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Savings Question – IRA, ETF, and Other Options

 

Q: I’m currently 23 years old and starting to save out a percentage of my income. What is the best way to invest my money if I’m just starting to save additional funds? I want to invest about 50% of my income as I go; however, I want this to be easily-accessible money. From what I’ve heard of IRAs, they don’t seem to provide that significant an amount of interest, instead just restricting access to your money for the next few decades or so. (And unfortunately, I often work as an independent contractor, so a 401(k) is not an option.) My question then is: what is the safest, most potentially-productive way to invest my money while I’m just getting into the habit of saving/investing?

A: Thanks for reaching out and thanks for listening to the radio show!

It’s great to hear that you are getting into a good habit of saving. You have the benefit of time on your side which is so important when it comes to investing. One thing we always stress with our clients is to have a long-term investment plan and keep your costs low.

There are different types of investment accounts (like Traditional IRAs that you mentioned, Roth IRAs and Individual Accounts) each with a different set of tax characteristics. We would need to know additional details about your specific situation in order to recommend the type of account that you should open, but in general: IRAs are pre-tax dollars that grow tax deferred and then are taxed when taken out of the account; Roth IRAs are post-tax dollars that grow tax free and then are taken out tax free; Individual Taxable Accounts are post tax dollars that are exposed to capital gains tax.

In keeping with low cost investments, we generally recommend our clients buy ETFs. A low cost and effective way to own a particular market segment or index. IVV is a good option to gain exposure to the S&P 500 index. VTI is also good for a person with a long term investment horizon. It’s the Vanguard Total Stock Market ETF. These investments would be riskier than say BND, which is a The Vanguard Total Bond Market ETF, which would be a little more conservative.

I hope this helps answer your question and please don’t hesitate to reach out if we can be of assistance in any way.


 

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