You've just pocketed an awesome graduation gift - the kind that folds. Or perhaps you scored a nice sales bonus at work. Maybe you even received a hefty tax refund from Uncle Sam. No matter what the source of the cash - whether it's a modest $500 or a meaty $5,000 - you now have the happy task of figuring out what to do with it. The Caribbean is calling ... you can taste that Pina Colada, smell the salty air, feel the palms swaying ...
Snap out of it. True, this kind of dough is enough to drum up some serious fun, yet not enough (not by a long shot) to allow you to declare financial independence and withdraw from the nine-to-five set. Still, if you cultivate your stash carefully, it can become a powerful tool to help you realize your dreams and financial goals. After all, "It doesn't really matter how much money you have to invest to begin with," says Don Phillips, publisher of Morningstar Mutual Funds, a Chicago-based mutual funds ranking service. "The trick is to get into the game."
Before you consider locking even a cent of your newfound nest egg away, however, make sure you have enough extra cash at the ready. Typically, financial advisers suggest keeping at least three to six months' worth of living expenses on hand to cover any unexpected financial demands. "To really make your money grow, you'll want to invest it someplace for several years," explains Lynn Ballou, a financial planner in Lafayette, Calif. "And because investing can be risky - a market may drop or dry up just when you want to cash out - you shouldn't do it with money that you may need to live on."
Where to park your funds, then, if you'll need them back in less than five years? The surest, safest places are bank certificates of deposit where, usually for minimum initial investment of a few hundred dollars or less, your funds are insured by the U.S. government for up to $100,000. Recently, rates for six-month CDs were about 3.10%. Care to up the ante with slightly more risk to your principal? Then consider short-term bond funds. Two winners are Babson Tax-Free Income-Short Term (recent yield: 4.43%; 800-821-5591) and Strong Short Term (taxable; recent yield, 7.33%; 800-368-3863). Both have minimum investment requirements of $1,000.
Beyond that, if you can commit your money for five or more years, you'll want to steer it towards faster-growing vehicles. In general, that means stocks: Over time, they've outpaced almost every other type of investment. Going back 50 years, for instance, equities gained an average of 12.6% per year, while corporate and government bonds and Treasury bills sputtered along at about 5%. Meanwhile, inflation (as measured by the consumer price Index) ticked up at an annual rate of 4.3% over the last half-century.
Thus, "if your (investment) horizon is long, the place to be is in stocks," says Ivan Thornton, a financial consultant at Shearson-Lehman Brothers in New York. "In fact given the way inflation cuts into your spending power, you can't afford not to be in them." The question, then is which type of stocks? And what are the best ways for young people to get into the market? Here are some suggestions.
You Have $500-$1,000 To Invest
If you're a novice investor, your first dive into the stock market should be a cool glide - not an icy splash. The best way to invest a small amount of money in stocks, then, is through mutual funds, which enable you to buy into a diversified portfolio of hundreds of stocks and bonds. Funds offer another advantage besides diversification: They're managed by expert stock pickers whose sole job is to follow the market.
The hitch? Many mutual funds have recently raised their minimum initial investments from $500 to $1,000, making it tougher for new investors to get their feet wet But there are two ways to buck the rules. The first is to open an individual retirement account in the fund of your choice: Some fund companies who impose minimums of $3,000 or more will accept IRA contributions of as little as $500. Aside from any 401(k) program that you may be eligible for at work, this is the best way to invest in funds, since earnings from both IRAS and 401(k)s accrue tax-free until you withdraw the money at retirement.
Cheryl Derricotte, 28, a consultant for the Seattle nonprofit housing developer Common Ground, is determined to revup her $30,000 salary through investments. On the advice of her financial planner, Oakland-based Cheryl Broussard, Derricotte began contributing $50 each month to an IRA. Derricotte plans to transfer the money to a socially responsible growth stock fund like Calvert-Ariel Appreciation, which avoids companies that invest in South Africa or sell weapons (minimum IRA investment, $1000; 800-368-2748). Another option is Pax World, a balanced fund which buys a mixture of stocks and bonds and steers clear of the gambling, liquor and tobacco industries (minimum investment, $250; 800-767-1729).
"When you're young and just starting to invest, you need to look at more growth-oriented vehicles," says Broussard. The logic? Time - to rack up stellar gains like those cited above - is on your side. To achieve her financial goals, which include starting her own business, Derricotte plans to make monthly, equal payments into her mutual fund picks. Known as dollar - cost averaging, this investing tactic ensures that you're scooping up more shares when prices are low, and fewer when prices are up. As for her new attitude about investing? "I felt it was time to start taking my own money as seriously as I take the public's money," laughs Derricotte.
