How should I invest my money? Savings Account? Mutual funds? 401K?

Question

I'm 23 years old. I have an "okay" job. Not wealthy but not living from paycheck to paycheck either. How should I go about puttng a little money away each month so I can end up with a decent amount for a vacation in a couple years and retirement around maybe 50 years of age.

Thank you in advance! :-)

Answer 1

Standard investment advice is that you should invest in a diversified mix of stocks, bonds, and money market funds. You want to buy a diversified portfolio of stocks as individual stocks are too risky. Most folks have a dificult time buying a properly balanced portfoilio of stocks on their own. They will misbalance their portfolio by buying all small stocks or all growth stocks, or some other misbalanced assortment of stocks. Unless you know what you are doing, it is best to buy mutual funds. I like Vanguard.com, other people like Fidelity, TIAA-CREF, and DFA. Buy no-load, low cost funds. If you are like most people you will invest part of your money aggressively in stock funds, and part conservatively in money market funds and bond funds. Vanguard.com has an on-line questionnaire which will give you an idea of how to do "Asset Allocation," determining how much to put in each type of fund.

If your company offers a 401K plan at work, try to invest the most you can. The money grows tax free, and some companies will match your contribution. Investing in a mutual fund IRA is also a good idea. If you have children, you may want to consider a 529 plan or other college savings plan that grows tax free.

I like index funds. Because of their broad diversification, you are less likely to have a dramatic drop in value. They also have the lowest expenses. For stock funds, I would suggest putting ~70-80% of your money in the Vanguard Total Stock Market Index Fund. and ~20-30% in a foreign stock index fund. However, there are many different opinions out there on what the best mutual funds are. Read the links below and form your own opinion.

If you have high-interest debt, like credit cards, it is best to pay this off first before trying most of the investment ideas above. You should also have 3-6 months of salary saved up as an emergency fund in a bank or money market fund before trying more risky investments.

Believing advice you get on Yahoo answers can be risky, so read these websites for further information. If you find it too confusing, contact a professional financial advisor. They will charge you significant commissions, however.

Sources:

http://www.vanguard.com/VGApp/hnw/planningeducation
http://www.fool.com/school.htm
http://sec.gov/investor/pubs/assetallocation.htm
http://www.diehards.org/readsites.htm
http://finance.yahoo.com/education/begin_investing
http://finance.yahoo.com/funds/basics

Asset Allocation Calculators
(Determining how much to put in stocks and how much into bonds and money markets is a personal decision depending on your financial status. These Asset Allocation questionaires give you a rough idea how to do this. I like Vanguard best, but try some of the other sites as well.)
https://flagship.vanguard.com/VGApp/hnw/FundsInvQuestionnaire?cbdInitTransUrl=https%3A//flagship.vanguard.com/VGApp/hnw/planningeducation/education
https://ais2.tiaa-cref.org/cgi-bin/WebObjects.exe/DTAssetAlcEval
http://www.ifa.com/SurveyNET/index.aspx

Web forum: http://www.diehards.org/
(Many investment web forums are overrun by scam artists. This one seems the most legitimate site.)


529 plans: http://www.savingforcollege.com

Answer 2

Great Question. I applaud you for thinking about retirement now, and also planning for important expenses.

Here's the key phrase. "Automatic Payroll Deduction."

First for the retirement. Does your company have a 401k and does it provide matching funds? If yes to both, invest the minimum amount necessary to get the full matching funds. That's free money, so don't leave it there unclaimed. See if your 401k plan offers a Lifecycle or Target date retirement fund. Those are diversified funds based on your expected retirement year. These make great places to invest your retirement money until you become a knowledgable investor. If your employer doesn't have a 401k, then invest in an IRA. Again, I recommend a Target fund. Vanguard Target funds are very low cost and simple.

As for savings for a rainy day, vacation, etc. See if your employer will do an automatic payroll deduction to an online bank. Online banks are FDIC insured, so your money is safe. By making it an automatic payroll deduction, you never see the money so you will soon learn to live without it. Right now, there should be several online banks paying over 5%. Check out bankrate.com to search for the best deals. These online banks link to your checking account, so you can get access to the cash with just 1 or 2 days delay.

If you'd like to read a very motivating book that discusses exactly what I've written about above, read "Automatic Millioinaire" by David Bach.

Answer 3

Without question, the 401K. Your employer is likely matching a certain portion of it, and you're getting a considerable benefit with deferred taxes.
If you might need some of this money before age 59 1/2, though, consider putting some in savings. Building equity in your house is usually a good idea, too, depending on the real estate market in your area and on your personal situation. (For a lifelong New York City resident, it may well be better to rent, depending on a number of factors.)
But the best way to put a little bit away for a long time and to then take a lot out is the 401k plan. It's unlikely you'll be retiring at 50 (almost no one does), but you'll be in fine shape at 60.
Mutual Funds are expensive and usually fail to beat the market. Savings accounts usually pay an interest rate that's lower than inflation - a 401K plan invested in (sound, well-chosen) equities sounds like what you want.

Answer 4

For the vacation figure out where you would like to go and what it would cost you approximately and divide that number by the number of months away you would like to go on vacation and put that amount into a money market account, then when you get ready just pull it out and enjoy a debt free vacation. For retirement, if your company offers a 401K with a match, then start there up to the match. Then put money into a Roth IRA up to the max each year. There are some good calculators on the web that you can use to figure out how much to put away each month or year to hit a certain amount in a specified timeframe. Stay out of debt and you will be able to accomplish your retirement desires.

Answer 5

401K is always best if your employer is also contributing, but you can't get the money until you are 59. But you should use all the above to some point for your retirement. Saving acct are good for when you need money in a short notice, but the rates are low. you should always have money in saving for emergency. Mutual Fund are also good for long term savings as college, vacations, or early retirement. Don't be afraid to play the market on your own at some point (when you have money to risk), The risk can be high but the rewards can also be big.
I hope this helps a little.

Answer 6

1- If you have any debt, first pay that off. Cards charge anywhere from 10-18% interest rate and a line of credit 3-5% based on what the prime rate is. So first way to save money is to pay off any loans.

2- You can put away money into an instuition that will pay 4%+ interest rate like E Trade once they come out of speculation. For a safer bet once you accumulate a bit of money you can put it into a GIC.

3-
You should get into investing in stocks/equities for the best return or pay a fund manager to manage your assets. Brokers are expensive like $40+ per trade, depending on how much you have to spar.

Answer 7

Why don't you save in three places. Save at your job's 401k for your retirement. Also save in what I call a rainy day account made up of mutual funds for stuff you would like to do down the road. Say 3-5 years. Also save in a savings account or a money market for things you would like to do in a year or so. Please read my profile and send me an email. I would be happy to help you set up the rainy day account. I am not suggesting you save more than you originally intended. Just divide the amount your originally wanted to save into thirds.

Answer 8

401K.