Thursday, May 3, 2007

How I save.

Before I have posted about my 6 essential savings goals. Now I'd like to mention how I personally am going about meeting them. I started my savings vehicles a few years ago and have added about one every year to make my goals, and its a system that has worked out so far. I now have a short term emergency fund, a readjustment account, and a statistical readjustment account. I've started my retirement portfolio, but so far it only consists of a small Roth IRA (which I do not contribute regularly to yet because of some debt) and a 403b with a 5% pre-tax contribution, a 5% base and a 4% match - ie, 14% of my pre-tax income.

So far I have a 10% after-tax disbursement into my short term emergency fund. We've fully funded that ($2,000 in a low-yield easily accessible savings account) and are funneling that 10% now into the 6 month emergency savings, but that savings is still pretty low. Another 5% - what should be going towards Roth IRA contributions, is being put into some debt repayments. We have a personal loan and a car loan that need to be eliminated before we can really free up come money for saving. Those two debts cost us around $500 a month in payments and although the interest is low, I don't like having debt.

When those are paid, we can start funding our Roths at 5% and take that $500/mo payment and split it up between a car purchase savings (to save for our next car so we don't have to finance it) and mortgage prepayment. My goals are to have the car/loan paid off by January of 2009 - which it will be at our current rate and shave at least 10 years off our mortgage. To do that I need to pay only $100 a month extra, which won't be hard at all once the other debt is gone.

The vehicle I want to fund this year, my goal, is our freedom funds to let my wife and I freely spend money without always worrying about whether its going to impact our budget (and without having to always consult each other), and can be funded with a modest 2.5% of our income. Not much at our income level but it's better than nothing. It will be a while (maybe 5 years) before our 6 month savings fund - which needs to be around $25,000 - is done, but once it is we can take that 10% and add to our retirement portfolio and skim the interest off the 6 month fund as spending cash for the freedom funds.

I also hope to increase my income by this time in 2008, which will make all these funds balloon nicely.

So my outlook right now is 2 years to eliminate all my debt, 5 years to fully fund my savings vehicles, and 20 years to pay the mortgage (assuming a job doesn't force us to move). The short answer is that the way I meet all of my goals is by having one or two to meet per year and slowly build them so they don't heavily impact my budget.

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