Inaction Is A Decision Too

Sometimes people become frozen and just can’t decide. They may be afraid of making the wrong decision or dither over what to do. We regularly meet potential clients who hold a lot of cash. They are the first to say I have too much cash then follow up saying but I didn’t know what to do with it.

Company retirement plans

We think it is unwise not to participate in a company retirement plan such as a 401(k).

• Contributing to a pre-tax retirement plan reduces your taxable income.
• You may miss “free money.” If the company has a match, you miss out. The only thing you would have to do is participate in the plan. It’s a bargain.
• Make sure to invest the money in the 401(k) plan so it has an opportunity to grow over time. Don’t leave it in cash.

Non-Retirement Savings Plan

We think it is a good idea to have different types of accounts. Retirement plans as well as non-retirement (taxable) accounts. And, assuming it is for long-term growth, have it invested, not sitting in cash.

If you need money, you may need to sell a security to free up cash. There might be a tax on the sale, but usually at a lower tax rate (capital gains).

Alternatively, money withdrawn from a retirement plan is taxed as ordinary income.

The saving hierarchy we suggest is:

• Have an emergency fund – usually it should be in cash and cover three to nine months of expenses, depending on your financial situation.
• Save in the company retirement plan.
• If you still have money available, open a brokerage/taxable account. You can have a certain dollar amount transferred each paycheck – sometimes it is easier than writing a check to the brokerage account. If you get a raise, consider “sharing” it with your brokerage account.

Holding cash due to inaction usually is harmful down the road. While the market does move up and down, over time it has moved up. You want to have some growth to, at a minimum, stay ahead of inflation.