March, 2005:

ROTH IRA

Mar 23rd, 2005
by Sean.
3 comments

ROTH IRA is a retirement plan where you put in your after-tax dollars and when you retire, you can withdraw from the account tax-free. If you earn less than 95K and single (150K for married) you can contribute a maximum of $3,000 for 2004 and $4000 for 2005. If you’re 50 or older, you can put in an extra $500. Also, when you reach the age of 70 and a half, you are not required to take minimum distributions.

The beauty of the whole ROTH IRA idea is to have your earnings avoid tax when you take them out. There are also some other nice additions to the plan. You can take your contributions out without penalty at any time. Another thing you can do is to take out up to $10,000 without penalty/tax to pay a down payment for a primary home, provided that your plan is opened for 5 years. There is a lot more details you can read here.

I want to talk more about taking advantage of the plan and how that will benefit you. If you qualify, it is very important to set it as a priority to contribute as much as you can, and because the limit is so low, it is best to put in the maximum. In the worst case scenario, if you have absolutely exhausted other options, you can withdraw the original contributions without penalty.

While ROTH IRA does allow the flexibility to withdraw deposits, I strongly suggest you not to do that. Putting funds into the account is like planting money seeds. If you take them out, you give up the opportunity for the seeds to grow and sprout. The end result is you having less money working in your favor.

The sooner you plant the seeds, the sooner it’ll grow. And the more you plant the more you’ll have growing for you. Therefore, it is very important to start early. A $3,000 contribution this year vs. five years from now makes a big difference over time. Assuming 8% average return per year, your $3,000 deposit this year can make you $30,187.97 in 30 years, but starting five years late with the same amount will only net you $20,545.43. That’s a difference of almost $10,000 for holding back five years. Now, if you had been contributing for five years straight, the difference is much more significant.

The bottom line is, if you have no idea what a ROTH IRA is, take the two minutes to read up on it and sign up as soon as you can. You have up until April 15 to make a contribution for 2004. If you’re low income and use the no-money excuse, then you should know that the government is already working in your favor. Any contribution you make will get you a 50% credit (or less depending on your AGI) from the Savings Credit. Having someone else put in half of your contributions, there are no more excuses. This is a benefit for you that will pay you big in the long run.

Desiring Financial Independence

Mar 23rd, 2005
by Sean.
No comments yet

I have been working for three years in the real world and I’m getting pretty tired of it. I have to show my face at the office by nine o’clock in the morning and sit there until at least 6pm. There are many times I have to work overtime (without paid) up until 10pm or later on busy days. I can see the same story repeating for the next 40 years.

Now that’s a picture I really don’t want. I want financial freedom. I want to decide when I get up, what I want to do for the day and when I get off. I want that power and as I sit in the office from one day to the next, I crave more strongly for that freedom.

I’ve read Rich Dad, Poor Dad and that book has really inspired me. I can’t say much for the validity of his contents, but the thoughts and the point of the book motivates me to get out of the rat race.

Even if I become wealthy now, I will still work, but it’ll be my own projects and business. The more I read up on financial articles and books, the more I become fascinated by the knowledge I can attain and develop for smarter investments — basically, make my money work for me!

But even knowlege can be short-handed by a lack of funds. I need something to start with. That’s why I’m working for someone else now. I’ll need to save up more and invest wisely in the meantime, and eventually when I have enough money I can do something for myself.

In the end, I just want more free time. Life is short, why waste time working for someone or doing something you don’t enjoy. I don’t mind working hard, but I want to be the one that gets rewarded. I’ll plant the money seeds, and hopefully in the future, I’ll have a forest of gold.

My Salary and Comparisons 2005

Mar 22nd, 2005
by Sean.
1 comment

I started with a salary of $37K in 2002. After working for several months, I was given a raise to $38.5K in February of 2003. Then I had to work a full year before they gave another raise. In Feb. 2004 I was at $40.5K. The 5% increase was mediocre compared to the field I was in. I was not satisfied, because I knew a lot of people in the same industry as me with relatively the same amount of experience and they were making over $50K.

This year, they postponed the raise to March, but the increase was much more substantial for me. I had a 11% raise to $45k. Although the percentage increase is good, my salary is still low compared to the same position in other companies.

Let’s take a look at table:

Year Salary Increase
2002 37,000.00
2003 38,500.00 4%
2004 40,500.00 5%
2005 45,000.00 11%

The 11% increase this year doesn’t make up for the poor raises in the previous years. I would expect to make $50K with 3 years of work experience in tech. Perhaps, a jump to another company will help boost that.

Education and Job Background

Mar 22nd, 2005
by Sean.
No comments yet

I graduated college in 2002 with a BS in computer science. At that time the tech market has just been decimated and thousands of tech employees were laid off every month. I have been working part-time in a small company during college and they need someone for tech. They offered me a $35K salary, but I barely negotiated it to $37K. I wanted $40K but the supply and demand of the market at that time was really working against me so I had to lower my expectation and accept the offer.

It was a good decision at that time because while many new graduates were hunting desperately around for a job, I was already working in an air conditioned office on a hot summer day. And in terms of finances, it was also good, because I had income coming to me immediately.

What To Do With $1K, $5K, or $10K of Savings In Your Twenties?

Mar 22nd, 2005
by Sean.
4 comments

Many recent college graduates have asked what is the best investments for their savings, ranging from a few to tens of thousands of dollars.

The best suggestion is to park your money in a liquid, high interest-bearing bank account while you read up on different types of investments and determine your financial plans and risk tolerance. There are several banks with very high paying interest rates like Emigrant Direct (3.25% APY) and ING DIRECT (2.80% APY).

The biggest mistake you can make is to look at the stock market and without doing any research, sink your money in the market thinking you can double your money in a short period of time. This type of irrational behavior is just blind gambling. If you don’t know what you’re doing, don’t do it. It is very important to prevent disastrous mistakes that can hinder your way to financial success. I know, because I have made mistakes in the past.

With that said, I hope you take the time to plan your goals. Park the money in a high interest savings account to earn interest while you do some research. First, find out your risk tolerance. If you can tolerate investment vehicles with high volatility, you could read up on the stock market or real estate investments. If you cannot tolerate much volatility or have the time to do research, go with mutual funds, high-rate CDs, or safe bonds.

Ultimately, you’re going to be the best financial planner for yourself. It does not have to take up much of your time. Spend a few hours planning for your future and it will make a big difference in the long run. Take an hour or two every month to make sure you stay on the right path. You can still manage your finances while looking for a job or working full-time. Before you know it, you will be well on your way to reaching your financial goals.

Short Term Goal – Get out of debt

Mar 21st, 2005
by Sean.
1 comment

In 2002, I graduated college with 30K in student loans and 10K in credit card debt. I got a full-time job right out of school and worked as an Applications Analyst. I have been making additional payments on top of my regularly student loan and credit card payments.

This month, I have lowered my student loan balance to 20K and credit card balance to 5K. I contributed as much as I could to my student loans because my credit card balance was on a 0% APR.

At the end of this year, I am projecting a 10K balance on my student loans and 2K on my credit cards.

Six months after the end of this year, I aim to have only 5K left in my student loans and 2K solid savings in my bank account.

By the end of 2006, my student loans should be completedly paid off, and I’ll come up with 5K solid savings.

Road Map
2002 – 30K student loans and 10K CC
March, 2005 – 20K student loans and 5K CC
End of 2005 – 10K student loans and 2K CC
Mid-2006 – 5K student loans and 2K savings
End-2006 – 0K student loans and 5K savings

*This is not my entire net worth.

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