5 Big Money Decisions You Can Make With the Toss of a Coin, According to Financial Experts

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Financial decisions don’t have to be painful.

Money coach Shang Saavedra recently heard from an entrepreneur who spent a whole year discussing opening a Roth or a traditional 401(k).

“Be hanged,” the person wrote. “It stops investing in both.”

“Toss a coin,” Saavedra replied.

Shang Saavedra

She wasn’t kidding. Choosing between a Roth or a traditional account is one of the few money decisions you can literally flip when you’re stuck, according to Saavedra and other personal finance experts. In either scenario, you get a tax-efficient investment vehicle that can help you on your way to financial independence.

The main thing is to do something. For people who have the resources and knowledge to invest, the number one thing holding them back is fear of uncertainty, research shows. bank rate as well as the experience of Saavedra. the founder of Save my moneyShe is a millionaire investor who became work-optional in her 30s after aggressively increasing her income and depositing in index funds. Still, she says, she still has butterflies in her stomach when she makes a big investment.

“It’s okay to feel insecure,” Saavedra tells her clients. “Don’t let that uncertainty hold you back.”

If you’re stuck with this investment decision, or a few others, here’s what you need to know about how to move forward and make your next best money transfer.

The price of indecision

Being stuck in doubt or uncertainty can be more expensive than making the wrong investment choice, says Anna N’Jie-Konte, a certified financial planner and the founder of Dare to dream, a financial planning firm. That’s because it robs you of time – your most valuable asset.

Anna N’Jie Konte

“It’s about making money work,” says N’Jie-Konte. “Time in the market is irreplaceable.”

Plus, working on certain steps of the process can waste precious mental energy. It’s better to focus your attention on things that “set the needle in motion,” says N’Jie-Konte, such as developing a sustainable budget, clarifying your financial priorities, and planning a career that will enhance your skills and income. will increase.

The stress of making the perfect decision can be especially acute for people of color and first-generation Americans, she says. These groups are paid less on average, generally have less access to financial resources and are systematically discriminated against. “We feel like we have less room for error,” says N’Jie-Konte.

One way to ease the tension is to remember that many financial decisions — including investing in a Roth or traditional account — can be re-evaluated later. “It’s not like you can never change it,” says N’Jie-Konte.

Make your next best move

There is no perfect financial decision, says Susie Moore, a business coach and author of let it be easya collection of short essays on how to bring ease to supposedly stressful situations.

“The future doesn’t belong to anyone,” she says. “Things are constantly changing. But if you look at people who get rewards, who make decisions, they’re flexible, they notice what they’re getting and they’re not too hard on themselves.”

If you’re stuck with a stressful decision, Moore has some tips. Try to catch yourself when you’re in a good mood and feeling calm, such as after a workout or a good night’s sleep. Think back to times in your life when you struggled with a choice, and notice when you’ve been too hard on yourself.

Sometimes “the most important thing isn’t making the right decision,” Moore says. “It is to make a decision. Nothing happens until something moves, as Einstein said.”

5 financial decisions you can make with a coin

If you want to take your finances to the next level and have the resources to do so, consider whether there are decisions you can make easier on yourself. These are some of the most common, according to personal finance experts.

Roth vs. Traditional

You earn a tax benefit for investing. And whether you choose a Roth or a traditional account, that’s what you get.

The decision between Roth and Traditional is one you’ll face when opening a 401(k), an investment account opened through your employer, or an individual retirement plan (IRA), which you can open yourself.

The difference is when you get the tax benefit. With a Roth account you contribute money that you have already paid tax on. That way, the money and all income can be withdrawn tax-free when you withdraw it later in life. With a traditional account, you contribute pre-tax money, meaning you immediately get a tax benefit equal to the amount you invested. When you take it out later in life, you pay taxes on your money and its income.

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 suspect your rate will be higher in the future, you can open a Roth and take the tax bill now. On the other hand, if you think your taxes will be lower in the future, you can open a traditional account and defer the tax bill.

But the truth is, no one knows what will happen in the future. “Tax rates are political as administrations change and Congress passes new laws,” Saavedra says. “The way we are taxed also changes over time.”

There are other nuances at play, such as income restrictions and withdrawal rules. On balance, young investors with high earning potential love Roth accounts. But according to your life and financial circumstances, you can choose to switch between both types of accounts. This encourages N’Jie-Konte among its clients, because it diversifies their tax burden.

“Having money in different buckets gives you flexibility,” she says.

Index Fund vs Index Fund

After opening an account, you need to choose your investments. Index funds are favored by investors because they are cheap and they tend to perform better more expensive, actively managed funds.

The idea is to buy and hold an index fund that tracks either all of the stock market or much of it. That way you can take advantage of the overall growth of the economy without having to bet on specific winners and losers.

Don’t be put off by the range of index funds available, financial advisors say. Many brokers have their own versions of a total market index fund. What matters is not the specific fund, but whether it has broad market exposure and low remuneration.

“QQQ vs VOO is literally hair-splitting,” says N’Jie-Konte, referring to the ticker symbols of two popular index funds. For some great options, start with NextAdvisor’s list of the 5 best index funds with low expense ratios.

ETF vs Mutual Fund

“This is driving people crazy,” said Jill Schlesinger, 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, such as stocks or bonds, that you can buy all at once to add instant diversification to your investment portfolio.

For example, many index funds may be in the form of an ETF or a mutual fund. The two types of funds trade somewhat differently in the market, but for most investors the nuances are not significant. As long as costs are low, any investment vehicle will give you what you need, Schlesinger says.

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 Fernández Paulino recently told NextAdvisor.

Debt avalanche versus debt snowfall

According to some experts, depending on your individual situation, it’s okay to invest when you’re in debt. But for those burdened by debt from multiple sources, it can be overwhelming to prioritize which debt to pay off first while pursuing other goals.

There are several methods of paying off debt, including the debt avalanche approach, where you tackle the debt with the highest interest rate first, and the debt snowball approach, where you pay off the debt with the smallest balance first.

There’s a math component that can’t be completely ignored, says N’Jie-Konte. But she often sees clients paying undue attention to this particular decision rather than the more impactful work of creating a sustainable and realistic budget.

Where to keep cash?

A basic rule of investing is to first set aside an emergency fund of liquid savings to cover unexpected expenses. That money should be kept separate from your investments, which fluctuate in value over time, in a more stable high-yield savings account.

Which high-yield savings account is not so important.

Interest rates change over time and banks occasionally offer sign-up bonuses. When choosing a high-yield savings account, focus on finding an online bank that has lower overheads and higher interest rates than a brick-and-mortar bank. Make sure it’s FDIC insured, has a low cost, and you meet the required minimums. NextAdvisor has a list of the best high-yield savings accounts.

N’Jie-Konte once advised a couple who had been debating which high-yield savings account to use for nine months. “A sign-up bonus won’t make or break your financial situation,” she says. “But expending mental energy has concrete effects.”

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