unnamedplayer

Hello all!

I'm hoping for some wisdom from fellow TFPers related to money

Here's the deal:

Basically right now I have a checking account and a savings account at a well known national bank. Through the past couple of years of working my checking account has grown to ~$10g. My savings account is much smaller (about a 1/10 of that due to an automatic transfer of $25 a month that I was encouraged to setup when I opened my checking account).

I am relatively young (early 20s) and this is the most money I've ever had in my life! But it seems to me that I should be doing something else with this money instead of just letting my checking account grow. I've thought about moving more money into my savings account obviously, but even that doesn't seem too great since the interest rate is pretty puny. So I am looking for some help. Basically a couple of questions I was hoping to have some input to:

1) How much money should you keep in a checking account? Savings account?

2) What are some investment options a youngin' like me should look into? I've been thinking about a 401k for long term since my employer offers that, but I don't know a great deal about them.

3) What about options for shorter term investment so I can have access to that money if needed?

Any input would be greatly appreciated!!

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yellowmac

1. You should only keep as much money as you need in a checking account to pay your bills and other monthly expenses. Everything else, I'd put it into a higher yield online savings account. I like ING Direct (current interest: ~3%), but there are other online savings banks (HSBC Direct, etc) that are great. Check bankrate.com .

2. I suppose you should decide what you want to do with your investment money, and what sort of timeframe you're thinking. If you don't have a retirement account set up, I'd do so asap. It's never too early to start saving for retirement. I hear a lot about people who regret not saving for retirement early. Compounding returns is a good thing.

If your employer offers a 401k, I'd definitely choose that, especially if they match your contributions. I mean, who can beat free money?? Ignore all the doom and gloom surrounding the markets right now, since retirement is a long-term investment and the market return will be fine.

3. Short-term investment... er, if you need access to the funds, I suppose CDs aren't the best thing. I don't really know too much about other options though...

Good luck!

kurty[B]

yellowmac has good sound advice.

Do a search and you'll find much more information on investing on the forum.

I definitely agree, only leave enough in your checking to cover bills (a bit more so you don't overdraft). Move the rest into savings/investment accounts.

My rules of thumb, which don't work for everyone.

1) - keep 3-6 months worth of living in a high-yield savings account (if you get laid-off, or something bad happens you have a nest of money that's relatively accessible and your not found with your pants down).

2) - save 10% of my income in a Roth IRA or 401k for retirement.

Set goals for savings for larger investment purchases (for example, home), and little goals for smaller purchases, non-investment (vacations, future automobiles/motorcycles). I'm not planning to buy a car anytime soon, but since I have no present car payment I'm still saving the amount of a car payment each month, so if my car breaks down I have repair money, and if I decide to trade it in and get a hybrid, or less gas guzzling vehicle I have more money for a down payment and to reduce the amount of my loan.

3) - if you have debt, pay that off (this should be number 1)

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Baraka_Guru

QFT.

After all, what's the point in earning even a solid 8% return on an investment when you're carrying debts that have an interest rate of more than double that at, say, 18%?

Paying down debts can be a better "investment" than stuffing cash into an investment vehicle. Nipping future interest expenses in the bud can save you a whack of cash.

Also, I agree that those ISA accounts are good for a reasonable interest rate while still having access to cash. The 3-to-6 month rule is a good one.

I'll just add as well: The sooner you get a mortgage and pay it off, the better. There isn't much better security than actually owning your own home. Look for a mortgage plan that allows for accelerated payments and lump sum deposits.

My 3:

1. Pay off debt. (Do this first. Very first.)
2. Set up RRSPs or 401K...maximize contributions each year. (Do this concurrently with #3, if you can.)
3. Get a mortgage on a house that's set to appreciate reasonably well...pay off the mortgage as fast as you can.

Next: Invest to your heart's content. Try value investing.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Xazy

Not sure I agree with pay your mortgage off as fast as you can, my rate is 4.875, I have no desire to pay 1 extra penny a month, between the low rate and the tax savings it is worth it to keep and use the money for other investment opportunities.

Baraka_Guru

Of course, individual situations vary. I hope you're locked in at that rate; it's great. But I'm not sure how many people are that fortunate....

The added benefit of the mortgage strategy is that it's virtually risk-free. You have a good rate, but I've seen current rates range between 5.5% and 7.65%. These rates are moving closer to the performance of mutual funds and other investments. The difference being the risk factors. How many risk-free investments do you know that give you as much as 7.65% return? I think you're lucky to get 4% with a government bond.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

kurty[B]

I agree with investing in property, but I strongly suggest doing tons of research before making such a large investment. Think of all possible caveats before getting yourself in over your head "if I lose my job, how will I afford to pay for my mortgage?"; will I have money left over each month for any potential repairs (from small things to HUGE problems, there needs to be a plan).

Real Estate is not always just as simple as buy and reap the benefits, but if done right it is certainly a GREAT investment vehicle. Don't buy the home looking at the past three years of value having shot up XX% and think it is going to continue to shoot up that much or that quickly. Luckily, the current state of the housing market does show that it is capable for housing prices to fall back on themselves. Don't buy a house thinking you are just going to offload it in three years and make a HUGE profit because you held onto it. Have a longterm plan, and if it so happens that housing prices do jump up and you can reap the benefits in the shortterm, go for it.

__________________
In the Absence of Information People Make Things Up.

Bill O'Rights

Right now...the mattress is looking like a pretty good place to keep your money.

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"I distrust those people who know so well what God wants them to do because I notice it always coincides with their own desires." - Susan B. Anthony

"Hedonism with rules isn't hedonism at all, it's the Republican party." - JumpinJesus

It is indisputable that true beauty lies within...but a nice rack sure doesn't hurt.

new man

All good comments, but I have couple of points to add. Paying down debt is important, but you need to pay yourself. If someone ended up at retirement with no debt but no retirement, are they well off? Or is the person who saved diligently, managed debt intelligently, and ends up with an income stream greater than their debt at retirement?
I agree that stupid loans with mad interest rates need to be paid down. However, house and student loans have fairly cheap interest rates. Of course, your loan can simply be too big, but lets assume that the loan principal would fit a reasonable standard of income. The choice is 401k vs loan payment. A loan is paid with after tax money, however the interest is deductible. But not the principal. Lets assume that the loan matches 50% on the dollar to X amount. Already, without any investments, the account is up 50%, even if it were placed in a fixed income account of 3% return per year. Contrast that with 6.5% or so loan. Plus, money goes in pretax. So you are already up 25 or 30%, whatever your taxes are. Also, inflation will eventually drive you salary up, but your loan stays as a fixed payment, so over time it becomes a smaller percentage of your costs. If you were planning on moving down the road, say from a townhouse or condo to a house, then your property over time will gradually increase in value, without you putting an extra penny into it. Even with huge market letdowns, the vast majority of people will find house appreciation over a decade.

Definitely keep 3-6 months cash available for emergencies. They will crop up in life. My wife and I spent too much time close to the edge, and we have managed to nix that habit before we got into trouble. I feel less secure now that I am older, and theoretically a little wiser.