Let me first start off by explaining my current situation, as well as
investing steps I've already taken.

I've been out of college for 2 years now; I'm 23 years old.  My
employer offers a company match with a Fidelity 401k/403b up to 10% of
my salary.  I've participated in this plan since day 1 because it's an
offer I simply can't (and shouldn't) refuse.  I'd be stupid to pass up
free money, expecially when their matching amount is much higher than
most.


I have no debt other than a $300 car payment each month. My montly net
income is approximately $1,100 after a variety of
bills/deductions/taxes, including: 401k contributions, car payment,
rent, utilities, food, beer, gas, insurance, and cell phone.  I have
somewhere between $10,000 - $15,000 sitting in an savings account
earning 4% interest yearly.

My question: What can I do with the money sitting in my savings
account that (1) will earn me more than 4%/year, and (2) is relatively
risk-free?

Additional relevant information/ideas/thoughts: I've been told I
should purchase a condo or a small home/apartment.  I feel as if I'm
just throwing away $800 every month on rent.  My parents tell me it
would make more sense to put that money towards a mortgage.  The house
itself would be an investment (right?), but I'm a little wary of the
potential housing bubble (or if I can even afford it?) but I know
absolutely nothing about the housing market.

I have also been advised to take a look at some mutual funds that
Fidelity/Vanguard offer.  This is apparently the best way (compared to
risk involved) to make money.  Yet even more people say that most
mutual funds should sit at lesat 3-5 years before touching them.  I'm
already putting away 10% of my salary that I can't touch until I'm
retired.  At my age, I don't think I'm comfortable putting away even
more money that I can't touch for years, especially if I decide to buy
a condo.

Lastly, my goal here is to essentially maximize my net worth.  I have
a decent amount of money that I feel is just sitting around and going
unused.

---

Request for Question Clarification by denco-ga on 18 May 2006 13:42 PDT

Howdy justa82-ga,

I will post this a request for clarification because what I consider is the
best advice (with support and references) is somewhat at odds with the first
part of your question, that is, how to get a better than 4% resturn.

Buying a house that you can easily afford is one of the best investments you
can make, as long as you do it right.  You are right in that your rent money
is better invested in property than "thrown away" on rent.

If you pay off the mortgage early (one of the "do it rights") then you have
several things.  Security in knowing you don't have rent or a mortgage at
all, as well as being able to use that money for further investments aee the
main benefits.

You are doing well with the company match.

If you want, I can expand on the above and work that up as an aswer to your
question, but I want to make sure that is an alternative for you, that is,
taking your savings account and using it as a down payment on a house.

If so, it might help to know in which city/state you are located.  Thanks!

Looking Forward, denco-ga - Google Answers Researcher

---

Request for Question Clarification by denco-ga on 18 May 2006 13:43 PDT

Apologies, but "aswer" should have been "answer" in my request above.

---

Clarification of Question by justa82-ga on 22 May 2006 07:04 PDT

Thanks for the response!

Yes, to clarify, buying a home would be an alternative to investing in
stocks or mutual funds.  This is assuming you recommend putting money
down for a mortgage and not taking out an interest-only loan.  Since I
would rather buy a home, please go ahead as suggested in answering my
question.

I currently live in Washington D.C, but I'm planning on moving to San
Diego, CA sometime in the short future.  If this affects you answer,
please assume that I will be living in San Diego.

---

Clarification of Question by justa82-ga on 24 May 2006 06:23 PDT

Is there a way of knowing if a Google researcher is currently working
on my answer?  Should I re-post my question if I don't hear a response
in a week or so? This is my first time on the site, any help would be
appreciated!

---

Request for Question Clarification by denco-ga on 24 May 2006 09:24 PDT

Howdy justa82-ga,

I am doing some research into the implications of your move to San Diego.

I should have a fully formulated answer for you this week.

Apologies on the delay, denco-ga - Google Answers Researcher

---

Clarification of Question by justa82-ga on 24 May 2006 10:02 PDT

Great! Take your time, I certainly appreciate the effort.  I just
wasn't exactly sure how the GA process works.

---

Request for Question Clarification by denco-ga on 29 May 2006 16:41 PDT

Howdy justa82-ga,

I am posting this as a request for clarification because I want to make
sure it truly addresses your question.

First, you are doing everything right so far, by taking advantage of the
matching plan provided by your company and saving money on the side. The
next step, putting that money to work for you, is the right thing to do
as well.

Although home ownership can appear to be quite daunting, if it is done
the correct way, it can provide multiple benefits, with a nice potential
return on investment not being the least of those benefits.

