The two most popular types of IRAs are the Roth and the traditional IRA. For most people under 45 or so the benefits of the Roth make it the better choice. The key difference of the Roth IRA is that your earnings grow tax-free, and the distributions are tax-free if qualified. I’ll explain what makes them qualified shortly.

Also keep in mind that the holdings in a Roth account can be almost anything. You can invest the money in your Roth in stocks, mutual funds, bonds, CDs, and more. What you invest in will depend on your tolerance for risk, of course, but you have a lot of options.

In 2008 you can contribute up to $5,000 to your Roth IRA. For those over 50 you can add an extra $1,000 to that. Payroll deposits make the process fairly painless, and help you pay yourself first. $416.66 a month would get you to the annual maximum, and those monthly contributions also help you take advantage of dollar-cost averaging.

But like many investing topics, this one is better explained with an example.

Let’s take someone who is 30 years old, with no money at all in their Roth account. Each year until age 65 that person contributes the maximum amount ($5,000) and earns an 8% return over time. Even with the current market volatility this figure is a good historical average of the market, even factoring in the Depression.

At age 65 that person will have paid in $175,000, but the account will be worth $930,511. Given a marginal tax rate of 25% during that time the taxable savings of putting the money into a Roth would be $590,604.

In other words, if that money had just been invested in a mutual fund without the tax benefits of a Roth, you would have lost that tax savings of $590,604.

Now back to what makes a qualified distribution. The rules are a little complicated, but not overly so. As long as you meet at least one of these conditions you won’t pay taxes on the money coming out of your Roth IRA:

• The Roth IRA account holder is at least 59 1/2 years old.
• The distributed assets are used towards the purchase or rebuilding of a first home for the Roth IRA account holder, or a qualified family member. (This is limited to $10,000 in a lifetime)
• The distribution occurs after the Roth IRA account holder becomes disabled.
• The assets of the Roth IRA are going to the beneficiary after the account holder’s death.

Everybody has different investment needs and priorities, and there are some people who would benefit more from a traditional IRA. To simplify your decision making I’ve linked to a Roth calculator below so you can see how you’ll benefit, given your age and current savings.
Roth calculator

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I have used E*Trade as my bank for about two years now. I first moved my accounts there when I saw they were offering 5.25% interest on their savings accounts. Times have obviously changed since then, and as I write this the interest rate is a lower 3.30%. One of the benefit of online only banks are the higher interest rates they offer. But it can be scary to give all your money to a bank you can’t readily walk into. So are online banks a good fit for you? Here’s my experiences with E*Trade.
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For someone worrying that their bank might fail it might be natural to consider spreading their wealth around at several different banks. Other people like the convenience of having all their finances housed under one roof. But which is the best idea?

In general I think it’s a really bad idea to keep all your accounts at one bank. Most of the banks that have failed in recent months have had very smooth transitions into FDIC control. When I say not to keep all your money in one place I really am not worried about your bank collapsing. If you have more than $250,000 in cash at any one bank than you should consider multiple account to maximize the benefit of FDIC insurance. But if you’re like most of us, you only dream of problems like that.

The real reason to have a backup bank is in case your bank gets mad at you. If you miss a payment on your credit card some banks will take that money out of your checking account automatically, if they’re the same company. That might be helpful, or it might cause you to bounce a whole bunch of checks. Or, turning it around, maybe you bounce a check and the bank freezes your credit card too, until you resolve the overdraft.

If you are self-employed it’s almost a necessity to keep your business and personal spending separate, so having two accounts would be helpful in that instance. Why not have the extra security of keeping those accounts at different banks? Realistically it is unlikely to find one bank that offers personal and business banking accounts that are both perfect for you anyway.

Some people find having different accounts for different reasons is useful, even when they aren’t self-employed. I know at least two people who have savings accounts that are just for vacation savings. When the account gets to a certain point they take their vacation. In the meantime the money is automatically removed from their checking accounts, and its out of sight and out of mind until they’re ready for a trip. Other people do similar things to save for any big purchase. With the prevalence of free checking and savings accounts now, there really is no limit to how many you have. Just be sure to keep an eye out for excessive bank fees, and if the money will be parked somewhere for long look for a good high-yield savings account.

