Recently I realized that my wife and I have not contributed to our Roth IRAs yet this year. Back in March or April we threw our entire tax refund at the IRAs which was better than nothing, but it wasn’t really enough. We didn’t come close to maxing out our contributions for 2005, and we didn’t meet our goal of saving 20% of our gross income for retirement.
When we made the lump sum contributions to our retirement accounts, we did so knowing full well that we weren’t dollar-cost averaging our money and that we were at the mercy of the market. If our funds were up, we’d get less for our money, and vice versa. We decided that during 2006 we would make regular monthly contributions to the IRAs. Here we are in October and we haven’t contributed anything to the Roth IRAs. What went wrong?
One issue was that we didn’t know how much money we’d have available to contribute each month since we had just started contributing 6% of my gross to my company’s 401k program. Unfortunately they don’t match, but it seemed like the time to get that rolling. The money is withheld from each paycheck and we don’t have to worry about it; we know that at the end of the year, we’ll have roughly 6% of my gross in the account. Hopefully the funds do well and we’ll begin accumulating a nice amount of money in the 401k.
Another issue was we didn’t know which funds would be the best, but I got some help with that.
Personally, I think the biggest problem was that we’re not keeping track of our month-over-month net worth. That would provide the much-needed incentive to contribute to our retirement accounts. If we’re not tracking our net worth, contributions to retirement accounts never really show on the radar. The most visible money totals are our bank account balances and the amount we owe on the mortgage, neither of which is affected by Roth contributions (of course).
I do use MS Money 2004, but the reports aren’t exactly what I’m looking for. Instead of contriving some complex way of doing things, an Excel spreadsheet seemed like the right way to address my need.
There’s a lot of debate regarding what should be included in the calculation of your personal net worth. I believe the following to be the best measure. The nice part of it is that’s it’s a conservative yardstick since this is likely to slightly underestimate your net worth. You’ll only be under by a little though, since it takes into account most of the important metrics. The amount by which you’re underestimating is the value of all your other “stuff”, but most of it you don’t want to part with (or you’d have already sold it on eBay).
- Liquid (i.e., the cash value could be obtained within a week)
- Checking account(s)
- Savings account(s)
- Savings bonds
- Stocks (non-retirement)
- Mutual funds (non-retirement)
- Non-liquid (i.e., they can’t/shouldn’t be liquidated quickly)
- Roth IRA(s)
- Traditional IRA(s)
- Equity in your primary residence
- Equity in investment properties
- Equity in a business
- 1st mortgage
- 2nd mortgage
- Mortgage on investment properties
- Home equity line/loan
- Carry-over credit card debt
- Car loan(s)
From that list, I created this simple Excel sSpreadsheet that does all the math for me so all I have to do is enter the month-end information and I can see definitively whether we’re better or worse off each month. We’ll have positive reinforcement of good behavior, joint accountability for bad behavior. Tracking our net worth will also allow us to make concrete goals and know for a fact whether we reach them or not. This may not sound terribly novel, but our previous efforts in this regard had failed for one reason or another. My wife and I will review the net worth numbers together so we’ll be on the same page and most importantly, we’ll both be motivated to save more and spend less.