What's Best Savings Vehicle for 22 year-old?

[LearningToGrow]

Tonight, at dinner, my daughter said she'd like to save for "some real estate." Spoke about putting money away for a few years and find a place she could live in and rent out part of. She is paying off the last of cc debt and has been enjoying the new feeling of seeing her savings account grow.

Am I ever sorry I didn't stick around longer to listen to my Dad when I was her age, as he was suggesting I maintain retirement accounts. Man, that seemed like another lifetime.

What can I suggest for my daughter, aside from automatic deposits to ING. Thanks for any and all suggestions.

Jean Patricia

[charlie]

First encourage her to max out her retirement
plan if she has one. If not, she should open
a ROTH IRA and deposit the max allowed in
one of the Life Strategy or Target Retirement
funds at Vanguard. At her age, she should
consider Target Retirement 2045 or LifeStrategy
Growth. With anything left over, she could buy
I-Bonds, EE bonds.or CDs to save for a down
payment on a duplex. I prefer I-bonds for their
inflation protection.

I admire the girl's spunk. Keep encouraging her.

Cheers,

Charlie

[BigMoneyJim]

I second the motion for retirement contributions. If she has an employer plan (401(k), 403(b), 457, etc) it would be smart to contribute at least enough to earn the maximum company match. Saving the max would be a great idea, but saving 5% or 10% of her income is a decent start if she either can't afford or can't stand to save more just now. If she's not eligible to contribute to a plan then save in an IRA.

In answer to the question, though, money for "a few years" might be put into a short-term or medium term bond mutual fund in a Vanguard account, for example. (Minimum initial investment starts at $3000, I believe.) Or maybe 3-year or 5-year CDs or money market mutual funds if she's conservative.

Any type of stock investment is probably too volatile for a saving term of a few years. Whole life insurance policies are also bad savings vehicles for this (and almost anything else, by the way). Just about anything a banker or investment advisor is eager to get you into is probably a bad idea, too.

Reading a couple of personal finance books now will reap big rewards for her in the future. As will reading this site. My first two personal finance books were "Personal Finance for Dummies" and Beth Koblinger's "Get a Financial Life". "The Wealthy Barber" is popular for its being presented as a series of story telling at a barber shop; I think some people like the less technical layout.

There's a lot one could learn about investing, but it doesn't have to be learned all at once. Her getting out of debt and building savings at 22 is a fantastic start. The personal finance books would provide a good baseline for various types of savings like saving for retirement versus saving for a house down payment.

[mickeyd]

Can't really expand on either of the previous posts.

I would like to emphasize BigMoneyJim's take on self-education. Reading as many books on basic investing over a lifetime is probably the most rewarding thing for an individual investor to do because you get to sample the ideas of many authors. Some authors will agree with your thinking, others will not but they ALL make you think and eventually solidify your asset allocation, time horizon, and risk/reward philosophy.

Or, MickeyD, you could just pick the brains of the
people posting here who have read all of those books

John Galt

[unclemick]

At age 60 looking back, I wouldn't waste my time reading a lot of investment books - except for their entertainment value.

Max DCA every tax deferred plan availible, the Lifestrategy or Target growth versions. Put some madd/got to heck money away - maybe even as aggresive as Vg short term corp. Live on the rest. Follow your passion. Mine was toiling away in grunt tasks in the space program from 1966 - 1992. Our 401k's weren't available until 1976 - but good old plunka, plunka, DCA got us 80-90% of our ER portfolio. Tryed a few other things along the way, read a lot of books but time in the market, dollar cost averaging, low cost, and diversification did the job. Watching paint dry or grass grow was more exciting than our portfolios.

[BigMoneyJim]

Too many books or the wrong books can certainly be a bad thing, and this board is generally a very good source of info. We might say something like:

Quote:

Max DCA every tax deferred plan availible, the Lifestrategy or Target growth versions.

And that's great advice, but it may look like greek to a 22 year old. I looked like greek to me when I was 28. That's why I suggest a personal finance book for a beginner: it will lay the foundation of IRA's, employer retirement plans, mutual funds, stocks, bonds, CD's, dollar cost averaging, strategies for saving for various purposes (retirement, house, car, vacations) and various tax implications. A good book probably also warns the risks of commodities, derivatives, collectibles, ponzi schemes, etc..

