Q: I’m a 27-year-old female trying to drop about $1,500 in the stock market and let it sit for about 10 years. Is this a good idea?
Kimberly, Inglewood, CA
A: Well, before you “drop” that kind of money, I have some questions for you.
- Do you have an emergency fund? You should have at least three months of living expenses saved to use should you lose your job or become ill. This pot of money should include everything it costs to run your house for at least three months-rent or mortgage, food, cable, monthly cell phone expense. If you are highly paid, bump this rainy-day fund up to six months to a year’s worth of living expenses. Why so much? Because, in this job market, you may find it hard to replace that good-paying job.
- Do you have a “life happens fund?” This is a pot of money set aside to pay for the things in life that happen. In this account, you want to keep money to pay for expenses, such as car repair. Keep at least $1,000 in this account. And, if you use the money, save to build the fund back up.
- Do you have any credit car debt? If so, drop that $1,500 on that debt.
- Do you have any student loan debt? Many people your age leave college with massive amounts of student loans. If you have student loan debt, how about using that $1,500 to make some extra payments to your loan principle?
See where am I going with this?
So many people who think they have some extra money want to find the latest hot stock, when what they should be doing is dropping that money on some debt. The best investment you can make is to get rid of as much debt as possible.
But, if you answered “yes” to the first two questions and “no” to the last two questions, then consider dropping that money into an index mutual fund. To learn more about index funds, visit the Securities and Exchange Commission Web site.
In various interviews, one of the world’s best investors, Warren Buffet, has recommended that most individual investors are better off putting their money in low-cost index funds. To search for an index fund, go to Morningstar’s Web site, where you’ll find a lot of great information. And, as always, keep an eye on expenses. What you pay to invest has a direct impact on your return.