Free Financial Advice

In the next month, I will have my credit cards paid off (I am sure some of you know how amazingly good that feels), which means I will, for the first time, have a nice amount of investible income each month. In addition, I plan on becoming engaged soon, so I would like to put that most of that money into something fairly liquid (or something that will be fairly liquid in 6-9 months). After that, the next thing to save for is a home, so recommendations on less liquid investments (2-3 year plan) would also be helpful.

Here are my quick, rounded off, monthly numbers:

Income:
8,000/month after taxes

Monthly payments:
1300 rent
700 car/insurance (4.1% loan, 3 year term)
1000 student loans (3.2% rate, so I really don’t want to pay more than the minimum amount, unless I am completely missing something there)
200 utilities
1500 food/movies/going out with friends or girlfriend (I know this could be lower, but I like to eat healthy, which means expensive, and I eat out a lot with work)

Lets just say that leaves $3,000 a month to save (most months it will be somewhat more, some months will be somewhat less).

Question 1: What are good options for investing if I want to use that money in 6-9 months for a ring (I want to pay cash for the ring). I have seen some online savings accounts that will give around 5% return with a minimum balance of 5k, which is what I am planning on using, unless other people have a better idea.

Question 2: After purchasing a ring (and maybe a nice TV, since I still have my 27 inch tv from 1998), what are some investment options that I would be able to liquidate in 3 years when I want to buy a house? I have heard that a Roth investment has a provision where you can withdraw funds for a house payment, but I’m not that sure how it works. My job does not make any matching payments for a 401k, but would that still be a viable option for investing money that I need in a few years?

Caveat: Because of my job, people often speak to me about financial stuff as if I know what they are talking about. Please assume I know basically nothing about finance. I plan on actually hiring a financial advisor in the next year, but I would still like to hear other people’s options, if for no other reason so that I will know what the hell the guy is talking about.

It’s my view that you probably want a better size emergency fund before you invest. You have to take the outlook that the money YOU DO NOT HAVE A FORSEEABLE NEED for can be investable. The reason I’m able to generate the returns that I do is because I never take money out of my brokerage account and my profits generate more profits.

Basically: If you have an extra $10k lying around you dont need and dont want to see in a CD, invest it. Do not constantly put money in and take money out. That breaks discipline.

Your best options are mutual funds or individual stocks, I like mutual funds more because you dont have to pay attention to them. You can run them for a short term or long term and do with it as you please, its a hands free approach to investing.

A roth IRA allows you to take money out of your retirement for your FIRST HOME - thats it. I’m not exactly sold on the idea of taking money out of an account that generates money tax free in perpituity to buy a house that’s going to appreciate only 2-3% a year but that’s just me.

With 8k a month, your mAGI is probably too high to contribute to Roth IRAs [at least until you get married]. It sounds like your time horizon for the cash is relatively short so my recommendation would be an ING Savings Account or Vanguard’s Prime Money Market fund [VMMXX]. You could also try Vanguard’s California Tax Exempt Fund [VCTXX].

I store most of my cash in VMMXX through a Wells Fargo PMA checking account. You get 100 free trades a year with the PMA account as long as you have 25k of assets shared across your checking and brokerage account. Money market mutual funds aren’t technically FDIC backed although the better ones invest in U.S. Treasuries and Bank CDs which are relatively safe.

Roth IRA
http://en.wikipedia.org/wiki/Roth_ira

ING Direct Electric Orange
http://home.ingdirect.com/products/…=ElectricOrange

VMMXX
https://personal.vanguard.com/VGApp…&FundIntExt=INT

VCTXX
https://personal.vanguard.com/VGApp…&FundIntExt=INT

for money you need in 6-9 months, a savings account or money market fund are your best bet.

For the 2-3 year term, stock investing is still too volatile — the next 2 years could be great and nearly double your money… or be horrible and cost you 35% or more.

