apartment complex will give me the most safety.  I assume _________ neighborhood will give me the opportunity to socialize with friends and walk to the amenities that make me happy.  I assume that I cannot live with a roommate.  I assume that I need a 1 bedroom floor plan.  I assume I need a parking spot included with my rent.  I assume…
  • After you’ve written as many assumptions as you can muster, honestly evaluate each one.  This is again where time and deliberation are important.  Some of the assumptions will hold weight for you.  If one does, you’ll feel it deep in your bones and know it’s worth the hours of your life you trade for it.  Some of the assumptions, though, will strike you as off.  Maybe you could switch from a one bedroom to a studio without a major hit to your quality of life, maybe you could add a roommate, or maybe you could take the bus (and enjoy it more) than supporting the commuting costs associated with your car.  Circle the assumptions that seem wrong or off to you.
  • On the back of your paper, write out the assumptions you question.  Jot down a few notes about what seems wrong and then create an action plan to address the assumptions that don’t make sense.  Break your action plan into steps that make the change realistic and achievable to you.
  • Get to work implementing your action plan and changing your automatic big four spending to a well thought-out system that makes more sense for your finances and your goals.

A word of warning–this is HARD work.   Depending on your personality, the interrogation might not be the sort of project that you can knock out in an afternoon, and the solutions you find will certainly take time to implement.  That’s the whole point, though; the biggest monthly purchases we make, and make again and again, should have an excess of thought and care behind them.  You’re worth the work this is going to take.

One last thing, Hatters.  This process?  It doesn’t end.  Over time, your big four will become automatic again.  When you realize it’s been too long since you’ve given them thought, break the pen and paper back out.  Not every interrogation will call for sweeping changes, but they will all give you valuable insights into your own behavior and the reasons behind it.

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Cell phone bill more than $35/month? You’re Being Ripped Off.

Cell phone bill more than $35/month?  You’re Being Ripped Off.

Hey, Hatters– Do you like unlimited calls, texts, and data?  Do you thrive on keeping up with the latest phones and tablets?  Are you paying more than $35 a month for the cellphone plan that makes it all work for you?  You’re being ripped off.

Let me say that again.  A cell phone bill that’s more than $35 a month for use with an iPhone, Galaxy, whatever much-hipper-than-I-am phone that lives in your pocket is a complete and utter waste of your money, which is a waste of the hours of your life you trade for your money.  That time is precious, and on Life as a Hat, I want you to keep every bit of it you can.

Why am I setting $35 as the limit to what you should spend on your cell?  It’s what I do with the T-Mobile and Walmart team up pre-paid plan.  Here’s what I get for $30 a month ( which comes to a grand total of $33 and change after taxes and fees.)

  • Unlimited texts
  • Unlimited data (5 gigabytes at 4G LTE speeds and unlimited data at 3G speeds after that.  For those of you who aren’t familiar with what those numbers really mean, I use my phone heavily.  I stream music when I workout, I use data for GPS, and I surf the internet prettttttty frequently in my downtime.  I don’t think I’ve ever gone above 3 gigabytes of data usage in a month.)
  • 100 minutes of talk time, which I extend into unlimited talk with Skype.
  • There’s no last bullet point because there’s nothing else you could want from a cellphone plan.  This is unlimited everything for 1/3 of what most consumers pay.

How can you join the ranks of this too good to be true plan?

  1. Own your own phone.  That might mean you don’t have the latest and greatest, but you will have freedom and won’t be locked into a pay off the phone by month plan or a contract with a subsidy.  Check out Ebay, Amazon, or your own network of friends for great deals on used phones you can buy outright.
  2. Purchase a SIM card through T-Mobile or Walmart.  As of last week, T-Mobile had a special where each sim was only $0.99.  That’s my kind of price.
  3. Activate your new sim card ONLINE.  This part is crucial.  Because of the dual nature of the T-Mobile and Walmart plan, you will not be able to purchase the correct plan if you call T-Mobile directly to activate your SIM.  Do you hear me?  Do not call T-Mobile to activate your SIM.  Use the activate online option.
  4. Select the $30 plan with 100 minutes from the dropdown menu.  Reread the options and ensure you’ve selected the correct plan.  This is the best deal on the market and the process is designed to make it difficult to access.

When I set up my plan, it took about an hour of my time, and it’s since saved me $60 a month, every month, and I have the luxury of knowing that I can walk away at any time.

That’s freedom in a phone plan.