Investing/Saving Question

Updated on March 07, 2011
R.W. asks from Salt Lake City, UT
7 answers

I'm hoping some of you are financial gurus who know a lot about investing and can help me with a question. As of right now, we are 100% debt free (about to purchase a home though), and we make about $35K/year. We figured right now, we can put about $400 or so into savings every month and still have plenty to live on during the month. My question is: Is $400 a good amount? What type of fund should we be putting it in? We're really interested in a good investment that we can retire on. We are both in our late 20's, so we have lots of time to invest, which is wonderful. We also have $10K in the bank for emergencies, so we're hoping to not have to interupt this investing process when something comes up. Thanks!

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J.S.

answers from Boston on

When I was a financial planner, we looked at a few major areas. That you have no debt and some emergency savings is wonderful. Does the $10K savings include the down payment on your house or is it above and beyond that? Is the $400 a month over and above what your increased expenses would be after you buy your home and factor in taxes, insurance, maintenance, etc.? If that's the case and your savings and extra monthly cash are over and above your home purchase, then you need to look at some key savings areas.

1) Do you have life insurance? If you do, great - you should each have a term policy that will provide for your children and surviving spouse if one or both of you die while your children are minors or while one of you is reliant on the other's income. If you don't have life insurance, find a reputable agent and shop around for what you need. While we're on life insurance, take some of that extra that you have for a couple of months and invest in setting up a will, living will, health care proxy, and revocable trust (which would be funded with your life insurance and provides copious details and crystal clear instructions to your survivors on how you want that money spent to care for your children). A good plan might cost $1000 to set up but it's worth its weight in gold.

2) After being debt-free, having emergency savings and life insurance, your next goal is retirement savings. If one or both of you works for an employer who sponsors a retirement plan, and that plan offers a company match, then that's where you put your money. A typical employer match is something like you invest up to 6% of your salary - pre-tax - and your employer matches 50% of that, or 3% of your salary. So you are automatically earning 50% on your investment, which far exceeds what you will earn in the market. So you should invest enough to maximize your employer match at the very least. At an annual salary of $35K, 6% of that per month (if that was the match rate) would $175 a month. After that - or if there is no match - it would be up to you to decide whether or not to invest the rest in that retirement plan. For most people, the answer to that would be yes because an employer-sponsored plan usually offers lower-cost investments than what would be available to you on your own. Most people think their retirement plans at work are "free" because they don't pay a fee. In those cases (which is most plans) the investments in the plan pay for the recordkeeping costs of the plan. When you invest in the funds, some money is taken off the top to pay for all of the servicing and this is known as share class. In most plans the share class available to employees provides a higher rate of return than the share classes available to the public. Some people have lousy plans though with expensive investments that perform poorly and for those folks, investing via another avenue makes more sense. If you have access to a plan at work then there should be a website that helps you calculate your retirement savings needs. For most people, $400 a month would be a good start but you would eventually need to save even more. I think that putting that towards retirement until you build a substantial nest egg makes sense, but everyone's retirement situation is different. If you are expecting a pension or an substantial inheritance, that changes the picture dramatically but for most of us average folks without pensions, we need to save well over a million to be able to retire.

3) If by some crazy reason you still have money left over after life insurance and retirement savings, your next step would be college savings. The best college savings plan hands down is a state-sponsored 529 savings plan. The benefits are too lengthy to list here but it beats insurance-based savings plans or accounts like UGMAs and UTMAs every time.

I hope this helps - you are taking the right steps and asking the right questions - congratulations on being financially responsible even in these tight times.

Jen

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D.M.

answers from Denver on

I agree - a finanical advisor can help. If you know you'll have the money each month and you already have emergency funds, I'd say invest in a mutual fund. I recommend talking to someone at Charles Schwab (or the like) and they can help you invest it in the right kind of funds given your goals and financial situation. NOTE - after you buy the house there may be many more expenses... so you might consider saving it as cash until you are in the house and see how it's going.

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A.R.

answers from Denver on

You should talk to a financial advisor. Some companies Offor free advice. The one I think of right off the bat is USAA. Call them!

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C.N.

answers from Denver on

I am a financial planner also. Jennifer S has a great response. The only thing I would add is that if you get advice from a financial planner, look for someone who is independent and has no quotas to fill. Then you know you are getting unbiased advise. The big names have lots of fees that are sometimes hidden and obviously, they are pressured to sell their own products (not always a bad thing but can't guarantee they are working in your best interest). If you are wanting to do it yourself, I would recommend using Morninstar.com to do your research on investing. There is a lot of information there and materials to educate you on making good decisions. They also have extra information if you pay for using the site, which I think is worth the cost and they offer a free trial. Good luck!

T.F.

answers from Dallas on

Congratulations on your home!

Talk to a financial advisor for professional advice. Debt free is SO important, we live debt free as well.

Like the PP said, make sure you don't have all your eggs in 1 basket. We have varied funds with varied risks, numismatics, savings bonds, real estate, etc.

Good luck to you.

C.O.

answers from Washington DC on

Mommy Jane:

CONGRATULATIONS!!!

Keep your savings account - although i would suggest buying things like gold and silver as a commodity so if the financial markets fail - you will have something to trade with instead of worthless paper.

Talk with a financial advisor - get to know the market before investing - go with a mixture of investments - long term and solid and make some aggressive choices as well. You can use E-trade as well - but talk with a financial advisor to get some basic information and know the difference in bull and bear market, aggressive and long term - what works for you. Keep in mind that investments can and do lose money. do NOT sell when it's lower than when you bought. Stay the course. DO NOT PANIC!!! Panic is what caused the Great Depression and what has caused much of the chaos we are seeing today!!

GOOD LUCK!!!

D.M.

answers from Denver on

You are so smart to be doing this at your young ages. My hats off to you. Personally, I prefer to invest in people and proven technology in the preventative healthcare arena rather than the stock market, bonds or earning interest in the different bank programs, etc. Do you guys have health insurance? Life insurance? We have both. Also, it's important to know if you are doing all you can to KEEP more of your paychecks, through different deductions (a small home business, for example can really save in taxes pd on W-2 income. I'll share some ideas with you on the phone if you want and you can see what you think. I'm really doing well with it and feel so fortunate to have found this investment/retirement model.
D. M.
303/898-6237

I am a post partum Babynurse but when I stop that or want to travel, I wouldn't have income any more, right?

So investments are very important. I found the perfect thing and would be happy to share it with you anytime, so you can see if it's the answer for you, too. Email me at ____@____.com

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