Building Wealth - Next Step?

[Anonymous]

I will complete a graduate program with managable student loans.  I have no credit card debt.  At this point, should I start investing in stocks and bonds or what?  I'm  wondering what the next step is in building wealth or saving for the house & land that I will want to purchase in the next 5 years.

[haulingthescoreup]

Two different things going on here: building wealth, and saving for a comparably short-term goal.

I assume that you're still in your twenties. If so, put enough into your 401(K) to get maximum matching from your employer. I'd make it 85% stocks, 15% bonds in index funds, if you have access to them. At your age, you have time to ride the rollercoaster. (One rule of thumb to determine stock/ bond ratio is to subtract your age from 110. That figure is the percentage that you should be in stocks. If you're more conservative, subtract your age from 100.)

Put the rest into some safe savings vehicle. These are pretty pitiful, but online savings accounts are running about 2% these days, which is about as good as you're going to get. Also, take a look at CD's, but I wouldn't lock up 2.5% for five years, for instance --if and when inflation comes roaring back, it won't be fun being locked into such a low rate.

Once you get your saving-for-a-goal figure high enough, shift some of that money back to funding your 401(K). I stayed home with my kids for years, and I'm glad I did, but I'm seriously screwed on my retirement savings.

But I've gotten ahead of myself. Do you have a 6-8 month emergency saving fund yet? That comes first. Although one option (that I've used) is to fund a Roth IRA. If a real, honest-to-goodness emergency comes along, you can withdraw all your contributions to a Roth (minus any earnings) without penalty. But you can't replace it, though. Roth IRA's are terrific for young people, because it's better to pay taxes on your contributions at your current rate than on your withdrawals, when you'll probably be at a higher rate.

I can recommend two books if you like big-picture, common sense financial advice: Smart and Simple Financial Strategies for Busy People by Jane Bryant Quinn and Young, Fabulous, & Broke by Suze Orman. Suze annoys the heck out of me, but this is a good book for those getting started.

The main thing is that you want to know where you're going, figure how to get there, put it all on auto-pilot, and let time do its magic.

Good luck!