One thing to consider with CDs versus Money Markets/Savings Accounts that you might not be thinking about: interest rates change. The money market rate changes every day, the savings account rate changes whenever the bank feels like it. But your CD will pay the promised percentage interest all the way to the end. If rates go up, the money market is better. If rates fall, the CD is better. Again assuming you don’t need the money in the meanwhile.

VMMXX (Vanguard Prime Money Market) is a good choice as far as that goes.

As sherpa pointed out, Money Market Mutual Funds (not to be confused with Money Market Deposit Accounts offered by your bank) are not FDIC insured. They start out at $1 per share, and “strive to maintain” that share price. There is no guarantee from anybody that they will. That said, so far as I know, no US Money Market Mutual Fund has ever “broken the buck” — so far, every time it’s happened, the company running the fund has bailed the fund out. The Vanguard Prime Money Market makes its money by buying, among other things, corporate bonds. Typically, they buy debts that are due within the next 30-45 days.

Vanguard offers another Money Market Mutual Fund that invests in only U.S. Treasury bonds. It pays a bit less interest, though the interest is *generally* tax-deductible for state income tax (you still pay federal income tax).

If you have tolerance for a little bit of risk, you can look at a short-term bond fund — either corporate or treasury. They typically buy bonds with 1-3 year maturity. The value fluctuates every day. It is rare but not impossible to lose more than a small percentage of your investment. In exchange, they typically but not always pay a higher return. Right now, they’re damn near identical.

Bill wrote,

I’m going to try and sum up a lot of history really quickly, all while utilizing a very limited pool of financial knowledge (luckily, the history part is not really all that important). The important tidbits are in bold if you want to get this over with quickly.

My grandparents established a trust fund that they envisioned would pay for my college. When they passed, the money was then controlled by my parents who put it in the stock market. It grew to a respectable amount, took a bad hit some time ago, and was pulled out in knee-jerk fashion. My father then put it in a “credit line” (?) through Ford (he worked at a Ford dealership) that provided a decent interest rate (9%) until recently.

Fast forward to now: I am about to graduate with my BS, having used the money from this account for living expenses (rent, bills, food, car repairs, etc.) as the Army was kind enough to pay for my schooling. My Dad, worried about the financial situation at Ford, pulled out the money and gave it to me. Adding these savings to the little bit I had leftover from working, I now have approx. $20,000.

Wanting to keep half of that on hand to continue paying for living expenses (rent, food, bills, repairs, general living) and potentially helping towards paying towards grad school (looking at my future commitment with the National Guard and potential GI Bill assistance, the schooling my girlfriend has left, and the working both of us will be doing over the next few years, I am not worried about needing to use much of this money to pay for more school) I want to invest $10,000 of it.

Don’t recommend me the grand trip around the globe; it’s not that I disagree with that sentiment, quite the opposite actually: I just returned from a stint in Europe that depleted those savings by about $4,000.

I am solely looking for a way to turn this money into more money; I am pissing away dollars by having this sit in my checking account. And yes, it is in a checking account. My banking account offered a whopping .1, yes, .1, percent return if I put my money in a savings account and a whole 1% if I put it into a Money Market Fund.

So, money goons, what should I do with it?

Oops! I am willing to not touch this for 15-20-30 years if the gains were to be worth it. There are no short-term needs for it that I can see; I just want this to become a nice nest-egg for later in life. And while I am willing to tolerate some risk, I am likely a bit of a pussy when it comes to large dollar amounts.

Even if you are looking to settle down, ask what the likelihoods are that you might, say, get a dream job away from your area? A house is the biggest possible financial decision you can make in your life aside from taking out a business loan of sorts, it’s not something to take lightly whatsoever.

You don’t buy a house if just have money lying around, I’ll say that. Use it on something you just plain want with immediate gratification of sorts or invest it carefully. An emergency fund is a damn good idea in this sort of time period though, and $10k sounds right for most servicemen to shove into a high yield savings account. On the other hand, with only $10k and fairly good lifestyle security, I’d say to blow half of it on hookers, drinks, and drugs and save the rest. I’m in a serious relationship so I can’t do the former really, but if I came across $10k well… I’ll be coming across something else.