REALLY need some guidance

[sgiusti87]

Here's my issue--->

I just turned 20 years old. I have always been deeply interested in finance and money, and I have a hard time coping with the idea that I might ever be hard-up for money. I currenly have 25,000 dollars, and I have no idea what to do with it. All I know is that I want to have a comfortable retirement someday, and that I want to have a comfortable life leading up to it, the problem is that I have no idea how to get there in the mean time. I've looked at IRAs, both traditional and roth, I've had multiple CD's over the last few years so I know how those work, I've looked at money markets, at 401Ks (which I'm not old enough to have yet anyway) and I've looked at stocks. I read everywhere that stocks are smartest for younger people looking to make big money, but I just don't trust them. They're not stable, they're not a sure thing, and I hate to be a gambler. So I have this money, and I need help figuring out what to do with it. In addition, I will have 25,000 more next year + whatever I make at part time jobs this year and next. I realize I might have to gamble a little to make a lot, but I need someone to give me a little guidance on what the best thing for me, at my age, and with my income and money saved, is. Thanks in advance.

[skydivingchic]

First, great job saving. Having $25,000 in savings at age 20 is no small feat. Do you have any debt? If you have any high rate debt such as credit card debt, I would first use the money to pay that off.

Next, I would recommend setting a portion of the money aside as your emergency fund. General recommendation is 3-6 months living expenses depending upon job stability/family status/number of dependants, etc. I keep my EF in my primary bank savings account, currently paying 5%. You could also do a CD ladder or online savings (Emigrant or GMAC, for example).

Next, do you have any plans to buy a home? If so, a portion of this money would be a good start for a downpayment. This money would also go well in an online savings account, depending on your time horizon for a home purchase.

You say you are too young for a 401(k). Do you mean your employer doesn't let you contribut at your age or you do not have access to one? Once you do have access to one, you should put in at least as much as your employer matches - instant, guaranteed returns.

Next, open up a Roth IRA with a low cost mutual fund provider such as Vanguard or T Rowe Price. You could put your money in an index fund, which provides easy diversification of your money with low costs.

Open up a high yield savings account for short term savings goals such as major car repairs, home down payment, vacation, etc.

I would also recommend automating as much of the savings as possible. 401(k) contributions are taken out before you ever see your paycheck. My direct deposit by my employer is automatically split between checking and savings, and my Roth contributions will be set up to automatically be deducted from my checking account. This way I never see the money that goes into savings and therefore can't spend it as easily.

[autoxer]

Diversify to mitigate the risks of being in the stock market. I don't gamble, but I feel that it would be riskier to keep my money in CD's forever, because of inflations effect on buying power.

For long term money, I use tax-advantaged accounts (Roth and 401k). It will make a big difference in the long run. I also choose funds with low fees, because higher fees don't guarantee better performance.

I'm 28 years old, so I have a long time until retirement. 80% of my net worth is in the stock market, mostly index funds. 16% is cash, part emergency fund, part house downpayment. If I didn't have plans to buy a house, I would have even more in the market.

[cptacek]

You probably feel like investing in the stock market is gambling because you watch shows or read newspapers or read magazines or talk to other people that just talk about the prices of the stocks. They never actually go into the relationship between the price of a stock and what the company you buy actually does or makes or how much profit they make and if their business is stable, etc. If you instead think that the stocks you buy mean you are a part owner of a company, you will try to buy stocks of companies that look to be stable, long term growers.

Here is how I explained stocks, bonds, mutual funds, etc to my younger brother and sisters...
Beginning Investing: Cptacek's Personal Finance Blog

If you want to REALLY get into investing, read The Intelligent Investor by Benjamin Graham. It was written ages ago (1949) but the theory behind what he proposes is how Warren Buffett invests, and Warren Buffett is the 2nd or 3rd richest man in the world. So even though it was written so long ago doesn't mean it isn't right...and new editions have come out since then. The one I read was updated more recently.

The good part is that you have $25,000 now and $25,000 next year to invest. You don't have to jump in and do something with all that money now, but I would try to live off of something else and keep this for investing. Get a high rate savings account until you decide what you want to do with the money, so at least you are earning something. Then you can make a good decision instead of just blindly throwing money at something because "everybody" says you should.

Then, decide if you have any short-to-mid term goals that would make sense for this money to go towards. Are you in school? If you aren't, could this money be used to put you through school? What do you want to do in your life? Do you want to start your own business? Do you want to get married? Do you want to move any time soon? Do you want to own a house? If there are things that you want to do immediately that makes sense for this money, that will help you make more money or help you save money in interest, that might make sense.

You are right that investing in ONE stock is very risky. But, over time, and boy do you have a huge time horizon (40+ years) stocks in the form of a mutual fund return much better than cd's or bonds.