If not done the right way, then you are better off with more traditional
investments, such as a money market account, so let's cover the things that
need to be done to get it right.  In your situation, a money market account
might be your best bet, but let's examine the whole home ownership option.

This Manhattan Mortgage article covers the basics of affordability.

"How Much Can You Qualify For - Self Test"
http://www.manhattanmortgage.com/show_art.asp?filename=howmuchhouse.html

"A general rule is that you can purchase a house valued at twice your annual
income, but this does not take into account your debts, a large down payment,
or other factors which can add to or detract from the amount you can afford."

Before buying a house, one should do a cost (and savings) analysis.  This
paper written by Margaret H. Smith, Ph.D., CFP and Gary Smith, Ph.D.
and titled "Is a House a Good Investment?" provides the tools to do
just that.
http://www.economics.pomona.edu/msmith/papers/BuyRent.pdf

The above paper, and other sources, tend to point out the general need to be
prepared to be in a purchased house a minimum of three to seven years for it
to make financial sense.

You will need to shop around for the right house, in order to get one that
you can afford.  If found, then you are looking at a 20% down payment, in
order to avoid having to carry mortgage insurance.  There will also be the
need to pay closing fees, which can run 2% or more of the purchase price.

When it comes to the mortgage loan, obviously getting the best rate is one
of the goals, and a 30 year fixed rate is still the most traditional.  But,
make sure any loan you get allows prepayment of not only the entire amount
of the loan, in the case of a refinance if there are lower rates, but also
of the principle of the loan.

You will want to pay down the principle with extra payments whenever you
are able to (make the payment separately and marked as being towards the
principle) so as to then reduce the life of the loan.

What are the benefits of going through all of this?

- You exchange pure debt (rent) for debt investment (house ownership)
- If properly done, a reasonable return on investment
- Once paid off, that much more money to start investing in other things
- Once paid off, the "ease of mind" of knowing you have a house

This last "benefit" might not seem like much, but it is actually one of
those "priceless" things that are a result of home ownership.

On the downside, there are the costs of upkeep, etc. to be kept in mind.

This SmartMoney.com article covers some scenarios as it pertains to return
on investment.

"Is Your House Really a Good Investment?"
http://www.smartmoney.com/mag/index.cfm?story=feb02-investment

"Take [a] $250,000 house with 9.2% annual appreciation ? the highest rate
for a major metro area over the past 10 years. In that case, your equivalent
annualized return rate would be 11.2%"

San Diego is a problem.

The San Diego Housing Commission (SDHC) covers some pricing information.
http://www.sdhc.net/giaboutus2.shtml

"To afford a median-priced house ($550,000) today in San Diego, buyers need
an annual income of about $134,000, assuming a 10 percent down payment and a
30-year fixed-rate financing at current interest rates."

The SDHC also provides first-time homebuyer loans and grants.
http://www.sdhc.net/hafirstimebuyer1b.shtml

This Kiplinger's Personal Finance article discusses "Should You Buy or Rent?"
http://www.kiplinger.com/personalfinance/columns/starting/archive/2005/st0714.htm

"Don't beat yourself up if you can't afford to jump into the sizzling real
estate market -- you might be surprised what a bargain tenancy has become.
Plus: Four places to house your cash while you wait for the right opportunity."

If you are considering the home ownership route as the best place for a
large percentage of your savings, then you might want to wait until you live
someplace other than San Diego.  San Diego might be an opportunity just
waiting though, in that if you continue putting aside money for a down
payment, a house might be a deal before going into foreclosure.

As it stands, San Diego is probably not the best place for you to buy a house
at this time.

For now, there are some money market accounts that are paying a 4.55% rate.
http://www.capitalone.com/directbanking/hymm/index.php
http://www.bankrate.com/brm/rate/mmmf_home.asp

Keep saving, save even more when you can, and keep it liquid, so you can act
when the moment is right.

If you will accept the above as an answer, please tell me.  Thanks!

Looking Forward, denco-ga - Google Answers Researcher

---

Clarification of Question by justa82-ga on 30 May 2006 06:51 PDT

Thanks for a very helpful answer! I only have one question related to
your clarification.

I should have been more clear in the beginning, as I'm fully aware
that my income  ($65k/yr) and savings level certainly limit my housing
options regardless of where I live.  When you say San Diego is
probably not the best place to buy a house at this time, are you
suggesting this because of their (overpriced?) housing market, i.e.
now is not a good time to buy any real estate in SD, or because I
generally can't afford a majority of the homes there?

