Starting a Roth IRA is a Critical Step for Financial Freedom

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Last updated on July 17, 2018 Comments: 13

I’m excited to be participating in today’s Roth IRA movement. There’s more information about this movement towards the bottom of this article.

I wish someone told me about Roth IRAs when I got my first real job. I was a teenager, working in a local Radio Shack store, even though I didn’t even know what a soldering gun was. So many years later, it’s hard to know what would have gone through my mind if someone were to start talking to me about investing part of the money I was earning. I had a bank account, but I’m sure most of the money I earned from working was spent on entertainment with friends. I wasn’t thinking about the future, and I’m not convinced that someone pointing me to an article about a Roth IRA would have changed my approach.

But it might have.

It would have been impossible for me, anyway, unless I had been visited by a time-traveler or I had received a book from the future.

Roth IRAs weren’t invented until years later, while I was in college. (This detail isn’t that germane to the point, as traditional IRAs were available and would have in most respects been appropriate for saving for the future.) Anything other than stock trading was missing from my understanding of investing. Considering Roth IRAs existed by the time I graduated college, why didn’t I know about Roth IRAs when I started my first job after that point? Well, they still weren’t widespread by then, and I was earning too little money to even conceive of dedicating some of it to my future.

I would have been wrong, of course, but I only know that now with hindsight. The problem with trying to educate young people about investing for the future is that it’s easy for them to be stuck in the mindset that other pressing needs deserve attention above investing for the future. Until someone’s mind is open to the possibility of financial security in the future with today’s sacrifice, any information about investing for the future, with Roth IRAs or not, just won’t have a strong effect.

Today, though, there are ways to make this transition easier. The benefits of investing for the future no matter how little an amount have been discussed on Consumerism Commentary ad nauseum, but they bear repeating. I’m not really discussing retirement as a goal. Most discussion about investing for the future revolves around retirement, but it’s unclear that the traditional concept of retirement will be relevant thirty, forty, or fifty years from now.

  • Investing in a Roth IRA with your first job creates a new habit that lasts your entire life.
  • The Roth IRA, with its ease of access, is a perfect gateway to investing for the future.
  • When you intentionally invest in a Roth IRA with every paycheck, you can easily see the effect your choices have on your wealth.
  • When you create an automated transfer plan from your checking account to your Roth IRA, you take some of the stress out of investing.

Good investing habits start with the Roth IRA because it’s so easy. There’s no concern about tax-related issues, because you invest with “after-tax” money. Minimum balances at brokerages are typically low for Roth IRAs because these companies know that these types of accounts are best used by people new to investing. The one step, opening a Roth IRA, opens a world of financial possibilities, and it’s possible to open an account with as little as $100 per month.

It’s easy to blame ignorance when we see young people in their first jobs, earning money but not saving for the future. Here are some typical anti-youth misunderstandings:

  • “If only they had a financial education and understood that the earlier they invest in the stock market, the wealthier they’d be four or five decades in the future, they’d want to invest immediately.”
  • “Today’s kids are focused only on the ‘now’ and don’t think about their future needs.”
  • “The public educational system is to blame for the lack of solid financial knowledge among today’s youth.”
  • “Why can’t parents take some responsibility for instilling good financial habits in their children?”
  • “Get off my lawn!”

There is some relevance to at least four of these misunderstandings, but what makes them misunderstandings is that the point is really about cognitive development. By the time most teenagers have their first jobs at fifteen, sixteen, or seventeen years old, their brains are not yet equipped to consider the concepts of investing for the future. Of course, different individuals experience different rates of cognitive development, but attempting to feed someone knowledge before his or her brain is ready to grasp some of the higher concepts necessary for full understanding is a waste of time.

You can hope that some of the ideas stick with a child long enough for the connections to be made later in develop. That’s why some parents teach and model good financial habits with their children starting in kindergarten or earlier, but when it comes to the practical side of investing, adolescents in their first jobs are often not mentally prepared. As teenagers seeing for the first time how they have control over their lives outside of their parents’ house, there’s a tendency to want to make decisions independently, and without the influence of an adult preaching about prudent financial habits.

