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Everyone makes mistakes, but some mistakes cost more than others.
And there’s a common investment boo that can cost you dearly. In a recent TikTok that amassed around two million views, user @kaylacaneat says she learned of this gaffe the hard way.
“Do you want to hear something that will make you feel better about yourself?” she asks in the video. “I invested in a Roth IRA for over two years, every month, and it took me dating someone in finance to realize that I had never invested anything, I had just deposited money. money. I never bought a single stock.
The TikTok user says she thought the investing part was “automatic” and her comments section is filled with people saying they made the same mistake.
They are certainly not alone. Some investors simply contribute and don’t invest, sometimes for decades, missing out on potentially big gains, according to Anjali Jariwala, founder of financial planning firm FIT Advisors in Redondo Beach, Calif.
“I’ve seen him more times than I would like,” says Jariwala.
A common investment mistake
Roth IRAs are individual retirement accounts that investors can contribute money to after tax, so their money can grow and be withdrawn tax-free once they reach age 59.5. (provided the account has been open for at least five years). Like any investment account, the longer your balance needs to grow, the better.
You can contribute up to $6,000 after-tax per year to a Roth IRA ($6,500 starting next year) if you’re under 50, then choose your investments, which can include funds, like exchange-traded funds (ETFs) and mutual funds – stocks, bonds and more. (If you’re 50 or older, you can contribute $7,000 this year and it’ll go up to $7,500 next year.) But some newbies neglect to actually invest money in their retirement accounts because they assume the investment is automatic when they invest their money.
“I think it stems from the fact that there are just a lot of people who don’t have basic financial knowledge,” says Jariwala. “It’s not because it’s their fault, and it doesn’t come from not being able to understand.”
This error can also occur in other types of investment accounts. For example, if you invest in a taxable brokerage account, you also need to make sure you invest your money once it’s in the account.
Tori Dunlap, founder of women’s financial education platform Her First 100k, said in a TikTok that uninvested Roth IRAs are a snafu she sees so often.
“I can’t tell you how many people think they’re investing their Roth IRA when all they’re doing is contributing,” she wrote. “Take 5 minutes and verify TODAY that you have purchased shares with your contributions.”
The dangers of not investing
The consequences of not investing can be quite devastating. Leaving a Roth IRA or other investment account uninvested for a few years isn’t the end of the world. But if you’ve been making contributions for decades and never actually investing your money, you’re going to end up with a glorified basic savings account that lacks the awesome compound interest investment accounts that can earn.
Compound interest is basically interest earned on interest. Let’s say you put $6,000 into your Roth IRA which earned simple interest at a 7% rate of return versus compound interest at a 7% rate of return. After the first year, you would have identical balances of $6,420 for both types of interest, according to an example from Fidelity Investments. But in year two, a compound interest balance would be a bit higher at $6,869.40 compared to $6,840 with simple interest.
After 30 years, the same investment earning compound interest would be $45,700, while your simple interest investment would only be worth $18,600, or $30,000 less.
Investment accounts differ by provider, but if you think you’re one of those people who didn’t invest your money by mistake, you can check pretty much the same no matter what platform you’re on. choose. Once you have logged into your account, look for available cash to trade.
If all of your funds are available for trading, it means that you have not purchased any stocks or other assets. Another way to check is to look under “positions”, which are investments you’ve bought – if there’s nothing there, you haven’t invested your money.
There is no way to invest retroactively. That being said, it’s never too late to start, according to Jariwala. So if you have money to invest in your Roth IRA, be sure to invest it as soon as possible.
Automation of your investments
The good thing about investing mistakes is that you can of course correct — and the longer your time frame when correcting the mistake, the less of an overall impact it will have, says Jariwala.
While it may not be the best strategy for everyone, an easy way to ensure your money is invested is to set up automatic investments through the platform you used to open your Roth IRA or other account. of investment. How you set up your automatic investments differs slightly by platform, but you can select which funding method you want to use, when you want automatic investing to start and end, and the amount of money you want to use. I like to invest.
Your future self could thank you.
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