||Ask Dr. Don
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.
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.
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