Monday, November 26, 2007 3:00 PM
What should we do with 10,000 in savings?
Don’t spend it all in one place. Really. That’s actual advice. Seriously, you have three basic options when it comes to investing: stocks, bonds and cash (sorry, a Marc Jacobs bag doesn’t fall under those three categories).
Most financial advisors argue mightily for diversity in your portfolio, which means choosing all three options at once. How you break it up depends on when you might need to spend the money as well as your age (see below). The key is to find a financial advisor that you trust and have that person explain your options to you in detail.
That is, of course, assuming you have no significant credit card debt, have a low interest rate on your student loans, have enough income to cover your mortgage and/or car payments and you contribute the maximum to your 401(k) and already make a yearly contribution to an IRA or Roth IRA. If you’re still stuck on any of these tasks, earmark some of your money first for getting your financial life up to snuff.
However, if you are fiscally fit to start a portfolio, start investing it. You can buy individual stocks from a broker. If you trust yourself to follow the market and you understand the risks, then buying your own stocks could be exciting and profitable. But the market is volatile, so this is not the best option for the uninitiated. A rule of thumb that some experts use is to subtract your age from one hundred (say 32), and that remaining percentage (68) is the amount from your portfolio that you can safely devote to more aggressive investments in stocks. A more stable option is mutual funds, which you purchase from an institution and require less research and less daily upkeep because they give you automatic diversification.
Bonds are not just for baby and graduation presents (or Daniel Craig), but are a significant investment option. As with stocks, you can buy bonds directly or invest in a bond fund, and your financial advisor can steer you toward the right ones.
Investing $10,000, or a significant portion thereof, in cash is not as easy as putting it in the bank. If you put this amount in a simple savings account, you won’t get as much out of it as you could. You want to get the highest interest rate possible, which means shopping for a high-yield savings account, a money market or short-term CDs.