I got a reader email that I had to share for two reasons. First, the question is about saving money and investing for retirement and it coincides very well with the Roth IRA Movement. Second, the reader is only 20 years old and is already looking at retirement savings!!!!!! This guy is a freaking BOSS!!!!!!

We’ll call him Military Mike, and here’s his email:

I was reading through your “Race to a million dollar net worth” blog. I really like it and it has shown me that I should start doing something.

Let me give you my background. I am 20 years old, active duty military. The only accounts I have are a checking, savings, and 2 credit cards (nearly paid off). I also have a TSP (Thrift savings plan) that is like a 401k/Roth IRA for military members. I only contribute 1% of my base pay to this.

Currently I only have around 2k in savings, my checking is almost zero (literally) and besides my fixed paycheck, I have no other means of income. I would like to start investing, however I really have no idea how to or what to use or if I can even do anything with 2k. Also since the 2k is all of my savings I don’t want to throw it all out there to potentially lose.

First of all, you are doing it right by getting started now. The earlier you start, the better off you’re going to be. Here’s how I would approach your situation:

Pat yourself on the back for not having any student loans

You’re way ahead of lots of young people who take out big loans to go to school. It took me years just to hit a net worth of $0 because of my student loans. On a related note, I want to personally thank you for serving our country.

Pay off any credit card debt you have that is accruing interest

Unless you are paying 0% interest, your best bet is to pay off the credit card first. If you are carrying a balance on a card with 15% interest, then paying that off essentially gives you a 15% return on your investment, which is higher than you should expect to get in the stock market.

roll of money

photo credit: flickr.com/59937401@N07/

You might want to add more to your savings account for emergencies

Considering you are active duty military, please correct me if I’m wrong but I understand you don’t have to pay for things like housing, meals, or a car. There’s not much that could happen to you that would put you in a financial emergency. However, you might have someone at home who relies on your financial support (parents, siblings, a wife or kids). If there is anyone at home who might need money, it’s good to keep a few thousand in your savings account that you can access immediately if necessary. If that’s not an issue, then don’t worry about your “emergency fund”.

Unless your TSP matches your contributions, I would stop investing there and start investing in a Roth IRA

Roth IRAs are better than other retirement accounts for two reasons: you can remove your contributions at any time if you need them, and you can invest in anything you want. I would strive to invest the maximum of $5,000 a year. If you can do that, you’re in darn good shape at 20 years old.

Now for the big question: what do you invest in for your Roth IRA?

Investment Options for your Roth IRA

The nice thing about a Roth IRA is that you can invest in anything you want. Two options I like are the stock market and peer to peer lending such as Lending Club, where you basically act as a bank and fund loans for other people.

For the stock market, I helped my girlfriend invest in her Roth IRA. You can see what she invested in and why in my article How to Invest When You’re Clueless. As an FYI, I checked my girlfriend’s account today and she is up $300, or 6%, in just under a year. We both use Sharebuilder for our Roth IRAs because of the low cost of trades and zero maintenance fees. The trouble with the stock market is that there is a real chance you can lose money here.

On the other hand, Lending Club boasts the fact that people in their 800 note club have 100% positive returns. If you have the time and energy to find the right loans, then peer to peer lending has historically been a very safe place to invest money and get a good return with very little chance of losing money.

For Lending Club, my friend Daniel Packer has done a lot of analysis in picking loans to fund. Here are a few of his tips:
Lending Club Loan Selection Criteria
Lending Club Loans to Avoid

I recommend you do about $2,500 in the stock market and $2,500 in lending club, but you could do all $5,000 in one or the other. It just depends on what you are comfortable with. Remember, this is your money and these decisions are yours alone.

(note: you can have as many different Roth IRA accounts as you want, as long as you don’t contribute more than $5,000 a year to all of them combined)

A Chance to Win $5,000 for your Roth IRA

In what is actually a very timely reader email, there is currently a contest going on right now where one lucky winner is going to get $5,000 for their Roth IRA (or $6,000) if that person is over 50 years old. To sign up, all you have to do is go here: http://www.iramarket.com/contest/refer?ref=Rn6Fcb

It looks pretty legit. They give you the option to opt out of their communications and you don’t have to provide a phone number; just like their Facebook page, give them your email, and cross your fingers! Plus if you sign up through that link and you win, I win too! And then we’ll be best friends forever!

Good Luck Military Mike!

Good luck with everything, and congratulations again on getting a head start on your retirement savings. I’m almost 27 years old and my net worth is only about $42,000 as of last month. With you starting right now, you can easily be worth over $42k by your 27th birthday as long as you start now and max out your Roth IRA every year.

Readers: Do you have any other tips for Military Mike?