[autoxer]

25,000 invested for 40 years @ 5% each year will turn into $176,000.

25,000 invested for 40 years @ 8% each year will turn into $543,113.

25,000 invested for 40 years @ 10% each year will turn into $1,131,481.

Compounding interest is very powerful.

[Ima saver]

I agree with the others. Open up an emergency fund at a bank paying at least 5%. Open a roth IRA and put in the max each year. I like Vanguard Index 500 for the remainer of your money..

[jIM_Ohio]

Here's my issue--->

I just turned 20 years old. I have always been deeply interested in finance and money, and I have a hard time coping with the idea that I might ever be hard-up for money. I currenly have 25,000 dollars, and I have no idea what to do with it. All I know is that I want to have a comfortable retirement someday, and that I want to have a comfortable life leading up to it, the problem is that I have no idea how to get there in the mean time. I've looked at IRAs, both traditional and roth, I've had multiple CD's over the last few years so I know how those work, I've looked at money markets, at 401Ks (which I'm not old enough to have yet anyway) and I've looked at stocks. I read everywhere that stocks are smartest for younger people looking to make big money, but I just don't trust them. They're not stable, they're not a sure thing, and I hate to be a gambler. So I have this money, and I need help figuring out what to do with it. In addition, I will have 25,000 more next year + whatever I make at part time jobs this year and next. I realize I might have to gamble a little to make a lot, but I need someone to give me a little guidance on what the best thing for me, at my age, and with my income and money saved, is. Thanks in advance.

you can be in a 401k if you meet your employers qualifications.

Nothing is without risk, a wise investor manages risk, they don't eliminate it. IMO you should be 100% equity at your age with retirement funds, and stay 100% equity until around 30 years prior to retirement.

In your case TIME reduces the risk associated with the stock market, when time is reduced, you will need to manage risk more closely with bonds, cash and other investments.

I would put $25,000 into a brokerage account or mutual fund account.

33% US domestic large cap equities, maybe even 50%.
25% Foreign large cap equities
10-25% US small cap equities
5% of less into something more speculative (micro caps, emerging markets, tech, something else of interest).

[Fern]

You mentioned money markets, CDs and stocks.

There is a middle ground between the low returns you'd see on CDs andmoney market accts and the higher risk of buying individual stocks. Mutual funds, which is what others here have suggested.

Mutual funds invest in groups of individual stocks, and while they are exposed to a risk/reward scenario, the spikes won't be as harsh as they would be with individual stocks. You are way too young to have the bulk of your money invested in a money market/CD anyway. Time is on your side, so let it work!

Choose a reputable mutual fund house like T. Rowe Price or Vanguard. If you want to just put things on auto piilot, set it up so they automatically deduct X $ amount from one of your bank accounts, and put it into an index fund that typically will have lower expenses. For someone your age, your asset allocation should be something like at least 80% in stocks/20% bonds. That stock allocation would include an international component of about 15%.

[Ima saver]

Good advice, Fern!!

[Scanner]

I think there's a lot of good advice here and it's very party line, which you definitely need to hear.

But out of all the things you said, this was the most significant to me:

I just turned 20 years old. I have always been deeply interested in finance and money, and I have a hard time coping with the idea that I might ever be hard-up for money.

and

but I need someone to give me a little guidance on what the best thing for me, at my age, and with my income and money saved, is

So, you are interested in money and finance (that's good) but you seem to be scared of loss or perhaps not loss, frightened of "lean times." (would that be right?)

In my opinion, your loss and risk tolerance doesn't seem to be too high.

In your case, just based on 1 paragraph of getting to know you. . .I would say you lean moderate to conservative in your investing approach.

Now. . .the pundits may say, "Well, at your age, you should be 100% in stock mutual funds" and they'd be right to a certain extent. The problem is, it's your money. . .not the Pundits.

If you are going to get weirded out when your International Fund tanks 30% next year due to a correction and then pull your money out. . .well, it would be just better to not have as much money there in the first place.

I would say deploying your money 50% in bonds and 50% stock mutual funds sounds like a better strategy tailored to you. Then, if you feel like you are missing out on bull runs and want to endure more risk, there's no reason why you can't push more out onto the table later.

In other words, wade in a little before you swim.

Just my opinion.

Good luck.

[InDebtInDC]

In addition, I will have 25,000 more next year + whatever I make at part time jobs this year and next.

How about putting the money towards a college education?

[DavidSB1950]

My recommendation is 3 month worth of your living expenses in passbook savings for emergencies. Then the rest in stable Mutual Funds... Check the Lipper ratings for Mutal Funds historic performance... thats the safest yet most powerful way to invest in my opinion. Try marketwatch.com for Lipper Ratings on MF's.. Good Luck... and stay away from credit cards!!! LOL