Banks will often step in to “help” you if they think you made a mistake. Overdraw one account and they will sometimes step in to solve your problem without your knowledge. Protect yourself from surprises by keeping your finances housed apart from each other.

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Of the many personal finance books I’ve read over the years, The Rules of Money: How to Make It and How to Hold on to It (Richard Templar’s Rules) has always struck me as the perfect money book for the reddit/Digg crowd. Nowhere else can you count on finding dozens of posts beginning with “12 ways to…” or “44 things you must…”. The Rules of Money is the “100 ways to end up with more money over time”.

Templar divides the book into five sections:

• Thinking wealthy
• Getting wealthy
• Getting even wealthier
• Staying wealthy
• Sharing your wealth

In the author’s own words, the goal is to provide, “a set of principles, strategies, and things to understand and to do that won’t make you get rich quick, but they will increase the odds of your making money and growing your wealth while remaining a decent person.” It’s hard to argue with that in principle. But there are places I disagree with Templar.
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This is part three of how I got myself into debt. Read part one here, and part two here.

After learning my lesson with spending too much while I didn’t have an income, I resolved to never make that mistake again. But apparently my resolution was like the kind you make about exercising more on New Year’s Eve, it didn’t last. Well technically I didn’t spend too much without a job, I just had a job that wasn’t paying me anything.

About the time I was really making good forward progress with my finances I decided I wanted to try my hand at entrepreneurship. I have always been interested in real estate, reading anything I can get my hands on about the subject. So after a little thought I decided I wanted to be a real estate agent.

In my defense I did lots of research, talked to successful agents about how they got started, even wrote a business plan. I didn’t have a huge network of people I knew, having only lived in Seattle for a couple of years at that point. But I had a lot of motivation and a lot of confidence.  Unfortunately confidence was lacking in the market. I made this career move just a few months after the bottom dropped out of the real estate market. The sub-prime mortgage mess was front page news. I looked at it as a challenge, figuring if I could survive in this environment I would be fine when things turned around.

I couldn’t survive though. I had set a six-month window as my exit point if nothing was happening. In truth my savings only carried me through three months and then I began the debt spending. This was compounded slightly by what I will only describe as poor decision-making involving a woman. Protip: never buy couture for someone if you can’t even pronounce the word.

When I hit that six-month point I had some good leads, but nobody wanting to move in the next few months. I left real estate (having developed some new opinions about the business model) with enough debt that I’m embarrassed to admit to the amount. And I mean to anyone, even close friends or family.

Now that I have a new job I’m plugging away at that debt, my emergency fund is about 75% of what it should be, and I’m more or less back to doing the right things. I’m in a phase of hyper-frugality that I don’t recommend for most people, but it allows me to make some big bites into what I owe. There is a really good article written by Trent Hamm, of The Simple Dollar fame, about figuring out what your least important bills are. It’s very helpful in identifying some places you can save some extra money.

As part of my getting out of debt plan I started this blog with the hope that building a community, and joining some already in place, would keep me on target. So for those who have made their own mistakes with money, how did you get in trouble? Share your stories below.

Edit: As I was getting ready to publish this I realized it will go out on my birthday. I like the idea of airing my laundry and starting fresh on a birthday.

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This is part two of how I got myself into debt. Read part one here.

About six years after my first foray into debt I decided I wanted to go back to school and finish my degree. I left my police job, having saved up a fair chunk of change to cover living expenses. Between my savings and the money I got from the G.I. Bill I was covered (on paper) for a few years.

Having joined the Army a few weeks after high school I had missed out on the whole “struggling student” phase and for some reason I wanted a taste. So no part-time work for me, I dove into school full-time. What could possibly go wrong?

I had gone from making very good money as a cop in California to making no money and relying on my savings. What went wrong was that I skipped the whole “struggling” part and didn’t really change my standard of living. I had a nice apartment, cable internet, groceries from the Whole Foods, you name it. Nowhere would you see ramen, 79 cent boxes of macaroni and cheese, and never once did I make grilled cheese with an iron.

