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Investing for the young adult

Dr. Don TaylorDear Dr. Don,
I am 22 years old, single, a recent college grad and working full-time earning $26,000 a year net. I need some advice on how to invest my money for the future. I currently live for free and have no expenses, other than my college loans (which total $16,000). I am interested in purchasing a home within the next five years and need a direction to begin saving for the home, mortgage payments and general savings. I would love your advice. Thank you greatly. -- Johanna Juncture

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Dear Johanna,
Assuming you qualify to contribute to an IRA account, I like that approach for young singles to start investing for future financial goals. IRA and Roth IRA accounts have provisions for first-time home buyers that will allow you to withdraw up to $10,000 for the down payment on your new home.

At lower tax brackets a Roth IRA can make more sense for qualified contributions since the withdrawals aren't taxed. There are, however, tax implications and potential penalties for withdrawals made from a Roth IRA within five years of the original contribution. IRS Publication 590, Individual Retirement Arrangements, provides more information about the "first-time home buyers program" as does this Bankrate feature. When in doubt contact your tax professional.

I like using the IRA accounts for the first $10,000 of savings because if, for some reason, you don't need this money for the down payment, you've got it invested in a tax-advantaged account ready to be aimed at your retirement goals.

In general, the closer the financial goal, the less risk you should take in investing. For an investing horizon of five years, CDs are a conservative approach. Stocks aren't a good idea because of the uncertainty of returns. You can open an IRA or Roth IRA account with a bank and invest in CDs out to your investment horizon.

For savings over and above the IRA contributions, first look to cash (money market investments) to fund an emergency fund. I know you don't have any current monthly expenses, but that won't last forever. Bankrate has more about setting up and investing an emergency fund.

How aggressive you want to be in paying down your student loans depends in part on what interest rate(s) you're paying on the loan(s). If you're choosing between carrying a balance on your credit card at 10 percent vs. paying down a student loan at 4.22 percent, then don't pay down your student loan that month.

-- Posted: Nov. 21, 2003




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