In their minds, adolescents may have already weighed the benefits of keeping more of their income for use today against the benefits of saving for the future and decided, independently, that their immediate needs are more pressing. They may believe they’ve already made the right decision.

I don’t know if I can propose a solution. Investing in a Roth IRA is a critical step towards financial freedom because of its ease, accessibility, and habit-making features, but if a young individual doesn’t apply this approach during the critical time when he or she first begins earning income, the barrier grows with time and it can be more difficult to start later on. The numbers have always been obvious; a five- or ten-year head start in investing in the stock market almost always pays significant dividends when it comes time to draw upon that nest egg, but these words are meaningless to young people who have other concerns.

Taking a slice of the paychecks from the first job can be done with little encroachment on expenses; directing 5 percent of each paycheck to a Roth IRA would hardly hurt at all. With a minimum investment of $100 each month, any working kid could find a way to make it happen, if not immediately, then after saving up for a few months and starting with a lump-sum rather than a periodic investment.

It’s not going to happen on its own, though, and it’s still unlikely to happen even after reading an article extolling the virtues of investing and saving for the future. It’s going to happen when the synapses in the brain fire in such a way that saving for the future makes sense and when sacrifice, no matter how small, is an acceptable option. In some ways, the latest guidelines that encourage automatic enrollment in 401(k) plans see this problem and have arrived at a solution: you’re busy thinking about other things, so we’ll get you started automatically. There’s always the argument that this policy benefits the financial industry more than the investors, but it does benefit the investors.

How do you propose encouraging young individuals in their first jobs to begin saving for the future with a Roth IRA?

Thanks to Jeff Rose, a Certified Financial Planner, who initiated today’s Roth IRA movement, involving more than 130 partners, all of whom are taking time today to discuss Roth IRAs on their websites, newsletters, or other publications.

Photo: stevendepolo

Article comments

Anonymous says:

I’m 20 and have a Roth IRA (:
But I guess I’m the exception…
I started it when I took on a second job and I set it up so that 100% of my salary from that new job would get deposited into the account, and I would simply live off of my main paycheck. Of course, the job did not work out and I quit a few weeks ago, and I am planning on finding a full-time job now (it is twice as stressful having 2 part time jobs vs 1 full time job, imo). Hopefully I will find a good high paying job and can again start contributing the same amount I was before. I only have about $3500 in the Roth IRA :/ My goal was to get $10,000 at the MINIMUM!

Anonymous says:

Anyone have a good recommendation for where to start? I want to open a Roth IRA but don’t know where to put my money.

Anonymous says:

If you are still looking i might suggest just look where you currently bank.

Anonymous says:

I hated, hated, HATED my economics teacher in high school. He was loud, obnoxious and every bit the non-intellectual, assistant football and wrestling coach that a band geek like myself tried to avoid. Still, he gave extra credit for opening a Roth IRA, regardless of how much you contributed. I opened a custodial Roth with a broker who was a part-owner in the family restaurant where I was a dish boy – I was 17. It no longer needs a custodian, and to this day has very little money it (I only contributed a couple grand and for about 5 years it was in some pretty fee-heavy mutual funds so almost all earnings were wiped out regularly by annual fees) – but it’s comforting to know that even now, at 25, I have a couple grand set aside specifically for retirement while I fight and claw my way through paying back stupid credit cards from college.

In the end, did opening a Roth make me a wise investor for life? No. But did my stupid jock of an econ teacher leave an indelible mark more so than 90% of the “academics” whom I loved at the time? Definitely.

Anonymous says:

I’ve been suggesting to all my friends to start at Roth IRA when they start their first job. “Just think, you are saving money for retirement right from the get go. Plus, if you set up automatic payments you don’t see the money so you don’t spend it!”

