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Dorothy Rosen -- The Dollar Diva Money Makeover

Debtless and happy

Twenty-seven-year-old Tzu-Hsuan Fan spends less than she earns. She wants to invest the surplus, but doesn't know how.

"I have $14,200 sitting in my checking account," she tells the Diva. "It doesn't earn any interest, and I would like to find a better place to put it, but have no idea where that might be." The Diva is going to help her sniff out a better place.

Tzu-Hsuan is a talented, international marketing professional. Although her current income is moderate, she expects her future earnings to be substantial. She wants to retire in her mid-50s, and with a little luck and some investment help from the Diva, she should be able to reach her goal.

Opportunities are on the horizon
Tzu-Hsuan's a child of the East, living and working in the West. She came to America from Taiwan as a student eight years ago and speaks fluent English and Chinese. She lives in California and works for a semiconductor company. Her job has taken her to Shanghai, Singapore and Beijing, and the economic progress that's taking place in that part of the world has knocked her socks off.

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Tzu-Hsuan wants to earn an English/Chinese interpreter certificate from UCLA and has already saved the $2,500 she needs for tuition and books. She'll have to give up a year's worth of Saturdays to complete the course, but the certificate will make her a more valuable player in the global market, and added value will give her a higher price tag.

She's also in the process of getting her green card. When she gets it, her salary should double. With that extra cash, she wants to build up her nest egg.

Attitude of gratitude
Folks with an attitude of gratitude get more out of life than folks with an attitude of entitlement. Tzu-Hsuan is one of the former who doesn't take her blessings for granted.

Thanks to her moderate lifestyle and parents who let her live rent free with them, Tzu-Hsuan has no debt and $14,200 in savings. She's grateful and is going to say "thank you" by buying her mom a new car this year, with $6,000 of her savings earmarked for the down payment. She'll make monthly payments out of the money she saves by living at home.

Tzu-Hsuan has learned two important principles of personal finance: Spend less than you earn and always give something back. Now the Diva is going to help her learn about saving and investing.

Saving for emergencies and short-term goals comes before investing, and that's what Tzu-Hsuan should do with the cash now sitting in her checking account. The Diva recommends the following savings plan for her surplus:

Down payment on mom's car (money market fund)
Tuition for interpreter class (certificate of deposit)
Emergency fund (Series I bonds)

Money market mutual fund
Money market funds are mutual funds, which are sold by the same companies that sell stock mutual funds, such as TIAA-CREF, Fidelity Investments, T. Rowe Price and Dreyfus. It's a good place to stash cash you need instant access to.

These funds are not FDIC insured, but they're regulated by the Securities and Exchange Commission and are super safe. Expect a current rate of just over 3 percent and look for a no-load fund with low fees (expense ratio of 0.5 percent or less). To learn more about these funds, read's "Money market mutual funds aim for liquid cash, temporary savings."

Certificate of deposit
A certificate of deposit is a good parking spot for cash that you're going to need in the near future but don't need instant access to. The $2,500 Tzu-Hsuan will need next year for school falls into this category. The banks sell CDs with maturities as short as three, six and 12 months, and they're FDIC insured up to $100,000. Interest rates depend on the term of the CD, and long-term certificates pay more than short-term. Read the Diva's "Where do I stash my emergency cash?" for the skinny on CDs, and visit for up-to-the-minute rates on CD products.

U.S. Series I savings bonds
Tzu-Hsuan's bare-bones living expenses are $950 a month. Her $5,700 would tide her over for six months if she lost her job, and a good place to stash this emergency cash is in U.S. Series I savings bonds. Being backed by the federal government, they're extremely safe.

Buying Series I U.S. savings bonds is patriotic and profitable. The current Series I rate is 5.92 percent, tax deferred, and they're indexed for inflation. The bonds can't be redeemed for six months, and three month's interest is forfeited if they're redeemed before 60 months. At the current rate, three month's interest on a $500 Series I bond is $7.40. The Diva thinks it's worth the risk. For more on Series I bonds read "Is the Series I bond's "fixed" rate really fixed?"

That takes care of Tzu-Hsuan's savings and immediate money needs. Her future abundance can be channeled into investments. Mutual funds are easier to pick than stocks. Since she's a novice investor, that's where her investment dollars should go.

As a general rule, stock funds are too risky for the short-term. Don't go near them if your time horizon is less than 10 years. Tzu-Hsuan has plenty of time to weather the ups and downs of the stock market, so her investment dollars belong in stock mutual funds.

"I am currently contributing 10 percent to my 401(k) plan," she tells the Diva. "Should I increase it to 15 percent?" The answer is "yes." Company sponsored retirement plans are powerful investment tools that bring affluence to ordinary, working folks. Here's how:

  • By investing the same amount with each paycheck, you get the benefit of "dollar cost averaging." Your contribution buys more shares when the market is down than when it is up.
  • You don't pay tax on your contributions and earnings until you take distributions. According to the Internal Revenue Service, Tzu-Hsuan is expected to live until she's 82 years old. Wealth builds up nicely when tax-deferred income compounds over a long period.

Tzu-Hsuan should strive to make maximum contributions to a Roth IRA: $2,000 in 2001, $3,000 in 2002. For more on the Roth, read the Diva's "Is the Roth IRA too good to be true?" and "What's the difference between a 401(k) and a Roth IRA?"

When she runs out of tax-deferred options, Tzu-Hsuan should look for tax-friendly ones. The Diva addresses this in "When you're ineligible for tax deferral, seek out tax friendly."

Asset allocation
Asset allocation is the cornerstone of a sound investment strategy. It's deciding what categories you want to invest your money in, and has much more of an impact on your investment success than the actual funds you pick.

At 27, Tzu-Hsuan can afford to take more risk than someone on the cusp of retirement. All or most of her assets should be allocated to stock funds. The Diva suggests the following asset allocations for twenty-something investors:

Mutual fund category
More conservative allocation
Less conservative allocation

The Diva urges investors to do their homework before investing in a mutual fund. Never buy a fund before reading its prospectus. Start out with a visit to the Morningstar Web site. Morningstar is the leading provider of independent, mutual fund analysis, and its Internet page is user friendly.

If that sounds like too much trouble, but you want to be in the market, consider investing in index funds. Read the Diva's "Is an index fund a good idea?" to learn more.

The Diva concludes
Tzu-Hsuan is smart, industrious, generous, forward looking and she gives more than she takes. The Diva expects her nest egg to be quite substantial when she reaches her goal of early retirement because she shares the following important traits with " The Millionaire Next Door":

  • Lives well below her means.
  • Allocates time, energy and money in ways conducive to building wealth.
  • Doesn't accept economic outpatient care from her parents.

Investing is a life-long activity, and the more Tzu-Hsuan learns about it, the better off she'll be. As a novice investor, she will benefit from reading the Diva's "How does a new grad start investing?" She'll find helpful advice and be introduced to books on personal finance and investing that will help her achieve her goals.

Editor's note: In April 2006, FDIC deposit insurance coverage on retirement accounts held at banking institutions was raised from $100,000 to $250,000. Non-retirement account FDIC deposit insurance coverage remains at $100,000.

-- Posted: Sept. 28, 2001

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-- Posted: Sept. 28, 2001

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