Michael on July 18th, 2007
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You: Because an mp3 player can hold thousands of songs and an IRA can hold thousands of dollars?

Not the answer I was going for first, but you’ve definitely identified one way mp3 players and IRAs are similar. But there’s something even more important about their similarities that I need to share with you today.

You: And that is?

An account without investments is like an mp3 player without music files.
Both are cool to talk about–but, fundamentally, rather useless. After opening an IRA or enrolling in a 401(k) plan, don’t forget the next step: investing your contributions. You must invest your money for it to have the potential to grow significantly.

You: But no one, okay except maybe my Dad, would buy an mp3 player and then not put any songs on it. So why would anyone set up an IRA and then not invest their money? Seems ridiculous.

Actually there are at least a couple of reasons why this happens, and neither of them are any good. First, some people think an IRA is an investment and therefore think that by setting up an IRA they are already investing.

Have you ever heard anyone say “I just invested in an IRA”?

You: Yes. But wait–that doesn’t make any sense.

Right, because an IRA is not an investment. Look, the abbreviation stands for Individual Retirement Account. No misleading advertising; they’re telling you it is an account right in the title.

Another reason people fail to invest their IRA money is that they are intimidated by the prospect of investing. That’s also unfortunate. Simply review your investment options, assess your risk tolerance, and then make investment choices.

You: That doesn’t sound so easy.

Gary: I know! That’s the best part. I can explain it to you.

Not here you won’t, Gary.

Understanding how to invest your retirement plan money isn’t difficult and it certainly shouldn’t be too stressful. Plus, there will be plenty more on the topic of investing in future postings. Coming up with the dollars to save should be the hardest part of this process and even that–once armed with the Ten Simple Saving Strategies—doesn’t have to be difficult.

Once you get the money in the account, just make sure to take care of step 2: invest it!

You: And what happens if I don’t?

With few exceptions, failure to make investment choices leads the plan’s custodian to select the default option: typically cash. While you won’t lose money invested in cash, you likely won’t meet your long-term financial goals either, because the growth potential of cash is minimal. Again, take the time to review your investment options, assess your risk tolerance, and then make investment choices.

You: What if I’m not sure about all this investing stuff? Does that mean I shouldn’t save in a 401(k) plan or IRA?

Absolutely not! Don’t ever let your fear of investing prevent you from enrolling in a 401(k) or setting up an IRA. It is still far better to save something and not invest the money than to save nothing at all. You still benefit from tax savings and will have money saved and ready to invest when you become ready.

Because you will be ready some day. I know you’ll eventually want to live Beyond Paycheck to Paycheck.

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