Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

09/21/2006
Options for maximizing my savings ...
I was hoping you could advise me on the most appropriate option for maximizing my savings, given my particular circumstances.

I graduated a year ago from undergrad and am now in my first job. I make about $43,000 per year, which comes out to around $2300 take-home per month. I have managed to accumulate around $8,000 in my checking account, but it isn't accruing interest -- it's just sitting there with the rest of my expendable funds. I am applying to graduate school programs for the fall of 2007 and expect to be in school for several years, so my income will dwindle significantly during that time period. I have about a year left at my current salary to boost my savings.

My question is: which savings option do you think is best for me? I am a bit confused about the pros/cons of IRAs versus savings accounts. Or is there another option that I should consider given my situation? I'm interested in something that offers a good rate of return and I'm less concerned about liquidity (because I would like these funds to go toward retirement). I can probably put in around $300 per month or more for the next year, in addition to the $8,000 that I have already saved. After that, my ability to contribute to savings on a monthly basis is less certain.

What do you think is the best option for me?
Gail Cunningham:
expert info »
I'm going to leave the investing part up to the financial planners who respond to this question. However, they and I would both agree that you need 3-6 months income in the bank, or at least liquid. You are there! Yahoo! I suggest going to bankrate.com which is a wonderful site for many reasons, among which is that they list the various money market accounts and their rates. You can easily earn 5% and have your money totally liquid. The next step would be a short-term CD which would tie your money up for 6 months, but give you a better return, probably around 6%.

I must congratulate you for your interest in your future. Financial stability is a series of smart, small steps, and you're off to a great start.
Gary Silverman, CFP:
expert info »
From your post it sounds like you do not anticipate needing to use any of your savings to make it through graduate school. If that is not the case then you need to keep most of your money in liquid investments...probably a money market mutual fund. But if you don't think you'll need the money, then I recommend a two-tiered approach.

First, open a Roth IRA. You can put in $4000 this year and come January you'll be able to add another $4000. As this money is for retirement, I recommend a fairly aggressive mutual fund that invests across multiple asset types (US stocks, foreign stocks, bonds, real estate, etc.). Most of the larger no-load mutual fund families have these, or ask your financial advisor. If you feel more adept at investing you can split the money among a variety of mutual funds and do the same thing. The key is diversity. The idea here is to ignore the ups and downs of the market and go for the growth. An additional benefit of the Roth is that you can invade the principal (the money you put into it) with no penalties or taxes.

With the left over money, I'd look at opening up a money market mutual fund. You will find that they are fully liquid, usually offer some minimum check writing ability, and pay very good rates of interest. This is your shorter-term savings for that rainy day, a broken refrigerator, new tires, or tuition if things get tight.

And with any of this, you should either do quite a bit of study yourself or consult a financial professional to make sure that this fits your true circumstances.
Susan Saleem:
expert info »
I think the best choice for you would be a Roth IRA. Since you have such a long period of time available for your assets to grow I would recommend a growth or growth & income mutual fund. Find a fund that has a long term history. You can go to Morningstar.com to get a report and information on ratings etc. You can set up an account at any bank or brokerage house or directly with the mutual fund company. Any earnings that you accumulate over the years will be tax free. If liquidity is not an issue then you can use $4000 of the $8000 to fund an IRA for 2006 and then start adding the $300 per month to fund 2007.

You indicated that the savings is for retirement. Do you have an emergency fund set up? It is recommended you keep 3 to 6 months of expenses in something that is more liquid. You never know. At a minimum you should keep your funds in a money market. They are currently paying close to 5% and are very accessible if something does come up.
Ben F. Boyd, Jr.:
expert info »
You should consider investing your liquid monies into a money market mutual fund. You may want to go to CapitalOne.com to investigate the potential of earning more money on your monies. I hope you can take advantage of your company's retirement plan options. All of the monies you put into the plan will be on a pre-tax basis and hopefully, your employer is matching a potion of whatever you are contributing to the plan. If your employer has a plan and you aren't taking advantage of it, it limits you from contributing to a tax deductible IRA Plan. If your employer doesn't have a retirement plan in, then you can have a tax deductible IRA Plan.

