Terry Mitchell

Converting Real Money to Theoretical Money



Posted: Friday, January 21, 2011

by Terry Mitchell
http://commenterry.blogs.com

There is a process that that I go through in my mind when deciding how much money to put into my retirement accounts such as my 401(k) and Roth IRAs. This process involves determining how much of my real money I can afford to convert to theoretical money. I didn’t get this from any financial advisor. Frankly, I doubt that you would ever hear it from the lips of a financial advisor. However, it is a very important process to me.

Real money, or current income as I often call it, represents the funds I need now in order to pay my tithes, pay my bills, spend for the necessities of life, and buy some of the things that I want. It contributes greatly to the quality of my life right now. I also put some of it away in savings to combat a near-term crisis such as a job loss or health problem. Keep in mind that money that has already been converted to theoretical money is not easily converted back to real money, in case of such a crisis.

Theoretical money, on the other hand, represents those funds that I will need when or if I retire. Barring sudden or imminent death, which is always a possibility for anyone regardless of health, I’m definitely going to need my real money. However, my theoretical money is less certain. That’s because it’s money that I’m saving for a future that I may never live to see. That’s why I said I would need it “when or if I retire.”

Therefore, converting real money to theoretical money involves risk. There is the risk of living an unnecessarily deprived life and then dying and leaving most of one’s accumulated wealth behind. There is also the risk of not having enough funds readily available to ward off a near-term crisis. But not doing it also involves risk, i.e., the risk of living to retirement without having put away enough money. For all of these reasons, the amount that one decides to convert to theoretical money needs to be carefully considered.
Terry Mitchell is a software engineer, freelance writer, amateur political analyst, and blogger from Virginia, USA. He posts a least one article a day to his blog - http://commenterry.blogs.com - on subjects such as current events, politics, technology, society and culture, religion, health and well-being, self improvement, personal finance, trivia, and sports. He is also the owner of a new privacy-enhanced search engine - http://www.SearchMost.com.

This Article has been viewed 752 times. (Not updated in real-time.)
No comments yet.
We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.