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Help! I want to invest in a Roth IRA ASAP! (Soledad Says #7)

Feb 26, 2022

Dear Lista,

I'm so glad the "How to Use a Roth IRA to Retire Early.pdf " workshop inspired you to start looking at ways to protect your dinero from inflation. I briefly explained in the 5th slide of the workshop slides the importance of having cash reserves but your question gives me an opportunity to explain the importance of emergency funds further.

Ideally, the money that you are investing in a Roth IRA will be there until you are at least 59 1/2 years old. However, you can

  • (1) withdraw contributions and earnings after five years from opening your Roth IRA under specific situations AND/OR
  • (2) withdraw contributions to your Roth IRA at any time without penalty

After five years, you could withdraw contributions and earnings from a Roth IRA without penalty for specific situations listed in the flow chart from the IRS website. Keep in mind that distributions in this context are the same thing as "take money out."

As for the second point, though Roth IRA contributions can always be taken out without penalty, it is possible that the value will decrease temporarily depending on the assets that you choose. That means the $6,000 you contribute to your 2021 Roth IRA could decrease in value and if you need to the money for an emergency it may no longer all be there.

In May 2020 when I first opened my Roth IRA, I contributed $3,500. As you can see from a screenshot of my account there was a period of time that value of my account decreased below $0 (red part). Since I was investing for the long term and understood that this is how investing works, I choose to buy more assets during that time.

The good news is that the $12,000 I contributed to my Roth IRA for 2019 and 2020 has now grown to $16,663.53 which means I received $4,663.53 in unrealized passive income. However, if I had needed the money I contributed in October 2020 for an emergency, I would not have been able to take it out and would have needed to pay for unexpected expenses with debt.

Which brings me back to your question, considering that you are automatically transferring $300 to savings each month. I'm going to assume that you have expenses of $3,300 a month. Since you have a stable job and stable living situation, the least amount of money you should have saved up in an emergency fund is $9,900. This is enough money to cover at least 3 months of your expenses.

This means you currently have about 91% of your emergency fund complete! 🥳 🥳 🥳 You need to save at least $1,745.87 more before you start investing in a Roth IRA. If you continue to save $300 a month, your emergency fund will be fully funded by August 2022 and you could start investing for your 2022 Roth IRA in September! 🥳 🥳 🥳

However, right now you are not paying student loans and I'm not sure what your student loan payment will be in May. This may impact your extra cash flow and decrease the amount of cash you can send towards your savings and/or Roth IRA. So I would challenge you to find a way to increase your extra cash flow by whatever you expect your student loan payment to be if not more.

Now if you are able to fully fund your emergency fund before the deadline to contribute to a 2021 Roth IRA, perhaps with a tax-refund or extra income from a side hustle then you can contribute whatever money you have separate from the $9,900 for your emergency fund towards the Roth IRA. And though April 18, 2022 is the last day you can contribute to your 2021 Roth IRA, you can choose your assets whenever you feel ready.

I'm proud of you for making so many great financial decisions. Keep up the great work and if you ever want to work 1:1 with me as your financial coach you can apply here. I have spots available starting March 18th and would love to work with YOU.

Todo con tiempo,

 

P.S. Back when @wealthparatodos was @generationalwealthparatodos, I created the following meme. I hope it makes you laugh.

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