Can you explain the difference to me...

Discussion in 'Budget Board' started by ziggystardust, Aug 23, 2005.

  1. ziggystardust

    ziggystardust DIS Veteran

    May 11, 2004
    Between a money market/IRA/CDs and all that other great investing stuff.

    I guess I'm financially naive and know very little. I'm 24 and looking to invest in the best ways I can. Please help!

    And if its not too much trouble, what would you recommend?

  2. guenzo

    guenzo Earning My Ears

    Aug 2, 2005
    Investing is not an easy subject. A great many people are paid huge sums of $$$ for investment advice/management.

    Fool dot com is a great resource for easy to understand (and entertaining) advice on money matters. There are many other sites also...this one just happens to be a favorite of mine.

    Generally, a good rule of thumb to follow when investing for retirement is the following:

    1. 401(k), 403(b), 457, etc. (especially if you have a company match)
    2. Roth IRA
    3. IRA

    Keep in mind that these are long term investment options.... >15 years. Short term investing is a whole different game (i.e. money market accounts, CDs).

    Once you have maxed out #1, move to #2 and so on. If you are like many of us, these three options are enough. (I would suggest sticking to Mutual Funds....individual stocks have inherently more risk.)

    Take some time to read up on investment topics you are interested in. It is important that you yourself understand what your goals are and what you can realistically achieve.

    If you have any specific questions, let me know.
    Good luck!

    PS- Budgeting and eliminating debt are just as important (if not more so) than deciding where to invest your disposable income.
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  4. Anastasia

    Anastasia Mouseketeer

    Feb 22, 2005
    Congratulations on getting a good start on your financial future.

    You are doing a smart thing by starting young. Starting young is the single best thing you can do as far as investing.

    Which investments make sense for you depend on many different things. Are you looking to save for retirement, or to buy a car or a house in the next few years? You would invest differently for each of these goals.

    Rather than trying to get answers here, I would recommend reading books on the subject. When I first started investing, I got information from a bunch of different stock brokerages. (Fidelity, Schwab, Vanguard, T.D. Waterhouse). Each one had some kind of brochure on the basics of investing. After reading several of them, I felt much more confident. I would look at their websites - they have all kinds of good information on them. I'm sure they can explain it much better than I can!!

    Beyond those sources, I would check out the book store or library. There are a ton of books on the topic. I like Suze Orman a lot.

    Good luck!
  5. Ardenne

    Ardenne Mouseketeer

    Jul 5, 2005
    Very quick and simple answers to get you started:

    A Money Market fund is typically a checking/savings type account that pays interest on the money you deposit. It's a good place to keep cash you might need immediate access to, like your emergency fund. They're a safe place to stash cash you plan to or may need in the near future (like when you're saving up for the down payment on a house, for instance, as well as your emergency fund), but carry lower interest rates than longer-term investments.

    A CD is a Certificate of Deposit, a short or medium-term investment (I think the shortest are 3 months, and you can get them for terms of up to a few years.) They'll earn a higher rate of return than liquid accounts (like the money market fund), but your money is tied up until the CD reaches maturity, unless you're willing to pay a penalty for early withdrawal. They're a good place to stash money you know you won't need immediately, but will need at a specific point in time not too far in the future (like if you have a child who will be starting college in a few years, for instance.)

    An IRA is an Individual Retirement Account. You can contribute up to $4000/yr, currently, to an IRA. If you meet the income requirements for a Roth (adjusted gross income under $150k) I'd recommend a Roth IRA, because taxes are paid on contributions, but your earnings (as long as you follow the rules) aren't taxed at all. With a traditional IRA, you can get a tax deduction for contributions to your account, if you qualify, but you have to pay taxes on the earnings. If you can possibly afford to, you should definitely max out your IRA contribution every year, because there's no way to make up for years you didn't contribute, and the power of compounding works in your interest when the money has years and years to sit. The money is tied up until retirement age, though, unless you pay a penalty for early withdrawal (and the penalties are pretty hefty.)

    A 401k (or 403b -- same thing, but for nonprofit organizations like universities) is sort of like an IRA, but sponsored by an employer, and with a much higher contribution limit. Some employers offer an "employer match", which means they'll match the first 3-6% of your income that you devote to the 401k. The funds get taken out of your paychecks throughout the year, and you don't get taxed on the money -- it's deducted from your gross income. It's a great way to save money on taxes AND save for retirement. If you qualify for one and you can possibly afford it, I highly recommend contributing the maximum allowed to your 401k or 403b. Like an IRA, though, the money is tied up until retirement. You *can* cash it out if you change jobs, but you'll pay penalties on the income if you do, and you can't reinvest it in such a great tax-sheltered way.

    Hope that helps :)

    Edited to add: forgot the 'what would you recommend' part :)

    I'd start with funding the 401k/403b if you qualify for one, especially if there's an employer match. If there is an employer match, contribute at least enough to get the maximum match. And if you don't have an emergency fund, start building one.

    After that, if you can fully fund the 401k and still have some left over, fund a Roth IRA if you qualify for one, or a Traditional IRA if you don't qualify for a Roth. One neat thing about these is that you can make a contribution for the previous calendar year up until April 15 of the current year -- so if you can't scrape up your full contribution by Dec. 31 of this year, you still have until April 15 of 2006 to keep working on it.

    After that... well, if you've fully funded the 401k and the IRA, and have 6 months of living expenses set aside in a money market account in case of emergency, you're already doing *great* for 24 years old :) But if you still have some left at that point, there are a number of things you can do. If you're saving up for a major purchase, like a house, you might want to go the CD route. If you have kids, I'd put money into a 529 for them. Otherwise, I'd put the rest into a good low-fee, no-load index fund, which is a fund designed to emulate the performance of an entire group of stocks -- the entire S&P500, for instance. You'll have a much lower risk and much lower fees than with purchasing individual stocks, and it's much easier because you don't have to do all the legwork required to make smart individual stock choices (which don't always do what's expected, even when all of the indicators are good.)

    Hope that helps :)
  6. dvcgirl

    dvcgirl DIS Veteran

    Nov 1, 2002
    First of all...good for you! You are young enough that if you start saving religiously beginning now you'll be well on your way to never having to worry about retirement. There are a zillion charts out there showing the difference in retirement savings if you start early as opposed to later all thanks to our good friend compounding interest.

    Forget about CDs and Money Market funds. They're only for short term savings goals and possibly your emergency fund. You want to think about things like 401Ks and Roth IRAs.

    If your employer has a 401K plan, you'll want to join and hopefully your company will match your contribution. The max for 2005 is 14,000 I believe. Now, that's a lot, but do as much as you can. Why? Because you can invest that money and not pay tax on it now. Pre-tax investing. Now, you will have to pay tax on that down the road on the earnings you make.

    Roth IRAs are for after tax that's been taxed by the government. However, if you don't spend any of that money until age 59.5 you will not be taxed on any earnings you make. The current limit for a single person is 4,000 per year.

    The new Roth 401K begins in January of 2006. If your employer will carry this, it combines the features of these two entities. It will be for after-tax dollars only, but you will not pay tax on your earnings when you begin to draw from the accounts in retirement.

    Within the Roth IRAs, IRAs and 401k plans you need to figure out how to invest the money that you put aside for those accounts. Those are sort of umbrella terms that indicate how the money will be taxed. I'd stick with mutual funds, but I'd probably go with more aggressive mutual funds at your age. This is money that you won't need for a long, long time. You're looking for growth here...and so don't play it too too safe...

    Best of luck to you!!
  7. ziggystardust

    ziggystardust DIS Veteran

    May 11, 2004
    exactly what I was looking for. Thanks!

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