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Where to begin investing

Dear Dr. Don,
I just graduated from college and have been working for three months. I only have about $2,000 saved up but want to know the best way to invest or save my money. I already have a 401(k) and put 10 percent of each paycheck into that account. I put 10 percent of each paycheck into a savings account as well.
Thanks,
Katherine Cache

Dear Katherine,
Keep socking it away. The earlier you start an investment program, the easier it is to reach your financial goals. Start out by defining those goals. It's hard to save for retirement when you're just out of school, but the money you save in your twenties has 40 years to grow into a retirement nest egg. If your company matches all or part of your 401(k) contributions, you've doubled your money just by investing up to the limits of the company match.

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A second investment goal is to have an emergency fund. Financial planners typically suggest that you set aside three to six months' worth of living expenses in investments that you can readily convert to cash in a financial crisis. Having this cushion can get you over rough times that crop up, like a health emergency or a period of unemployment.

Investing in financial assets lets you choose between investing in stocks, bonds and cash. Money market investments are called cash investments because they are readily converted to cash. Cash investments are appropriate for your emergency fund, especially when you're just starting out.

The longer your investment horizon, the more risk you can accept in investing. Stock and bond investing is more appropriate when investing to meet your long-term goals.

Your twin-pronged approach to investing is appropriate in meeting short-term and long-term investment goals. Many 401(k) plans have a limited universe of choices in how you can invest your account. Review the plan choices, while keeping an eye on expense ratios and fees.

Just starting out, it's better to concentrate your investments in diversified funds than it is to diversify your investments in concentrated funds. Most 401(k) plans will offer an indexed stock fund and an indexed bond fund. The annual expenses are usually the lowest of all the funds offered in a plan. But be sure to check!

You won't beat the market because you're investing in the market index, but they're great places to start when first investing in a 401(k) plan.

-- Posted: Oct. 15, 2002

Read more Dr. Don columns
See Also
15 must-know investing terms
Investing Strategies 101
10 must-know IRA terms
Financial advice glossary
More Dr. Don stories

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