How I Will Be Rich

If you have not read Matt’s previous post about Roth IRA’s, I’d suggest scrolling down to read his first and then skipping right back up to here…

With that said, we should all now have a basic idea of how a Roth IRA works and a few simple reasons why they are not as scary as once thought. Holding off on starting a Roth IRA until you “think” you have enough money to afford to invest is simply being in the wrong mindset. From the beginning of your working career at that first job, by saving about $500 would have been enough to start putting money away for the future. At such a young age (teens-20s), time is on your side and the magic of compound interest should be your very best friend. Play around with this snazzy little calculator if you don’t believe me.

I have heard many of my friends say their school loans, car payments, and the monthly rent sucks up all of their salary. As many of us pay these on-going expenses, there is a simple solution to continue our desire to invest for the future: automatic money transfers. This innovation is a wonder that online banking has allowed all of us to utilize. If it wasn’t for the internet, many of us would continue to pay the typical bills and occasionally throw some extra cash into our very low interest paying savings accounts, but only if we’re feeling really loaded! The power of automatic money transfers to a Roth IRA account makes investing and saving absolutely painless. By starting with a measly $20 transfer each week, you’ll never know that money was ever in your checking account. Setting up this automatic flow of money is the most essential step in the beginning to fund your new Roth IRA, especially while feeling a financial pinch from the bills. Sooner than you know it, you’ll want to bump up that weekly amount to $50 or more while noticing you’re inching closer to maxing out your yearly limit; it’s a good thing!

Now the option is to figure out where to sign up for this Roth IRA. There are many online brokerage sites that all offer fairly the same options and perks. The key here is to never get overwhelmed; you’ll always be able to transfer money from one brokerage to another, and you’ll always be able to shift how you want your money invested within your Roth IRA. Compare companies like Vanguard, Fidelity, and T. Rowe Price. Look closely at the amount they require to begin investing, yearly fees, and the required monthly transfer amounts. I would say a good initial investment is $500, hopefully finding a plan with no yearly fee, and $50 or less monthly transfer requirements.

Once that’s figured out, you need to decide how you will invest your money within your Roth IRA. If you are in your 20s, investing the money in the stock market is the way to go. Finding a well diversified mutual fund is much better in this case than diversifying through various stocks. Try to find a no-load mutual fund with a broad-based market index. The key here is to pay the least in fees as you can and diversify enough to cover all bases to ride the market as it shifts up and down. Check out Morningstar’s mutual fund screener to easily evaluate which funds would best suit you.

There’s not much of anything left to do now that you’ve completed all of this. Figuring out where you want to open the account is the most difficult step, but it’s no more challenging than deciding which credit cards you want to sign up with. Now just let that automatic money transfer let it do its thing, and sit back and enjoy watching that Roth IRA balance grow!

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