Recently, I mentioned that I strongly value an emergency fund and that I had reached my short-term goal of a two month emergency fund, currently held in a high-interest savings account. Since I reached this goal, I’ve continued to automatically drop the same large amount each week into that account.
“That’s great,” you might think, “but what’s the point?” Since I reached my emergency fund goal, I decided to use that account as the “springing-off point” for future investments. I have some rather lofty long term goals and it has become clear to me that I need to start thinking about serious investing if I want to make those goals. So here’s what I’m doing.
Before I even receive my pay, I’m putting the full matching amount into a retirement plan. I view this as an immediate 100% return on my investment, because that’s exactly what this is: free money. Not much else to say here, other than the investment allocation is pretty aggressive.
I am continuing to put $200 a week into my “emergency fund” account, which also serves as my “investment base” account. This way, my budget accounts for $200 a week for all investments. I use this account as the springboard for my other investment moves.
Right now, I am putting $100 a week from my “emergency fund” account into a index fund. Between my wife and I, we’re calling this our “dream house” fund. We’re hoping that in about twelve years or so, we will have a home mortgage mostly paid off and about $80,000 to $100,000 in this account. At that point, we’re going to buy our dream home.
Starting in January 2007, I am opening a Roth IRA and contributing $80 a week from my “emergency fund” account into it. Over 50 weeks, this adds up to my $4,000 annual contribution to the account. As I’ve mentioned, it was something of a difficult decision for me to go ahead with a Roth IRA, so I consider this a big step forward for me.
This leaves $20 a week to continue slowly growing the emergency fund. I want the growth of the emergency fund to exceed my salary growth so that the time it can “cover” us (if need be) can grow over time.
Any “bonuses” get invested straight into the mutual fund unless there is some other obvious need that the money could address, such as an automotive purchase or so forth.
This plan basically revolves around two principles.
Automatic investments make it very easy to budget. I simply don’t include this money in my weekly or monthly budgets, knowing that it’s “taken care of.” This makes it very easy to save, as it is “out of sight, out of mind.”
I’m under thirty, so I’m looking long term. I want to really accumulate by the time I’m fifty or sixty or so, so now’s the time to put things in places where they will grow a lot until then.
I feel pretty confident in this plan and I believe it will provide for my future. I hope that it will also help me meet my long term financial goals.