The Costly Mistake I Made When I First Opened My Retirement Account — And How I Fixed It
November 3, 2017
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The author, pictured, spent many hours reading personal finance sites to learn what it meant to invest for retirement.
We all remember our first time … reaching a big financial goal. The planning! The stress! The self-doubt! And then, finally, that massive sense of accomplishment (and relief). In our “My First Time … ” series, LearnVest asks people who’ve reached huge money milestones how they did it — and for lessons they learned along the way.
Here, a twentysomething shares how she got started saving for retirement so young — and the mistake she made early on in building her nest egg.
It was during a casual conversation about finances that I realized I truly knew nothing about investing. I was two years out of college and walking with a friend down a New York City street when she mentioned she had just opened up a Roth IRA. She said it with a laugh, like she couldn’t believe she was already saving for retirement.
I laughed along with her because I was too embarrassed to admit that I had no idea what she was talking about. She had dropped the acronym so casually that I felt as if I should know what it meant. (For those of you like me who were too afraid to ask, IRA stands for Individual Retirement Account, and it’s a type of investment account you can open to help you save for retirement.)
That conversation stuck with me. At the time, I was working as a waitress, trying to pay off student loan debt, and was pretty broke. My financial situation had really been bothering me and I knew I needed to turn it around, I just didn’t know where to start — and the fact that my friend was already thinking about retirement made me think I should be, too.
A few weeks later, my roommate and I sat down to Google what this mysterious IRA was all about. She called her dad, a lawyer, who was able to explain the basics to us. We decided that we should open up our own accounts and start being responsible adults, for real.
Now I’m an Investor … Right?
I’ve always been a good saver. I’ve had a savings account for as long as I can remember and I always liked to keep something in it, even if it was just a few hundred dollars, as it was in college. Even when I was making very little money post-graduation, I managed to build that to about $1,500.
So when I decided to start saving for retirement, I withdrew $500 from that savings account and used it to open a Roth IRA at a discount brokerage. I chose the Roth over a Traditional IRA because I prefer paying taxes on my contributions upfront so that I won’t have to pay them later when I withdraw the money in retirement (something I learned through my obsessive Googling on the topic).
When choosing where to put my money, I decided to invest the whole $500 in a money market account. Then I designated my roommate as my plan beneficiary (I was hers, too!) and closed my computer. I had done it! I was adulting just the same as my college friend in New York.
There was just one problem. I wasn’t investing in the stock market the way I thought I was. I didn’t truly realize that until I was reading a personal finance blog, and the blogger mentioned keeping an emergency fund in a money market account so that the cash could be accessed more easily. So … wait a minute. Had I not been investing in stocks? Was I “investing” in little more than a high-yield savings account?
I Googled it, and yes. Turns out that’s exactly what I was doing.
Finally, Investing the Way I Want to
What I had done was put my money in a low-risk savings vehicle that earned barely more interest than what you’d get from a checking or savings account at your bank — when what I really wanted to do was invest in the stock market. I was disappointed when I found out I hadn’t actually been doing so. And here’s the kicker: I didn’t realize my mistake for eight months! That meant eight months passed where I wasn’t earning as much as I potentially could have.
So while, yes, I’d opened a retirement account, I wasn’t truly investing, which meant I wasn’t taking that much advantage of compound interest — the interest I would have earned on my principal (that $500 I initially deposited), plus the interest on top of interest that money would have earned. I liken compound interest to a double whammy of savings, and it can make a huge difference to your balances over time. (Here’s a calculator that helps you see just how compound interest works.)
Today, I put a set amount of money each month into my Roth IRA and invest it in index funds. I do this manually, although you can automate your savings, too. Personally, I like checking in on my accounts once a month and taking the time to do it myself.
I’ll never get back those eight months that I lost while my money sat in the money market account, and that’s a bitter pill to swallow. But here’s the good news: Through this experience, I’ve become a lot more educated about what it means to invest. I read personal finance blogs and Investopedia and even things like “The Bogleheads' Guide to Investing.” The other big bonus? I have the satisfaction of knowing I started saving for retirement early, which means I’m giving myself more time for my money to grow before I ever need to touch it.