Say, for example, I find a lovely 1 bedroom studio, apartment, or
condo for $200,000 or less, and maybe my parents help me out with the
down payment so that I avoid mortgage insurance.  Assuming all other
conditions stay the same, would this affect your opinion?

---

Request for Question Clarification by denco-ga on 30 May 2006 12:27 PDT

Howdy justa82-ga,

At this time, it does not appear thst any real estate purchase in San
Diego would be advisable, and buying a condominium might be even less
advisable.  In a "bubble" situation, condominiums tend to suffer more
as the ramp up of prices before the "burst" attracts more investors
and speculators.

This article in The San Diego Union-Tribune by Dean Calbreath outlines
some of the pitfalls of housing conditions such as the one in San Diego.

"Housing slowdown, state woes are forecast"
http://www.signonsandiego.com/uniontrib/20050928/news_1n28economy.html

"The widely followed UCLA Anderson Forecast said the economic outlook is
mediocre at best and that a deep drop in housing prices could prompt a
recession by the end of [this] year.
...
Thornberg said that when the housing boom ends, every sector of the
economy will feel the impact. He said he is especially concerned about
how tightly the state's job market has become intertwined with the
housing boom."

Looking Forward, denco-ga - Google Answers Researcher

---

Clarification of Question by justa82-ga on 30 May 2006 12:54 PDT

Thanks for your help! Answer accepted :)

Howdy justa82-ga,

Greatly appreciate you accepting this as the answer to your question.

First, you are doing everything right so far, by taking advantage of the
matching plan provided by your company and saving money on the side. The
next step, putting that money to work for you, is the right thing to do
as well.

Although home ownership can appear to be quite daunting, if it is done
the correct way, it can provide multiple benefits, with a nice potential
return on investment not being the least of those benefits.

If not done the right way, then you are better off with more traditional
investments, such as a money market account, so let's cover the things that
need to be done to get it right.  In your situation, a money market account
might be your best bet, but let's examine the whole home ownership option.

This Manhattan Mortgage article covers the basics of affordability.

"How Much Can You Qualify For - Self Test"
http://www.manhattanmortgage.com/show_art.asp?filename=howmuchhouse.html

"A general rule is that you can purchase a house valued at twice your annual
income, but this does not take into account your debts, a large down payment,
or other factors which can add to or detract from the amount you can afford."

Before buying a house, one should do a cost (and savings) analysis.  This
paper written by Margaret H. Smith, Ph.D., CFP and Gary Smith, Ph.D.
and titled "Is a House a Good Investment?" provides the tools to do
just that.
http://www.economics.pomona.edu/msmith/papers/BuyRent.pdf

The above paper, and other sources, tend to point out the general need to be
prepared to be in a purchased house a minimum of three to seven years for it
to make financial sense.

You will need to shop around for the right house, in order to get one that
you can afford.  If found, then you are looking at a 20% down payment, in
order to avoid having to carry mortgage insurance.  There will also be the
need to pay closing fees, which can run 2% or more of the purchase price.

When it comes to the mortgage loan, obviously getting the best rate is one
of the goals, and a 30 year fixed rate is still the most traditional.  But,
make sure any loan you get allows prepayment of not only the entire amount
of the loan, in the case of a refinance if there are lower rates, but also
of the principle of the loan.

You will want to pay down the principle with extra payments whenever you
are able to (make the payment separately and marked as being towards the
principle) so as to then reduce the life of the loan.

What are the benefits of going through all of this?

- You exchange pure debt (rent) for debt investment (house ownership)
- If properly done, a reasonable return on investment
- Once paid off, that much more money to start investing in other things
- Once paid off, the "ease of mind" of knowing you have a house

This last "benefit" might not seem like much, but it is actually one of
those "priceless" things that are a result of home ownership.

On the downside, there are the costs of upkeep, etc. to be kept in mind.

This SmartMoney.com article covers some scenarios as it pertains to return
on investment.

"Is Your House Really a Good Investment?"
http://www.smartmoney.com/mag/index.cfm?story=feb02-investment

"Take [a] $250,000 house with 9.2% annual appreciation ? the highest rate
for a major metro area over the past 10 years. In that case, your equivalent
annualized return rate would be 11.2%"

San Diego is a problem.

The San Diego Housing Commission (SDHC) covers some pricing information.
http://www.sdhc.net/giaboutus2.shtml

"To afford a median-priced house ($550,000) today in San Diego, buyers need
an annual income of about $134,000, assuming a 10 percent down payment and a
30-year fixed-rate financing at current interest rates."

