What are my best saving options now?

Question

Hi, I just started a really stable job back in January. I am 31 years old and a widowed mother of 1. For every hour worked, my employer puts in $3.01 into my 401k. I have decided to forego my company's health insurance until the next open enrollment in December so that I can use my money to pay off some bills and get some stuff for the house. When that is accomplished, I will take 3.00 of my hourly wage to add to my 401k, so that would be $6.01 for every hour I work going into my 401k. I just joined my company's credit union by opening a savings account because I know they have excellent rates and I also have a checking account with BOA. So my question is, I want to sock away an extra $500 every month into some type of investment but I am clueless as to what I should invest in. Should I just put this in my savings or something else(CD, money market, etc). I want the greatest ROI of course.

ThomasK,

Thanks for the response. So do you think I should maintain my relations with the credit union too? After all, credit unions are touted as being better than banks.

So if I were to open up a roth ira, would the money be deducted from my paycheck, or would I have to physically go in to one of the investment branches and give it to them? Also, what is the difference between roth ira and roth 401k. Bettter yet, what does "ROTH" mean??? Sorry if these questions seem stupid.

Maddrealist,

Yes, the insurance my company offers is expensive. Coverage for my daughter and I will run a little over 400 per month. I consider that expensive. LOL

Dave W,

The company I work for has a mandatory 401k plan that they put money into for me so I can't close it out. But if you say that a Roth IRA is better, then if I was to ever leave my job in a few years, would it be possible to roll over this company's 401k into a roth IRA? And what is the difference between a roth ira and a roth 401k?

Answer 1

1. You should put in place at least some type of catastrophic health insurance with a high deductible, particularly since you have a dependent. One significant health expense could wipe you out.
2. My recommendation would be to open an account at a discount brokerage such as Optionsxpress, Scottrade or the like. Invest your savings in a mutual fund. Watch out for the fees to minimize their impact.

Answer 2

First, let me congratulate you on taking charge of your financial life. You sound like you are mature and financially wise enough that you should be able to do well at saving and investing.

Paying off bills is certainly a good thing, though having no health insurance is kind of scary. You're young, though, and if you and your child are in good health, you'll probably be fine, but one serious illness or accident can wipe you out financially. Just be aware that you are taking that risk.

Other things I'd do:
- See if the credit union has a better deal on a checking account and consider moving that. Banks generally have higher fees and charges on checking accounts than credit unions do. Even if they are equal, I think it's easier having both accounts in the same place.
- You should save up at least 3 months, and preferably 6 months of living expenses in your savings/checking account before investing. That's to cover unexpected expenses and in case you lose your job.
- Once you've done that, I'd open a mutual fund account at any of the major mutual fund companies (e.g. American Century, Fidelity, Vanguard, T. Rowe Price). For someone young like you, I certainly prefer stock funds. They bounce up and down a lot, but over the long run, they have historically given better returns than any other class of investment. Small company stocks and "value" stocks have had slightly better returns, so I personally would choose a small company mutual fund or better yet, a small company value fund.

Savings accounts, CDs, and money market accounts are fine for short-term savings that you might need in the next year or two, but for long-term investing, I think they're not a good place to be. After taxes, they generally return little if anything more than inflation so you can't really get ahead that way. Stocks historically have returned far more than the rate of inflation, so I would always choose those for any long-term savings.

A Roth IRA is a retirement account that you can put money into and it grows tax-free (i.e. you NEVER pay taxes on the earnings), which is better than tax-deferred (you don't pay taxes on the earnings until you retire and take the money out). I think Roth was the name of the congressman that wrote the bill that authorized this type of account, so his name is on it. To contribute to that, you would have to take money you have and deposit it (in a bank or mutual fund or brokerage account). IRAs are not funded through your employer.

Answer 3

Once you get 3 to 6 months worth of living expenses in your credit union savings account (or a money market account) for your emergency fund, and some life insurance on yourself for your dependent child, the next step would be to start up a Roth IRA. This differs from your 401K. The money going into the 401K deducts from your current income tax and grows tax deferred until you take distributions. The money that goes into your Roth IRA you pay income tax now, but all its growth is tax free as long as you wait till age 59 1/2. You can open a Roth IRA at any mutual fund family like Fidelity or Vanguard.

Answer 4

Your healthcare is pretty darn important, and extremely expensive if you must pay for it yourself. Since you've been out of your employer-sponsored healthcare, the rates have risen and continued to rise. They will not go down. This may eat up some of the savings you're making this year. It might be best to remain fairly liquid (Short-Term Investments/Savings) for a short while longer. Stay healthy - otherwise your investments will be the least of your worries.