Anonymous says:

I love my Roth and try to encourage my younger family members to open one. Even tiny contributions will grow with the time they have. I, too, didn’t have this option when I was young. From another perspective, I can see how much it would benefit my elderly relatives if their investments were tax free. Imagine yourself as an older person with fewer choices, and give that self a great gift of a Roth.

Anonymous says:

Great post. My 19 yo is researching different mutual funds to start her own Roth. I have one myself that I manage on my own that has performed decently. It does take some time, though, to go through the prospectus when choosing where to invest, but obviously it’s well worth the time. I hope my kid learns from her mom and keeps investing as regularly as she can. I only wish I had started sooner!

Anonymous says:

My regret is that I didn’t open my Roth IRA sooner because I really love investing not just in my Roth iRA but in the stock market as well. I’ve got my money invested in some of the different funds that the Roth IRA offers & I go through the prospectus to see which companies are in which funds. As far as encouraging young people to start a Roth IRA, that’s difficult because it depends on each individual’s own situation. I would say that given how things are changing in america economically/socially/politically that young people should start investing as soon as they financially can.

Anonymous says:

I don’t think this post is entirely fair to the young set. I’m now in my mid-20’s and while I have a 403(b) and a Roth IRA, I think the trouble faced by some people starting out in their careers is that they need to use their earnings to pay for student loan debt or to fund a few starting-out-in-life-costs, so the retirement saving takes a back burner. From my own experience, a significant chunk of my paycheck from my first few years on the job after college was thrown at my student loan debt until it was gone. It would have been nice to max out my retirement accounts then, but not having student loan debt was a huge burden lifted and enabled me to make a few choices I could not have otherwise. If not student debt, then for most people there is some combination of: the car, the business wardrobe, the moving for a job, the weddings (ours and those of our friends), etc.

Now at mid-20’s, I need to balance saving for a house (wish I could have started that earlier, too!) and saving for retirement. So, I don’t think it’s a lack of mental capacity to save for the future, because I think you’ll find myopic people at all ages, it’s that we’re living moving forward and there’s a lot to be taken care of in the immediate to medium-term and only hindsight can tell us what was the right choice.

Luke Landes says:

You’re right that when income is low, there need to be priorities, and the short-term often wins over the long-term. Obviously student loan debt is an important priority always. As you say, though, only hindsight can identify the best choices, after the fact.

The barrier to entry for a Roth IRA is incredibly low, though, and the benefits are high.

I believe that many are saying just like you, “I’d love to save for my future but I just can’t spare a dollar.” It’s an understandable position, and difficult to argue against. I was there. I felt that way, and I was adding to my debt every month until I was about 25 rather than adding to my net worth, in a worse position that most of my friends at that age. But even if you have to put $5 a week into savings for a year before investing, it beats doing nothing.

The reason I point to cognitive development is because delayed development (and today’s society seems to encourage in some form later cognitive development in adolescents) means that the connections people make between today’s actions and results in the future are often blurred until a later age. It’s not true for everyone, of course, but for those it is true, lessons about sound financial principles that involve planning and retirement seem out of touch.

Anonymous says:

Dude! You worked at a Radio Shack, too? Awesome!! I was our regions top seller for a few months and I was only 19 at the time. 🙂

You didn’t happen to work at McDonalds, too; did you? That would be really weird as I worked their when I was 16. Would like you to super size that?

Thanks for taking part in the Roth IRA Movement!!

You can find the list of all blogs taking part and their respective links to their own Roth IRA posts here:

I’m getting the first batch added, but I’m expecting many more to trickle throughout the day. 🙂

Luke Landes says:

Radio Shack was my first and last experience with retail, and I could never bring myself to work in a fast food restaurant. I had some friends in high school who did, and looking back, it probably would have been an interesting experience, but it was one that didn’t seem right for me at the time.

Anonymous says:

You want fries with that? Sorry I couldn’t resist.