The SDHC also provides first-time homebuyer loans and grants.
http://www.sdhc.net/hafirstimebuyer1b.shtml

This Kiplinger's Personal Finance article discusses "Should You Buy or Rent?"
http://www.kiplinger.com/personalfinance/columns/starting/archive/2005/st0714.htm

"Don't beat yourself up if you can't afford to jump into the sizzling real
estate market -- you might be surprised what a bargain tenancy has become.
Plus: Four places to house your cash while you wait for the right opportunity."

If you are considering the home ownership route as the best place for a
large percentage of your savings, then you might want to wait until you live
someplace other than San Diego.  San Diego might be an opportunity just
waiting though, in that if you continue putting aside money for a down
payment, a house might be a deal before going into foreclosure.

At this time, it does not appear that any real estate purchase in San
Diego would be advisable, and buying a condominium might be even less
advisable.  In a "bubble" situation, condominiums tend to suffer more
as the ramp up of prices before the "burst" attracts more investors
and speculators.

This article in The San Diego Union-Tribune by Dean Calbreath outlines
some of the pitfalls of housing conditions such as the one in San Diego.

"Housing slowdown, state woes are forecast"
http://www.signonsandiego.com/uniontrib/20050928/news_1n28economy.html

"The widely followed UCLA Anderson Forecast said the economic outlook is
mediocre at best and that a deep drop in housing prices could prompt a
recession by the end of [this] year.
...
Thornberg said that when the housing boom ends, every sector of the
economy will feel the impact. He said he is especially concerned about
how tightly the state's job market has become intertwined with the
housing boom."

For now, there are some money market accounts that are paying a 4.55% rate.
http://www.capitalone.com/directbanking/hymm/index.php
http://www.bankrate.com/brm/rate/mmmf_home.asp

Keep saving, save even more when you can, and keep it liquid so you can
act when the moment is right.  Give living in San Diego at least a year
or two before making the step of home ownership.

If you need any clarification, please feel free to ask.


Search strategy:  Personal experience.

Google search on: "San Diego" "real estate" forecast
://www.google.com/search?q=%22San+Diego%22+%22real+estate%22+forecast

Google search on: "affordable house" investment
://www.google.com/search?q=%22affordable+house%22+investment

Google search on: buying home OR house rent "annual income"
://www.google.com/search?q=buying+home+OR+house+rent+%22annual+income%22

Google searches on variations of: home, house, real estate, investment(s)

Looking Forward, denco-ga - Google Answers Researcher

First, if you want risk-free (or relatively risk free) 4% is the going
rate.  It can be in T-bills, TIPS or whatever.

For instacne is your 4% rate was risk free and someone else offered a
riskfree rate of 6%, who would invest in the 4%.

Second, Fidelity finds are general cheap; pick one that is no load and
you should be ok; its when you pay a 3% or more load up front that you
need to keep the money in place for a while.  I suggest an index fund
cause they are real cheap.  I think the one restriction is if you
withdraw money within 90 days, they will charge you a 2% redemption
chrage.  After 90 days you are in the clear.  these fuinds generally
have a 10k minimum investment.  Otherwise, choose a fund or funds of
your liking.


As far as your 401k, it sounds like a good deal matching 10%, but
remeber that onyol works out for you if you stayt past the vesting
period.  Otherwise, you are tying up a large chunk of your money
(though tax-defferal could still be a good thing).

At 23 y.o. you should not be afraid of some risk.  I'm not talking
about hedge funds or anything like that, but you should be 100% stocks
in a broadly diversified portfolio.  You should keep around 3 to 6
months of living expenses in cash.    You should max out your 401k
contributions.  You will be glad you did.  Pay yourself first.

If you have any debt, pay it down.  You didn't mention student loans
or credit cards.  If you have none of this debt, you are in very good
shape.

Definitely save for a downpayment on a starter home.  You don't say
where you live, but unless you are in a seriously overpriced market,
the value of your first home is not going to disappear to zero.  It
might not appreciate as much as it has in the past, but it will still
be the best investment you can make.

Minimize your expenses and maximize your income.  Always look for ways
to move ahead in your profession to increase your salary.  If your
company will pay for a master's degree go for it now.  Your life will
only get busier.

Live simply, but don't forget to have fun.  There are a lot of
responsibilities and burdens waiting for you in years to come, so live
while you can.  They say that youth is wasted on the young.  And it is
true.

You were not in the investment market when the rest of us got wacked
in the head when the tech bubble burst in 2000.  These things are
inevitable.  they are nothing to be afraid of in the long run.  Buy
low and sell high.  Simply said, but hard to accomplish.

Good luck.

Thanks for all of the comments, much appreciated...