23 Years Old: $7K to invest...

[tnhooper45]

Hey Bogleheads,

Still new to the site but have been lurking a while. I am 23 years old, about to be graduate assistant basketball coach. That will pay for grad school and I get $3,200 a semester and $6,400 a year. Parents pay for rent, food, car. Only thing I pay for is bills...which I figure will cost me about $6400 a year.

I have emergency funds available worth about 6 months of living expenses.

My goal for investing is not really clear cut besides growth but if I had to give a reason I would say to buy a house.

Right now, I have $3,000 in the Star Fund (VGSTX) on E*Trade. Want to invest $4,000 more so a total of $7,000. My local bank has a high interest checking account that pays 3%. I have known about this but since parents have paid for everything in undergrad I practically never use my own credit card which is part of the requirements each month (10 debits, check online banking, etc). Again, I have no idea if VGSTX is better off than the high interest checking or vice versa. Also, it seems all the rage is I-Bonds.

Bogleheads, what do you think is the best option for me at this point?

Thanks,
Mack

Edit: Have no debt.

[jmbkb4]

I'd put it in the mutual fund and forget about it.

[dmoose42]

I think it depends on when/if you will need the money. If you think you might need it in the next couple years, you want to stay conservative - STAR fund is probably fine. If you don't see needing it for at least 5-7 years, then you might want to put it in either S&P500 index fund or a global fund. Agree with jmbkb4. Put it in and forget about it. The worst thing you can do is put it in the stock market and then get freaked out when the market drops 10% (as it will) and then you pull it out.

As long as this $7000 is not included in the 6 months of living expenses, then I would probably invest it in VTWSX (Vanguard World Stock Index) and forget about it (except to add to it )

[tnhooper45]

jmb and dmoose, thanks for your input.

dmoose.....member since 07' and just 2 posts!!?!?!?!? wow lol

[Jacotus]

You should put the money into a Roth IRA at Vanguard. If you need it for an emergency, contributions can be withdrawn at any time without penalty. This lets you take advantage of valuable tax-advantaged space.

I'd suggest VTSMX (Total Stock), or possibly a Target Retirement Fund if you want some bonds thrown in.

[tnhooper45]

[quote="Jacotus"]You should put the money into a Roth IRA at Vanguard. If you need it for an emergency, contributions can be withdrawn at any time without penalty. This lets you take advantage of valuable tax-advantaged space.

I'd suggest VTSMX (Total Stock), or possibly a Target Retirement Fund if you want some bonds thrown in.[/quote]

Thanks for the input. Where would I get the Roth IRA? Online on E*Trade or where?

[dmoose42]

You can easily sign-up for a roth ira directly through vanguard. The contribution limit for 2011 is 5000. You can either open the account online or have them mail you an application package for you to fill out. (The open an account link is right at the top of the main personal investors page).

[tnhooper45]

Ok, I did some googling on Roth IRA's and I am dumbfounded. All the rules and stipulations is over my head. Would 3% interest on my checking account be much worse than a Roth IRA? I feel like that is a bad question...

[medicine man]

Since the Vanguard minimums are $3000, in your case, I would get two funds: Vanguard Total Stock Market and FTSE All-World ex-US Index or Total International Stock Market Index, 50/50. That way you have exposure to domestic large, mid, and small cap equities along with value and growth, in addition to international equities minus the mid and small caps.

[Jacotus]

Ok, I did some googling on Roth IRA's and I am dumbfounded. All the rules and stipulations is over my head. Would 3% interest on my checking account be much worse than a Roth IRA? I feel like that is a bad question...

Here's the basic rule: you need earned income (e.g., income that appears on a W-2 form) to contribute to a Roth IRA. The maximum contribution limit each year is the lesser of $5,000 and your earned income. That's really the only rule you need to worry about (there is also a maximum income, but you are not there yet). You don't even have to report anything about contributing to a Roth IRA on your taxes, because the money is already taxed.

Yes, if you don't need this money right away, then a checking account would be less advantageous than contributing to a Roth IRA. First, because there is a contribution limit, every year you don't contribute to a Roth IRA you lose out on tax-advantaged space which you can never get back.

Second, the issue of asset allocation - since this seems to be long term money, people are recommending stocks. If you do see yourself needing it within a few years, then stocks are not the way to go, because they are risky. However, over many years, with high probability you will get a much higher return from stocks than from a checking account.

Since the Vanguard minimums are $3000, in your case, I would get two funds: Vanguard Total Stock Market and FTSE All-World ex-US Index or Total International Stock Market Index, 50/50. That way you have exposure to domestic large, mid, and small cap equities along with value and growth, in addition to international equities minus the mid and small caps.

Your info is a little out of date. Total International now contains mid and small caps and has admiral class shares, and as such is better in every way than FTSE All-World ex-US.

[Anon1234]

My local bank has a high interest checking account that pays 3%. I have known about this but since parents have paid for everything in undergrad I practically never use my own credit card which is part of the requirements each month (10 debits, check online banking, etc).

Edit: Have no debt.

I don't like checking accounts with a bunch of strings attached. If you use the debit only 9 times in a month the fees will probably take back 2 months of interest. Gotcha.

[kikie]

The investment seeks long-term capital appreciation and income. The fund invests in a diversified group of other Vanguard mutual funds, rather than in individual securities. It follows a balanced investment approach by placing 60% to 70% of assets in common stocks through eight stock funds; 20% to 30% of assets in bonds through two bond funds; and 10% to 20% of assets in short-term investments through a short-term bond fund. While the investment is non-diversified, it invests in diversified underlying holdings.



at your age, the general rule is minimize your bond funds, as you must know the rule is if you don't need the money for 10 years put it in stock funds.

instead of a balanced fund, if you might need the money for a house down payment, then you deal with the same uncertainty we all do

hopefully, your $7000 is not going to be your only source of what you use for the down payment. and your income goes up, and your grad school leads to a liveable wage.

[maxinout]

I wouldn't worry too much about fund selection right now. What I've learned (in my 20's) is that saving as much as I can is much more important than where it goes.

I would open a Roth and max that ($5,000 for the year) as long as you have enough earned income. For simplicity's sake, and until you've learned more about asset allocation, I would just put it into one of Vanguard's Target Retirement funds. You'll get a diversified fund with low expenses.