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  Dear
Dr. Don,
I'm only 21, but trying to think about my financial future. What
should I be doing now? My employer does not offer a 401(k), so what
should I be doing instead? I don't have a savings account because
it seems pointless since I am more likely to lose money by getting
charged for going below the minimum amount than I am to benefit
from the very minimal interest rate. Is there anything as simple
and easy as a savings account, but helps me make a little money
on interest? What else should I be doing with my money? Thank you.
-- Adrienne Accumulate
 Dear
Adrienne,
There's a host of things you can be doing with
your money to help you invest for your future. On the retirement
side, look into investing in a traditional IRA or Roth IRA account.
Fidelity.com
has a nice interactive worksheet that helps you decide whether using
one of these two types of accounts is right for you. In general,
the lower your marginal federal income tax rate, the more sense
it makes for you to use a Roth IRA account vs. a traditional IRA
account.
It's getting a little late to invest for the 2004 tax year, since
the funds have to be invested by April 15th, 2005, but it's a great
time to start funding an account for the 2005 tax year. The contribution
limit in 2004 is $3,000, while in 2005 that bumps up to $4,000 for
people under 50. People over 50 can put an extra $500 aside. IRS
Publication 590, Individual Retirement Arrangements, has more
details.
Of course a traditional IRA or Roth IRA is a type
of account, not a type of investment. You still have to choose between
investing in stocks, bonds or money market instruments. I like working
with a no-load mutual fund family, investing in a broadly diversified
index fund. You'll pay annual fees and expenses, but you can manage
these expenses to be fairly minimal. Morningstar.com has a free
mutual
fund screening tool that lets you shop for no-load funds with
low annual expenses.
Certificates of deposit (CDs) typically don't have
account fees. You can shop rates on CDs using Bankrate's Highest
Yield search
feature. You can currently earn 4.77 percent in a five-year
CD. Don't want to tie up your money for five years in an upward
trending interest rate environment? Check out no-fee money market
accounts earning 3.25 percent, again using Bankrate's search
feature. Both money market accounts and CDs can also be set
up as a traditional IRA or Roth IRA account.
Savings bonds are often overlooked as an investment
with some tax advantages and no transaction fees. The Series EE
savings bond earns 90 percent of the average yield on a five-year
Treasury note for the preceding six months. The interest rate adjusts
every May and November. Savings bonds aren't subject to state and
local taxes, and you can defer the federal taxes due on the interest
earnings until you redeem the bond.
Two drawbacks to savings bonds are the minimum one-year
holding period and the three-month interest penalty if you redeem
a savings bond within five years of purchase.
The Bureau of Public Debt's Web
site has more information, including details about the Series
I inflation-indexed savings bond. It's not a retirement account,
but it is a way for you to invest toward your future financial goals.
EDITOR'S NOTE: Dr. Don Taylor
has investments with Fidelity funds.
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