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Financial decisions dont have to be agonizing.
Money coach Shang Saavedra recently heard from an entrepreneur who had spent an entire year debating whether to open a Roth or a traditional 401(k).
Getting hung up, the person wrote. Its holding up investing in either.
Toss a coin, Saavedra responded.
She wasnt kidding. Choosing between a Roth or traditional account is one of a handful of money decisions that you can literally flip a coin over if youre stuck, according to Saavedra and other personal finance experts. In either scenario, youll get a tax-advantaged investment vehicle that can set you on a path to financial independence.
The important thing is to do something. Among people who have the means and the knowledge to invest, the fear of uncertainty is the No. 1 thing holding them back, according to research from Bankrate as well as Saavedras experience. The founder of Save My Cents, she is a millionaire investor who became work-optional in her 30s after aggressively raising her income and pouring it into index funds. Even so, she says, she still feels butterflies in her stomach when she makes a big investing move.
Its OK to feel uncertain, Saavedra tells her clients. Dont let that uncertainty stop you.
If youre stuck on this investing decision, or a few others, heres what to know about how to move forward and make your next best money move.
Getting stuck in doubt or uncertainty can be more costly than making the wrong investment choice, says Anna NJie-Konte, a Certified Financial Planner and the founder of Dare to Dream, a financial planning firm. Thats because it robs you of time your most valuable asset.
Its all about getting your money working, says NJie-Konte. Time in the market is irreplaceable.
On top of that, laboring over certain steps of the process can waste precious mental energy. Your attention is better spent on things that actually move the needle, says NJie-Konte, such as developing a sustainable budget, getting clear on your financial priorities, and planning a career that will increase your skills and income.
The stress of trying to make the perfect decision can be particularly acute for people of color and first-generation Americans, she says. These groups get paid less on average, tend to have less access to financial resources, and face systemic discrimination. We feel we have less room for error, NJie-Konte says.
One way to alleviate the tension is to remember that many financial decisions including whether to invest in a Roth or a traditional account can be re-evaluated later on. Its not like you can never change it, NJie-Konte says.
There is no perfect financial decision, says Susie Moore, a business coach and author of Let It Be Easy, a collection of short essays about how to bring ease into supposedly stressful situations.
The future belongs to no one, she says. Things change all the time. But if you look at people who get rewards, they make decisions, theyre flexible, they notice what theyre getting, and theyre not too hard on themselves.
If youre hung up on a stressful decision, Moore has some tips. Try to catch yourself when youre in a good mood and feeling calm, like after a workout or a restful sleep. Think back to times in your life when youre wrestled over a choice, and notice when youve been too hard on yourself.
Sometimes, the most important thing isnt to make the right decision, says Moore. Its to make a decision. Nothing happens until something moves, as Einstein said.
If youre looking to level up your finances and have the means to do so, consider whether there are any decisions you can make easier for yourself. These are some of the most common, according to personal finance experts.
You deserve a tax break for investing. And whether you choose a Roth or a traditional account, thats what youll get.
The decision between Roth and traditional is one youll face when opening a 401(k), which is an investment account thats opened through your employer, or an Individual Retirement Arrangement (IRA), which you can open on your own.
The difference is when you get the tax break. With a Roth account, youll contribute money that youve already paid taxes on. That way, when you withdraw it later in life, the money and all of its earnings can be taken out tax-free. With a traditional account, youll contribute pre-tax money, meaning you get an immediate tax break equal to the amount you invested. When you withdraw it later in life, thats when youll pay taxes on your money and its earnings.
Investors are often advised to choose between a Roth and a traditional account based on what they believe will happen to their tax rate in the future. If you suppose your rate will be higher in the future, you can open a Roth and take the tax hit now. On the other hand, if you believe your taxes will be lower in the future, you can open a traditional account and delay the tax bill.
But the truth is that no one knows what will happen in the future. Tax rates are political, as administrations change and Congress passes new laws, says Saavedra. The way that we are taxed also changes over time.
There are other nuances at play, such as income limitations and withdrawal rules. On balance, young investors with high earning potential tend to love Roth accounts. But as your life and financial circumstances, you can choose to pivot between both types of accounts. Thats something NJie-Konte encourages among her clients, because it diversifies their tax burden.
Having money in different buckets gives you flexibility, she says.
Once youve opened an account, youll need to choose your investments. Index funds are a favorite among investors because theyre cheap and they tend to outperform more expensive, actively managed funds.
The idea is to buy and hold an index fund that tracks either the entire stock market or a large portion of it. That way, you can benefit from the overall growth of the economy without having to place bets on specific winners and losers.
Dont let the array of available index funds put you off, financial advisors say. Many brokerages have their own versions of a total market index fund. Whats important isnt the particular fund, but whether it has broad exposure to the market and a low fee.
QQQ vs VOO literally is like splitting hairs, says NJie-Konte, referring to the ticker symbols of two popular index funds. For some great options, start with NextAdvisors list of the 5 best index funds with low expense ratios.
People drive themselves nuts over this one, says Jill Schlesinger, a CFP, Emmy-winning business analyst at CBS News, and host of the podcast Jill on Money.
Exchange-traded funds (ETFs) and mutual funds are more similar than they are different. Both are groups of securities, like stocks or bonds, that you can buy in one swoop to add instant diversification to your investment portfolio.
Many index funds, for example, can come in the form of an ETF or a mutual fund. The two types of funds are traded somewhat differently on the market, but for the majority of investors the nuances arent significant. As long as the fees are low, either investment vehicle will get you what you need, says Schlesinger.
Any expense ratio below 0.5% is great, and keep in mind that some expense ratios can be as low as 0.02%, financial educator Rita-Soledad Fernndez Paulino recently told NextAdvisor.
Its OK to invest when youre in debt, according to some experts, depending on your individual situation. But for those who are burdened with debt from multiple sources, it can be overwhelming to prioritize which debt to pay off first while pursuing other goals.
There are a variety of debt payoff methods, including the debt avalanche approach, in which you tackle the debt with the highest interest rate first, and the debt snowball approach, in which you pay off the debt with the smallest balance first.
Theres a mathematical component that cant be completely ignored, says NJie-Konte. But she often sees clients place undue attention on this particular decision instead of the more impactful work of creating a sustainable and realistic budget.
A cardinal rule of investing is to first set aside an emergency fund of liquid savings to cover unexpected expenses. That money should be kept separately from your investments, which fluctuate in value over time, in a more stable high-yield savings account.
Which high-yield savings account is not as important.
Interest rates change over time, and banks occasionally offer sign-on bonuses. When choosing a high-yield savings account, focus on finding an online bank, which will have lower overhead fees and higher interest rates than a brick-and-mortar. Make sure its FDIC-insured, low-fee, and that you meet any required minimums. NextAdvisor has a list of the best high-yield savings accounts.
NJie-Konte once advised a couple who waffled for nine months over which high-yield savings account to use. A sign-on bonus wont make or break your financial situation, she says. But spending mental energy has concrete effects.
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