Financial decisions don’t have to be agonizing.
“Getting hung up,” the person wrote. “It’s holding up investing in either.”
“Toss a coin,” Saavedra responded.
She wasn’t 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 you’re stuck, according to Saavedra and other personal finance experts. In either scenario, you’ll 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 Saavedra’s 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.
“It’s OK to feel uncertain,” Saavedra tells her clients. “Don’t let that uncertainty stop you.”
If you’re stuck on this investing decision, or a few others, here’s what to know about how to move forward and make your next best money move.
The Price of Indecision
Getting stuck in doubt or uncertainty can be more costly 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.
“It’s all about getting your money working,” says N’Jie-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 N’Jie-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,” N’Jie-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. “It’s not like you can never change it,” N’Jie-Konte says.
Make Your Next Best Move
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, they’re flexible, they notice what they’re getting, and they’re not too hard on themselves.”
If you’re hung up on a stressful decision, Moore has some tips. Try to catch yourself when you’re in a good mood and feeling calm, like after a workout or a restful sleep. Think back to times in your life when you’re wrestled over a choice, and notice when you’ve been too hard on yourself.
Sometimes, “the most important thing isn’t to make the right decision,” says Moore. “It’s to make a decision. Nothing happens until something moves, as Einstein said.”
5 Financial Decisions You Can Make With the Flip of a Coin
If you’re 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.
Roth vs. Traditional
You deserve a tax break for investing. And whether you choose a Roth or a traditional account, that’s what you’ll get.
The decision between Roth and traditional is one you’ll face when opening a 401(k), which is an investment account that’s 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, you’ll contribute money that you’ve 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, you’ll contribute pre-tax money, meaning you get an immediate tax break equal to the amount you invested. When you withdraw it later in life, that’s when you’ll 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. That’s something N’Jie-Konte encourages among her clients, because it diversifies their tax burden.
“Having money in different buckets gives you flexibility,” she says.
Index Fund vs. Index Fund
Once you’ve opened an account, you’ll need to choose your investments. Index funds are a favorite among investors because they’re 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.
Don’t 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. What’s important isn’t 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 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
“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 aren’t 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 Fernández Paulino recently told NextAdvisor.
Debt Avalanche vs. Debt Snowfall
It’s OK to invest when you’re 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.
There’s a mathematical component that can’t be completely ignored, says N’Jie-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.
Where to Keep Cash
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 it’s FDIC-insured, low-fee, and that you meet any required minimums. NextAdvisor has a list of the best high-yield savings accounts.
N’Jie-Konte once advised a couple who waffled for nine months over which high-yield savings account to use. “A sign-on bonus won’t make or break your financial situation,” she says. “But spending mental energy has concrete effects.”