Extra cash, what to do?

[InvestorB]

Hello all,

I've been perusing this forum and have seen some great investment ideas thrown out there, so I thought I'd see what advice you might offer a friend of mine who has asked me to help her figure out what to do with some extra cash. Here are some details:

-Age: 23
-Salary: $45k/yr
-Savings: ~$20k, sitting in a low-interest savings account
-Debt: $0 (no student loans, car payments, etc.)
-Properties: None (rents apartment in city, is not looking to invest in a house yet)
-Looking at possibly going to grad school within 5 years
-Has SEP IRA through employer, does not contribute (unbelievable, I know, but this is going to change!)
-Has expressed interest in making a return (obviously), but doesn't want to lock down all her cash
-Medium risk tolerance--she is a little freaked out about volatility of stock market


What I have suggested is that she starts contributing to her IRA immediately, at least to the level of employer matching (5%). Then, there are a wealth of possibilities--Roth IRA? Mutual Funds? Money Market savings account?

What would you suggest?

[bjl584]

She has a healthy emergency fund. (50% of annual salary.) She could invest part of that by starting a Roth IRA, but first it will depend on her goals. Does she want to buy a house at some point in time? If so, she will need a downpayment. What is the status of her car? Will it need replaced in the near future. If so, some of that 20K will be neded for a car.

Roth IRA seems like the obvious way to go, but first find out more about what she need her money for going forward.

[artwest]

She has done a GREAT job so far!

First she should invest in her IRA immediately as you have suggested.

My next suggestion is to build up that $20k that she has saved in case she does go to grad school.

After she has done that, I would suggest that she invest. Personally, I like Mutual Funds. There are many funds that have averaged over 10% growth over the life of the fund and they have been around for 30, 40, 50 years or more. Those are the kind to look into for long term investing.

[InvestorB]

Originally Posted by bjl584

She has a healthy emergency fund. (50% of annual salary.) She could invest part of that by starting a Roth IRA, but first it will depend on her goals. Does she want to buy a house at some point in time? If so, she will need a downpayment. What is the status of her car? Will it need replaced in the near future. If so, some of that 20K will be neded for a car.

Roth IRA seems like the obvious way to go, but first find out more about what she need her money for going forward.

Thanks for the response!

She is not planning on buying a house any time within the next 10 years, she says. As for her car--she doesn't have or need one since she lives in a city.

Since she would like to attend grad school, she will need some of her cash when that time comes. So I guess the logical thing would be to find more short-term solutions for a portion (maybe half?) and long term solutions for the rest?

A Roth IRA or Mutual Funds seem feasible for long-term--perhaps a money market or high(er)-yield savings for the short?

[Slug]

She can actually contribute to a 2011 Roth (before 4/15). My recommendation would be to put in $5k for 2011 now followed by another $5k for 2012 spread throughout the year so her emergency fund is not halved. Maxing your Roth each year should be a goal for us all (that are still eligible to contribute).

[marvholly]

Roth invested in a couple mutal funds or a target date fund is probably her best bet.

Remind her that she can withdraw contributions w/o taxes or penalties at ANY time. So, it can be a car/grad school/house account.

[97guns]

Originally Posted by InvestorB

What would you suggest?

marry her, doesn't much matter if your male or female anymore. she should get you guys into a house in a few years and retired in 25 or so.

[Mr Nice Guy]

Originally Posted by 97guns

marry her, doesn't much matter if your male or female anymore. she should get you guys into a house in a few years and retired in 25 or so.

lmao!!

[jpg7n16]

Keep most of it in cash.

She should have approx 3-6 months expenses in cash. I'd recommend around $12,500 - $15,000 to satisy the EF. Which should be kept in low interest super safe accounts.

Which means she only has $5,000-7,500 excess.

If she's guaranteed to go to grad school: Depending on her state, she may be able to get a state tax deduction for contributing to a 529 plan. Only do that if she's guaranteed to go to grad school. (FinAid | Saving for College | State Tax Deductions for 529 Contributions) And find a cheap plan. There are some expenses for a 529, but that will be more than offset if she gets a good state deduction and a lower expense plan.

If she gets investment options, choose something very short term. (Money market funds, CDs, short term bond funds, target date school plans <5 years away, etc)

[InvestorB]

Thanks for all the responses! I can't seem to figure out how to multiquote, but I will definitely look into the Roth IRAs and 529 plans to see if those will be a good fit.

Thanks again!

[jpg7n16]

Originally Posted by InvestorB

Thanks for all the responses! I can't seem to figure out how to multiquote,

How to multiquote: in the bottom right of each post, there is a little "plus" sign. Just click that on every post you want to quote. Then scroll to the top/bottom of the page and hit "reply"

You may also want to check out this thread I created a while back: A How-To Thread

Hopefully that helps out with some future posts!

but I will definitely look into the Roth IRAs and 529 plans to see if those will be a good fit.

Thanks again!

About these two, here's my opinion on that:

The Roth IRA is a retirement account. The 529 plan is a college savings account. They should each be used for that purpose.

In other words, if she wants to save for retirement, use the Roth IRA - not a 529.
If she wants to save for college/grad school expenses, use a 529 - not the Roth.
If she doesn't know what she wants, keep in cash until she figures that out.

[ecoadapt]

Originally Posted by artwest

She has done a GREAT job so far!

First she should invest in her IRA immediately as you have suggested.

My next suggestion is to build up that $20k that she has saved in case she does go to grad school.

After she has done that, I would suggest that she invest. Personally, I like Mutual Funds. There are many funds that have averaged over 10% growth over the life of the fund and they have been around for 30, 40, 50 years or more. Those are the kind to look into for long term investing.

Definitely, She has done a wonderful job! I'll second the suggestion above!

[InvestorB]

Originally Posted by jpg7n16

How to multiquote: in the bottom right of each post, there is a little "plus" sign. Just click that on every post you want to quote. Then scroll to the top/bottom of the page and hit "reply"

You may also want to check out this thread I created a while back:

Hopefully that helps out with some future posts!

About these two, here's my opinion on that:

The Roth IRA is a retirement account. The 529 plan is a college savings account. They should each be used for that purpose.

In other words, if she wants to save for retirement, use the Roth IRA - not a 529.
If she wants to save for college/grad school expenses, use a 529 - not the Roth.
If she doesn't know what she wants, keep in cash until she figures that out.

Great stuff, thanks!

[psuicyde king]

Originally Posted by artwest

There are many funds that have averaged over 10% growth over the life of the fund and they have been around for 30, 40, 50 years or more.

Any pointers???