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-- Posted: March 7, 2000

Dorothy Rosen -- The Dollar Diva Ask the Dollar Diva

How do I invest extra cash?

Dear Dollar Diva,
I am 39 years old and bring in $5,000 to $7,000 a month. This includes $750 a month from Social Security that I receive until my 9-year-old son is 18 because his mother just passed away. I have between $1,000 and $2,000 a month to invest, and I want to use this to save for his college education and my retirement. I currently have $4,000 saved, so I'm just beginning.

I understand the stock market is a long-term investment and have invested in blue chip stocks in the past. I am also interested in specialty funds, i.e. technical and medical. Do you have any suggestions?


The Diva regrets the terrible loss you and your son have suffered, and she understands how difficult it is to be a single parent. She congratulates you on being the kind of father who makes his son's education a top priority. It will allow him to start his adult life without the burden of student loans!

College

In less than 10 years you'll be writing that first tuition check, so now's the time to start socking money away. Here are some investments to investigate:

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  • Qualified state tuition programs. If you don't like your state-sponsored plan, look into the offerings of other states; many of them allow non-residents to participate.

  • Series I or EE U.S. savings bonds. Put them in your name, not your son's, to be eligible for the income exclusion when they're cashed in for college tuition. The tuition can be for you or your son. There are income limits and other rules that are explained in IRS Publication 17, Your Federal Income Tax -- For Individuals

  • The SteinRoe Young Investor Fund has a twofold mission: long term growth and sparking young peoples' interest in investing. The fund develops materials for children to learn about economics and personal finance. The Diva isn't a fund analyst, so this is an introduction to the concept rather than a recommendation of the fund. You'll have to read its prospectus to decide if it's a fund you'd want in your portfolio.

IRS income limits
Filing Status Modified adjusted gross income limit for 1999
Single and Head of Household $53,100 to $68,100
Married Filing Jointly and Qualifying Widow(er)* $79,650 to $109,650
*Qualifying Widow(er) is a filing status that applies to the surviving spouse who remains unmarried and maintains a home for a dependent child. This status is available to the surviving spouse for as long as two years following the year of the spouse's death.
Source: Internal Revenue Service

Retirement

You can expect to be around for another 40 years, so time is on your side. Here are some suggestions to help you plan your portfolio:

  • Before you start investing, make sure you have a cash reserve for emergencies. Put aside three to six months of living expenses, plus a cushion for emergencies. Also, make monthly deposits to cover those periodic big-ticket items like taxes, insurance, summer camp and vacations.

  • Decide on an asset allocation that will give you the maximum return for the risk you are willing to take. The Diva's Will you retire rich or in rags? reports on a couple of Web sites that help accomplish this goal.

  • Contribute the maximum to every tax-deferred vehicle available to you -- 401(k), Keogh, Simplified Employee Pension, Individual Retirement Account.

  • Consider tax-efficient mutual funds. Morningstar's story, Top Tax-Managed Funds, offers some suggestions.

  • If you want to invest and are clueless about what to do, put your money in index funds. Vanguard is the 800-pound gorilla in this forest.

  • When you find growth funds in which you're interested, look at the stocks they invest in. You should find enough high-tech and medical stocks in most of them to satisfy your desire to be invested in those sectors.

Wealth Accumulation

The secret to accumulating wealth is spending less than you earn, and systematically investing the difference. Keep to your plan and you will find yourself walking in the shoes of a wealthy man.

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