Investing for the young
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
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.
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
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.
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.
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.
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.