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 Dear
Dr. Don,
I am 24 years old. After getting my finances in order, I
found out that I have $400 extra every month. I opened a savings
account, but the interest rate keeps dropping by a tenth of a percent
every month. Are there any other options that guarantee a more stable
and maybe higher interest rate until I can afford investing in stocks
and bonds?
Thank you,
Duo Debut
 Dear
Duo,
Congratulations on getting your finances organized to the
point where you can put a line item in your monthly budget to invest
for your future.
Start out by building
an emergency fund. Most financial planners recommend that you
keep three to six months of living expenses in liquid investments
so you can ride out financial emergencies. Ideally, you'll never
need this money, so it seems shortsighted to keep it in low-yielding
investments such as a savings account, but liquidity, not return,
is the most important attribute for this investment.
While you're funding this account, you have time to
think about what financial goals you're working toward. Most people
in their 20s are more focused on financing homes and cars than they
are on funding their retirement accounts. Try to find a balance
when investing for your short-term, intermediate-term and long-term
financial goals. The money you save in your 20s for retirement has
30 or 40 years to grow, making it easier to reach your financial
goals for retirement.
If your employer offers a full or partial match in
the company's 401(k) plan, you should look at investing at least
up to the limits of the company match. Funding an IRA account, assuming
you meet eligibility requirements, can give you some flexibility
on financial goals, since you may be able to withdraw up to $10,000
from the account without penalty, using the
account's first-time home buyer provisions.
Once your emergency fund is in place, you're ready
to consider stocks and bonds. In general, the longer your investment
horizon, the more risk you can accept when you invest. Be more conservative
in investing for short-term and intermediate-term goals, and be
willing to accept more risk (stocks and bonds) when investing for
long-term goals such as retirement.
Starting out, I think it's better to concentrate investments
in diversified mutual funds rather than diversifying investments
in concentrated funds. Look at indexed stock and bond mutual funds.
Keep an eye on annual-expense ratios, and especially for these diversified
funds, avoid mutual funds with sales loads. Indexfunds.com
provides a nice primer on investing in index funds.
Don't ignore certificates of deposit and savings bonds
for shorter-term investments. You can shop
CD rates on Bankrate and learn all about Series EE and the inflation-indexed
Series I savings bonds on the Bureau
of Public Debt's Web site.
The savings bonds now have a minimum holding period
of one year and won't meet your liquidity needs in the emergency
fund. CDs have interest penalties for early withdrawal but can be
an investment
alternative in an emergency fund.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics:
"Financing a home," "Saving & investing"
or "money."
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