After someone knows the basics then further learning is probably a matter of style: comparing books, reading online, subscribing to a financial publication, whatever. But this site is the best for me!

[mickeyd]

I agree with John Gault, unclemick and BigMoneyJim that this site is a great place to get information. But I totally disagree with your comments that reading an array of financial publications and books is not a great benefit to your overall investment education.

Reading what John Bogle, Rick Ferri, Burton Malkiel, Larry Swedroe, Wm. Bernstein etc have to say on the subject is a fine way to assist you in coming to your own conclusions on investing and investment philosophy.

There are many things that these guys write about that I do not agree with, but I have broadened myself by being exposed to their ideas.

[unclemick]

Being one month short of 61 and actively working on grumpy old curmudgeon status - I'll borrow a line from 'The Good, The Bad, and The Ugly' - "Don't talk, Shoot".

Invest now - and let time in the market and compounding do it's thing. After, during and along the way you can dink around reading. Forget the market, stick with DeGaul and later the Norwegian widow. Invest based on your AGE - and ignore what the stock market is doing.

[unclemick]

BTW - TH said it more better - ie smoother to the young guys coming to work at his old company (I can't find the post?). Must be the marketing background. Anywise - like start NOW - the younger the more nest egg when ER time comes.

[cute fuzzy bunny]

Yep, that was my standard pitch to newbie college grads.

Set up the 401k, put the min 2% into it, start with the s&p 500 index.

Every year thereafter during the couple of hours spent on the annual review, development plans and whatnot I'd goad them to invest more, and explain diversification to them.

After a couple of years, I didnt need to do much work on this. Co-workers primed them at lunch on their first week to get into the retirement program, and later a lot of discussions revolved around which funds in the program to allocate into.

Most of those guys are into their 30's and 40's now. They're already well on track for a very comfortable retirement and all they had to do was give up a couple of beers or a few expensive meals a month in their 20's. No last minute heroic efforts in their 40's and 50's.

Re. "last minute heroics", that would have pretty much
summed up my almost complete lack of any real
preparation when I semiretired at 49. Thankfully,
I got lucky at just about the right time. Someone
once said that he would rather be lucky than good.
I don't recommend counting on it for a secure future though.

John Galt

[Trace]

I am 34 years old and started investing right out of college. I would recommend the following:

(1) Invest in the 401K plan. Start out with at least the minimum to get the company match (more if able). Take at least 1/2 of any raise and devote it to increasing 401K contributions (until you reach the maximum). If you are getting a tax refund each year, increase the amount of exemptions on your W-4 and raise your 401K contributions accordingly.

(2) Fully fund a Roth IRA every year. Vanguard has some really good Index Fund choices. Most employers pay their employees bi-weekly. This translates into 26 paychecks each year. I take the 2 extra paychecks a year and apply toward funding Roth IRA's. If any additional $ are required to maximize the contribution, I send this in monthly. You will be surprised at how you will not miss the money.

(3) Personal Finance education helps a person to become comfortable with asset allocations. At age 22, I was 100% invested in stocks. It is important to learn as much as possible. This will help prevent making costly mistakes later in life (when the investment balance is larger)

(4) It helps to model what the future may look like with consistent contributions. Bloomberg has a great 401K calculator:

http://www.bloomberg.com/analysis/calculators/401k.html

(5) Don't go crazy with houses and/or cars. This can pinch the budget and take away funds that can be used for investing.

(6) Set up mini-goals. A person may want to have a net worth of $100K by age 30, $500K by age 40, etc. Celebrate the attainment of mini-goals.

Take care.

[LearningToGrow]

Many, many thanks to everyone for the swift responses and practical suggestions. I'm printing these out for guidelines as some of the ideas are also new for me!

Trace, it's particularly key for my daughter to hear from another gal who has been investing early on (even if you weren't as diversified -lol! Hey, I'm not personally acquainted with many who, at 22, even hung on to gift stock - way to go!)

These posts have already motivated us. Thanks again, I'm going to keep reading and learning.


JP