When I’m out in public I often get this question from fans who recognize me. It usually goes something like this: “So I’ve heard Roth IRAs are good and index funds are good, but which is better?” And my answer to them is always the same: “How dare you speak to me.”
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But seriously, this question is demonstrating a core misunderstanding of what these things are. Let’s break them down:‎
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• A Roth IRA on its own is an empty account. It’s just a bucket that holds stuff. If you put nothing into it, it’s worthless. If you just put cash into it and leave the cash there, it’s just a savings account. The magic happens when you put cash into a Roth IRA and then INVEST IT. You use that cash to buy something that goes up in value! The Roth IRA protects that growth from all future taxes!‎
• An index fund is the thing that goes inside of the Roth IRA! It’s a collection of an entire market of stocks that are purchased conveniently and inexpensively. When you own an index fund it goes up in value over time!‎
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So the whole process goes like this: Madison wants to get rich and minimizes taxes. So she completes the following steps:‎
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1. She opens a Roth IRA (now she has an empty account)‎
2. She contributes money to that Roth IRA (now she has cash in there doing nothing)‎
3. She uses the cash inside her Roth IRA to buy an index fund (Now she’s on her way to getting rich!)‎
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So it doesn’t make sense to ask if one is better than the other. You need both!‎
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As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.‎
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-Jeremy‎
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p.s. If you ever DO ever see me in real life, please say hi! I promise it will be a bigger thrill for me than you.