I have given a lot of thought about how I burned through my savings without noticing until it was too late. How did it happen without causing more worry for me? I did learn that it’s very difficult to reduce your cost of living any significant amount. At least it was for me.

I don’t remember passing a zero debt threshold and being angry. I imagine it started again with just floating a small amount until next month, and eventually that small amount grew. After a few thousand dollars in debt though I just hit a wall. I knew I had messed up and was really angry that I had let it happen again. I found a full-time position as a 911 operator and reduced my class load.

After about eight months I was out of debt again. More importantly I was maxing out my 403(b) contributions and building up my emergency fund again. This time I really was in debt for the last time. Lesson learned, never again.

Check back tomorrow for the final installment detailing how I opened a business in 2007, or, Real Estate’s A Growth Industry, Right Guys?

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I firmly believe that understanding the habits that got you into debt is the first step to climbing out. Part of the reason I started this blog is to make my efforts more public, with the hope it will keep me better on track.

I made plenty of mistakes with my money, and most of them more than once. I think many bloggers end up coming off a little preachy so I want to be clear that I have done no shortage of dumb stuff. Bill Of Wealth is often the excuse I use to learn more about personal finance, and hopefully the information I gather will be of use to others.

So without further ado, let’s get on with the public shaming.

In 1995 I was living fat and happy in the former Yugoslavia. In addition to my standard Army paycheck we were keeping the cost of living adjustment (COLA) we were payed for living in Germany, as well as the hostile fire pay we thankfully weren’t earning. I was getting paid a lot of money (by my standards then) and had almost no ability to spend it. We couldn’t leave our camp and this was well before the internet allowed easy purchase of things you don’t need. The most I could spend was a few bucks on snacks or socks at the little exchange we had in the camp. Times were good.

When I left Bosnia and returned to Germany there was a very favorable exchange rate and I was able to spend lots of money and still be able to invest a good chunk of my paycheck in mutual funds. The problems began when I moved back to the United States.

I had lost my hostile fire pay and my COLA but I continued to spend money like I had that income. The trouble was that I didn’t seem to notice, though in hindsight this seems terribly obvious. I typically used credit cards for convenience and paid the balance every month. But now I was finding myself unable to pay the full amount each month. This was the first sign of danger. I ignored it though, like an artillery round landing well ahead of you. Noteworthy, but you’re not in danger.

The next sign of trouble was that I could no longer afford to invest as much each month. Rather than change my spending I instead reduced the amount I paid into my mutual funds each month. This was another artillery round, this one landing well behind me. Again I ignored the potential danger. But my bad spending habits now had me bracketed. Then debt fired for effect.

It took the better part of a year before I wised up to what was going on. During that time my debt slowly increased, until one day I took the time to figure out how long I would be in debt making minimum payments. That number scared me far more than the actual balance owed for some reason. The period of years, which seemed like a lifetime to someone in their 20s, was what motivated me to make better choices.

I drastically reduced my spending, and sold nearly all of my investments to eliminate my debt. When I start to think the world is all sunshine and butterflies I like to look at what those investments would be worth today and that keeps me humble. In about 8 months I sent my last check to the credit card company and promised myself I’d never fall into debt again. But what good is a story with just one chapter?

Tune in tomorrow for the story of the second time I fell into debt, or Why Should Unemployment Change My Spending Habits?

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A new law in Washington state, that took effect Sept. 1, lets any state resident freeze their credit report. With the freeze in place credit bureaus cannot send your financial history and credit score to potential creditors. This means it is nearly impossible for an identity thief to open an account in your name. If you apply for credit later you can use a personal identification number (PIN) to lift the freeze temporarily.

Those over 65 pay no charge, but the rest of us have to pay $10 per agency. To put a freeze on your accounts send a letter to all three agencies, Equifax, Experian, and TransUnion. They’ll charge you again if you decide to lift the freeze, so give it some thought before you send off that letter.

As this potentially applies to only a few people I included this as a bonus post for the day. But other states may have similar laws, and this is a great way to protect yourself from identity theft. If something similar exists where you live, let others know in the comments below.

Source: Washington State Office of the Attorney General

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