How I Will Be Rich

This is part of my ongoing theme “The 8 Step Process to Being Rich“.

I think the importance of a Roth IRA and how I feel about them has been stressed quite a bit here at this site. I wrote “No Reason not to have a Roth IRA” and Joe wrote “More on Roth IRAs: Just Starting Out“. I think I’ve just decided that I can’t talk enough about this tool. It is such a great way to earn capital gains and actually keep your share of it. Sure, you’ll pay taxes before you make your contributions but from then on, everything is all yours! It’s like giving the finger to the man. Well, maybe not, but still it’s one of the few loopholes that the IRS is gonna give you. I think the reason I like them so much is that it makes it hard to pull money from the investment. You put the money in and you can’t touch any of those gains to go out and buy something stupid that you don’t need. Those gains are there for what’s really important; a home or retirement.

So I figure I’ve spoken enough (for today) on why I like a Roth IRA but I haven’t given much input on what to do with an IRA once you’ve got it set up. The best way to get the most out of your IRA is to max it out every year. Every year you can contribute $4,000 to it. I suggest setting up an automatic investment plan. I like having the money automatically withdrawn from my bank account each month. If you take $4,000 and split it up among twelve months, it figures to be about $333.33 per month. Or if you’d prefer, some investment brokers will allow you to have the money withdrawn on a weekly basis. In that case it would figure to about $77 a week.

So once you have your investment schedule set up and you’ve got money pumping in to your IRA, what do you invest in? Well personally, for an IRA, I like index funds. No Load Index funds to be more specific.

Here’s what I like

• The Vangaurd 500 Index (VFINX)
  This fund follows the performance of the S&P 500 index. The S&P 500 tracks 500 large capitalization companies in the U.S.. Over history, the S&P 500 averages gains of about 10% per year. Over the last 5 years, this index has returned at a rate of about 12% to its investors.
• The Vangaurd Total Stock Market Index (VTSMX)
  This is a fund that tracks the performance of the entire stock market. This is another fund that you can probably expect to average about 10% per year over the life of your holding.
• The Vangaurd Small Cap Index (NAESX)
  This fund tracks MSCI US Small Cap 1750 Index. The Small Cap Index is comprised of 1,750 smaller U.S. companies. This is a riskier index fund. By that, I mean that the years this fund is down, it will probably be a lot farther down than the safer investments. On the other hand, the years that this fund is up, you will be seeing much higher returns than the safer funds. This fund, over the last 5 years, has averaged about 17% for its investors.
• The Vangaurd Total International Stock Index (VGTSX)
  This fund follows companies in Europe, The Pacific Region, and emerging markets. Like the last one, it’s a bit higher risk but has returned an average of 20% over the last 5 years.

As you can see, I am a fan of Vangaurd Funds and those are my picks to hold in an IRA account. Obviously you can not purchase all of them and there are some minimum balance requirements. But do some research in to those because I think they are all pretty safe bets over the long haul.

Now go get that IRA started and then move on to Step 3: Setting Up a Discretionary Investment Account.

Popularity: 8% [?]

 Subscribe in a reader