If you are contributing to your company's retirement plan, then you may want to consider opening a Roth IRA Account. With the Roth, eventhough, you can't deduct the monies contributed, the monies do grow tax free until you take them out anytime after the age of 59 1/2.
In your current position, these are a couple of ways to maximize your investment monies, keep Uncle Sam out of your pocket and get started on a successful long term investment program.
Claudia James:
expert info »
I recommend that you get with a financial consultant who is "fee-based." A "fee based" consultant does not usually sell financial products and they will do a full analysis of your situation. Just based on the information in your e-mail here are a few things to consider:
1. If your company offers a 401 take advantage of it, particularly if they match your contribution. Income tax is not withheld from the amount of your contribution, which saves you tax dollars now and the amount that your employer matches is "free money," Plus, depending on where you invest these dollars, you'll have some rate of return.
2. Usually it is recommended that a young person just entering, the workforce invest 75% of their portfolio in stocks because their risk tolerance is generally higher. And 25% in bonds. (Remember as a stock holder you own part of the company and your stock value is subject the volatility of the market as well as the volatility of the company. As a bond holder you are similar to a creditor in that you've loaned the company some money at a stated rate of interest for a stated period of time, therefore your risk is less than that of a stockholder.) When you work with a consultant they will assess your risk tolerance from 4-5 different perspectives and suggest what level of stocks you should invest in (i.e., moderate, aggressive, etc.). When you do invest I highly recommend you only invest in organizations that match your values-it hard to "stay the course" in an economic downturn when you're not in agreement with the companies values (i.e., investing in a rifle manufacturing company when you don't like guns).
Jeff Kyle:
expert info »
Great question SD & well articulated! Without knowing ALL your info that would normally go into providing this kind of advice, Im going to make a few assumptions. The first is that you are young. The second is that your time horizon here for this particular piece of the financial puzzle is a long-term view. When building a house, the foundation is what you MUST start with. The same goes for your financial house. A few foundational things you should immediately consider are: Putting a will in place (Pre-Paid Legal Services is a very inexpensive way ($28 p/month) to accomplish that), be sure youre debt is either paid off or being paid down (student loans are usually low interest so dont accelerate payments and this will help you with immediate cash flow as well as establishing good credit), use a written budget, build a cushion of 3-6 months of fixed living expenses in a dedicated savings account & dont touch it! This should be a money market savings account. Credit Unions usually pay out the best interest rates. Then the two best things I believe you can do for yourself is to start & fully fund a Roth IRA and purchase a permanent life insurance. Both are after-tax dollars that will compound tax-deferred. The Roth will come out tax-free as long as you dont touch the monies until youre 59 . The life insurance cash value is monies you can supplement your retirement with (provided you over-funded it properly) and you can take out low interest loans to yourself , which is not a taxable event. Id recommend the IRA be set up inside of an annuity. If you have a little higher risk tolerance, make it an equity indexed annuity. Youll get market-like returns with NO market risk to principal. You could do the same with the life insurance, but I simply like to use an over-funded Universal Life policy. With the things Ive advised you on, any & everybody should be doing these fundamental & foundational disciplines & strategies. Please let me know if I can serve you further.
Connie K. Marmet:
expert info »
Money in a retirement fund will compound significantly over time so if you don't need the funds while you are in graduate school, an IRA gives you the benefit of not having to pay tax on the funds until you withdraw them. The value of that depends on your tax bracket now and what you think it would be after you retire.

How you invest the funds within the IRA is also a function of your age and appetite for risk. If you have a number of years to let your funds grow until you retire, stocks produce a higher return over time historically but can be subject to significant swings at any point in time. The website for your IRA should have guidance on investment options.

If your employer provides a 401k or the government equivalent and matches some or all of your contributions that would provide the same tax benefit as an IRA plus the value of the match.
 

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