Wednesday, April 29, 1998

Common Sense
By Alex Blanton ([email protected])

About 230 years ago, a young political Fool named Thomas Paine wrote a pamphlet that ignited a nation. His words were direct, his conviction unmistakable, and he gave a budding nation a proverbial "kick in the pants" toward freedom. His pamphlet was appropriately titled Common Sense, appealing to the Foolish side of all patriots.

Although my "kick in the pants" is going to be directed toward personal finance for the infamous Generation X, I feel a similar conviction toward the Roth IRA. At the age of 24, I am positive that I am not the next Albert Einstein or Peter Lynch of my generation. However, even I can see that if a Fool is given money, (even if that Fool and his money will be parted for 30-40 years) he should take it.

Certain advantages have been given to us that previous generations did not enjoy. These benefits include the 401(k) plan and a Roth IRA. Our parents would be fishing off the dock of their solid gold bay if they had the chance to take advantage of these financial stallions. Both options do not require hours upon hours of research, and many firms will automatically enroll new employees to encourage the use of the 401(k). Any contribution over the company-matched percentage becomes a personal choice, but to pass up free money shows an incredible amount of wisdom. (That being for the Wise.)

The Roth for an individual in their twenties is another slam dunk. I do not know the exact capital gains tax rate, but does that really matter? Tax-free growth for 30-40 years will far outweigh the tax-deferred option our parents have been forced into. In all reality, $2,000 isn't very much to muster for an entire year. You will feel much better forgoing the 2,000 hot dogs at the ballpark or spending that bonus in the IRA as opposed to a new and rapidly depreciating car.

I am hoping that when Fools read this they are saying to themselves, "I am glad that I already took care of that little detail." Unfortunately, though, I am afraid that this personal, financial "kick in the pants" is what most of us require. Friends and Fools alike, these investment vehicles make too much common sense.

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