Let me throw this out for discussion:
The rough look at the "proper" way to begin investing is:
1) pay off real high interest accounts (ie. credit cards)
2) save enough in an emergency fund
3) begin investing
What I'm planning on doing however is to somewhat combine #2 & 3. I don't have a totally sufficient emergency fund (EF) set up as of yet, but I still plan on investing the max in a Roth IRA. The way I figure it is that since the opportunity to start participating in a Roth goes away each year (ie. you can only max out at $4,000/year if under 50 and can't go back to catch up for previous years lost) I'll max out my Roth for this year and consider that an interim "emergency fund" as I continue to save for the real EF. That way I don't miss out on the chance to open and max out an IRA while I'm building up my EF. I know you're not supposed to take money out of retirement accounts due to the defeating purpose it has on gains, but if used as a TRUE emergency fund, there should be no need (hopefully) to touch it. If I do need the money, well then I'll have to take it out (no penalties on your contributions). I'll miss out on the interest the money could have been making, but that's a risk I'll take. However, if an emergency doesn't arise before I can properly establish the REAL emergency fund then I'll be 2-3 years already invested in an IRA.
To give an example:
I have only $4000 this year to invest and I need say $6000 for an EF. I'm putting the $4000 in a Roth for this year as opposed to the EF. Next year I'll have $6000 to invest. Instead of putting the $6000 in an EF (and missing out on a year eligibilty of the IRA), I'll max out the Roth again and put $2000 in the EF. I'll repeat for the next two years and then I'll have a fully funded EF and an almost maxed-out 4 year Roth started. Notice I say "almost maxed-out" because the contribution limit for an IRA rises in 2008 but for argument's sake we'll keep it at an even $4000. I know that by that time there may be a little more money needed in an EF than the $6000 dollars I currently need but I'll catch up the small difference and in the meantime I have a fully funded Roth. Whereas if I put all of it into an ER as soon as I was able, I'd miss out on a full year of a maxed out Roth and a year with only a 50% funded Roth.
Hope that wasn't too confusing. I know it's not perfect and not for everybody but it is a slightly different way of looking at things and getting started. Comments and/or concerns are appreciated
