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George Saenz, the Tax Talk columnistSingle mom seeks investment advice

Dear Tax Talk,
I am a 31-year-old single mom. I gross $35,000 a year currently and have no debt. I bring home $2,076 a month (four weeks' pay). I have roughly a bit over $60,000 in my savings and desperately need to invest it. I am renting an apartment and need a new car -- not necessarily NEW.

But I'm not sure how to invest it. I've been saving and holding onto this money. Meanwhile, I'm losing every day by keeping it in an account making about $40 a month. I really need help. I'm trying to do the best I can, but I know I have lacked in the responsibility of investing even though I've been saving. Now with all the costs gone up I won't be saving a lot of money.

I would like to know if I should put some in a retirement account, and just split up my investments, but I don't know how to or what's good for my situation. I don't want to depend on anyone, but I have to be secure for me and my daughter. I'm open to many suggestions. Please help. Thank you.
-- Dawn

Dear Dawn,
It's never easy knowing what to invest in. When you have a greater return, you also have greater risk. However, since you're young, you have an investment horizon that will help overcome any short-term setbacks. For example, if you invest in stocks, your original investment might decrease in value within a year or two if the economy doesn't do well, but in 10 to 15 years, chances are good that those investments will have gained more than a safe investment such as a certificate of deposit.

One of the safest and lowest-cost investments is a mutual fund that is tied to major stock fund index such as the Dow Jones industrial average, Standard & Poor's 500 or Nasdaq. The costs associated with these funds are usually low, as the fund management is rather straightforward: They just buy the same stocks that make up the index.

The worst advice I've seen clients receive with your level of investment is to buy annuities and managed brokerage accounts. These investments have high costs or management fees and the clients have tended to opt out of these accounts as they have underperformed. Stay clear of anyone trying to sell you on this idea, because they'll make more money than you will.

Being a single mom, you should also check into some life insurance in case something happens to you. You may want to check into a variable life policy, but the costs of these policies are high and your income is limited. A good alternative would be a term life insurance policy that insures you until your child is of majority age.

A retirement account, such as a Roth IRA, is a good place to put some money for the tax advantage. At your level of income, there's a tax credit equal to about 10 percent of your retirement contributions. You can invest these funds in a stock index mutual fund.

However, using some funds to buy a home for you and your child also makes good sense. If it's your first home, you should be able to get in to the property with little money down. If you intend to finance the newer car, I suggest you wait until after you close on a home purchase so that it is easier to qualify for the home.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: June 2, 2006
Read more Tax Adviser columnsAsk a question
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