Done To Zen

As I mentioned previously, one of my goals for 2009 is to earn $24,000 in side income; it’s also the hardest of all my goals. I spent a couple of hours today trying to figure out how to motivate myself in this area. It’s hard to motivate yourself to work an extra 10 - 40 hours every week and face whatever fears are holding you (me) back when your goal with the money is to invest it. Invest it for what? “Financial freedom” is one goal but it’s not enough to make me want to put in all those extra hours.

I instead decided to invest my side income for various big purchases I anticipate having to make over the next 10 years. Some of them are fun-related (such as a vacation to wherever) while others are huge expenses that I am certain to incur (for example, downpayment on a home I will buy with my husband).

As I was working on my long-term plan, I came across this article at Get Rich Slowly on purpose-driven investment:

Traditionally, most people invested for various vague goals and lumped all of their savings together in a single investment account. That’s pretty boring. It’s not very inspiring or effective.

Purpose-Driven Investing satisfies our need for a purpose and our need for instant gratification by thinking of each of our goals as a separate “basket”. Each of our baskets represents a single goal with a clear purpose that we can see and grow.

What does this mean in the real world? It means that we have a single investment account for every goal. For example, if one of your goals is to take the family on a European vacation, create a separate savings account called “Family European Vacation Fund”. This account or basket contains all of your savings toward that one goal. Every penny in the account is for the European vacation — not for retirement, a new car, your emergency fund, your kids’ college tuition, or any other goal. What was once just a plain investment account is now a dream — a real goal you are committed to achieving. Account statements have been transformed from boring pieces of paper into exciting treasure maps!

(Quoted from The Six Day Financial Makeover by Robert Pagliarini)

Purpose-driven investment is making a conscious decision on where to spend your money. That’s right — the decision isn’t so much on how much to save as it’s on where to spend the savings.

In the end, you and I aren’t pinching pennies and saving money to die with $15 million in the bank account. What’s the point if you have $5 million in retirement accounts but look back at the previous 60 years and end up regretting what you never did?

We save because we want to enjoy life to the fullest extent possible. This means being ruthless with unwanted expenditures and lavish with ones that we want. The reason we save is so that we don’t go into debt and stress out about the payments.

Whatever investment you make should have purpose behind it: investments into 401K and IRAs are to let you live comfortably in retirement while the purpose of your emergency fund is to save you in case of emergenices. Simiarly, every other investment should also have a purpose attached to it. Is it for a downpayment? Is it for college? Is it for a vacation? What?

Having finished mapping out where exactly each of the $24,000 will go (yes, this unfortunately includes taxes), I’m 300% more motivated to accomplish this goal than I was just three hours ago.

Earlier, I promised to go into more detail about what my expenses were for the month of November. Even before I opened the statement for the last month, I knew that I would have something along the lines of $150 - $200 that I should not have spent, and I was right:

And how I wasted the money:

1. The “fast food” spending is so high because I paid for dinner for my family one night. I did pretty well in this area otherwise; I’ve dutifully packed my lunch since the 6th and stayed away from not just restaurants but also shops of all kinds, shapes, and sizes.

2. I obviously spent a lot more in books than I should have. Every single penny of the money could have been saved easily; about three quarters of the way through the month, I ended up subscribing to a technical site, which cost me about $50. (I am, however, going to unsubscribe at the month end, so it’s not a recurring bill.) The rest of the money was spent on a variety of books, of which I only liked about half.

3. It’s kind of funny that $200 is about what I used to spend per month in 2007 and early 2008. Only, then it was on food. Now that I cut down on food, I’m spending it on books, apparently.

4. You might remember that my goal was to not spend on anything that isn’t necessary, but it obviously didn’t work out. I had discretionary spending on the following days:

Of the 30 days in November, I spent on only 8 days. Over half the money was spent on just 2 days, and over 80% of the money was spent on 4 days. If I had exercised a little self-discipline on the 17th and the 21st, the urge to spend would probably have gone away, allowing me to save the money. I can’t say the same about the spending on the 26th and the 28th, though.

MSN Money has an article about the characteristics of people addicted to saving. Via FreeMoneyFinance:

You’re probably a saver if you:

1. Save more than 20% of your earned income each year.
2. Spend and give away less than 3% of your total net worth each year.
3. Increase your net worth by more than 5% from year to year.

Me

1. Yep, I save 20% of my earned income each year. I save a lot more than 20% of my earned income each year.

2. Are they talking about spending savings? I hate spending savings and usually restrict my spending to my income for the year. This year has been something of an aberration because Yours Truly is slogging through her MBA, which unfortunately cannot be financed completely through earned income…

3. I’ve only started tracking net worth this year, but I’ve been increasing my net worth by 25% (give or take a couple of percentage points) over the past couple of years.

So, looks like MSN Money would classify me as a saver (though I don’t much feel like one this year). What about you?

Junger over at Online Savings Blog wants to know how many funds we have:

An open question to everyone to start off the week: how many funds do you have?

In funds, we’re talking about savings, not mutual funds. Examples:

• car
• emergency
• college
• retirement
• house
• vacation
• PlayStation

I have:

1. Emergency
2. College (2)
3. Roth IRA
4. Traditional IRA
5. 401K
6. Travel
7. Fun

I used to have a fund for downpayment on my future rental real estate property but I’ve since dumped it into my emergency fund because I didn’t have 3 months’ worth of emergenices yet. At some point (probably late next year), I will reinstate this fund. I’ve also been eyeing the new MacBook PRO. I know I won’t buy it next year (my current MacBook is just 2 years old). Maybe for Christmas 2010.

How about you? What funds do you have into?

I recently engaged in a conversation with my HR department to find out if there was anything I could do to get my company to give us the option of investing in a Roth 401K (along with a regular 401K). Imagine my surprise when the HR person informed me that the committee that oversees our retirement planning had considered Roth 401K but decided against it because it is just a glorified Roth IRA.

What?

There are several differences between a Roth 401K and Roth IRA, but the main one is the max contribution limits: in 2008, you can contribute a maximum of $5,000 to your Roth IRA but the full $15,500 to your Roth 401K (just like your regular 401K). At a return of 10%, $5,000 annual contributions turn into just under $2.5 million in 40 years whereas $15,500 contributions turn into just over $7.5 million. You contribute $200,000 in the first case and $620,000 in the latter case. (You would have $7.5 million if you had consistently invested in a regular 401K, too, but you would owe tax on your withdrawals, so you only really have just under $5 million.)

Currently, there are also income limits placed on participation eligibility for Roth IRAs. If you earn more than $110,000 (or $160,000 for married couples), you cannot participate in a Roth IRA, but there is no such limit for a Roth 401K.

A Roth 401K is certainly similar to a Roth IRA, but they are not the same.