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Letter Re: Savings & Investing

16 September 2010 7 Comments

Hey Kevin,

I first wanted to say, I love your blog and appreciate all of the useful information it provides. I was wondering if you could do a feature article on people in there early 20’s who have money to invest but just aren’t sure how to allocate it. I will give you my own situation right now. I currently have 12,000$ in a Sallie Mae high yield savings account at 1.4%. I am contributing 10% of my salary to my companies Roth 401K, which is allocated among 5 different mutual funds. I keep around 1,000$ in my checking account for bills and leisure expense. I have 4,000$ in my Bank of America savings account that is earning pretty much nothing. I have zero debt. I know I should be investing some of this money elsewhere, just needed your help on where that may be.

My Resposne

Great questions and ones that I think are relevant for many readers of this site – therefore, I’m doing a public response to your question.

You really don’t have excessive savings that is screaming to be allocated into some sort of “risk asset.”  You essentially have $16,000 in basic savings / emergency funds.  Read more about how important liquidity is on post entitled Your Personal Financial Statement.

What I would propose instead of moving money around is to instead start allocating new money into something else.  Leave the savings as is for liquidity purposes, and start putting money into one or all of the following:

  1. 1 or more DRIP plans – I currently contribute a small chunk of money every month into my WMT DRIP and my MCD DRIP.  Great way to build positions in great companies.
  2. Start buying a couple silver American eagle coins each month.  You probably have no exposure to precious metals.  Excellent way to diversify savings and hedge against inflation.
  3. Start putting money towards a down payment on real estate.  I say this because most people always default to buying real estate.  I don’t really think it’s a good investment, but since most people are likely to do it, saving up for it is a logical thing to do.

Let me know if you have any comments or follow up questions.

You’re ahead of the game!


  • TaJ said:

    There are a lot of investments out there that you could make with around $2,500 where the company will pay you to be a customer – online brokerages like Sharebuilder or Tradeking, ING Direct's savings accounts, or Lending Club… I'm talking about the "establish an account with a minimum deposit of X, and get $Y". In many cases, for small accounts, $Y is high enough that you're getting a better APY than if you'd done anything else with the money, particularly when it's just putting money in an FDIC insured account.

    I agree with the statement that you should consider keeping high liquidity though. Sure, returns on savings are terrible, but unless you're willing to accept a degree of risk (and sometimes even then), returns on EVERYTHING are terrible right now.

  • micromillion said:

    I was thinking the same thing about this reader: they are doing a lot of right things. The hardest thing for most people to do is to get money working for them, instead of against them (debt), even if it's at a low interest rate. If there is one piece of advice I can give someone in their twenties, is that they should invest money in high quality companies with a great business that has management that looks out for the shareholder. And to either use DRiPs or a low cost broker that reinvests dividends.

    WMT and MCD are good picks, I would also add Johnson & Johnson (JNJ), Philip Morris (PM), and Realty Income (O). JNJ is good, though, PM and O are pricey (I'm a seller of O right now – holding PM).

    In the two years that PM has been spunoff it has raised its dividend by over 20%. My yield on cost basis is about 5.7%. In a few years it's gonna be double digits.

  • tim said:

    Just wondering where you buy your silver coins from. Do you do proof or standard?

  • 20smoney said:

    tim, just go check out a reputable local dealer. pay cash and stash 'em somewhere.

  • SBF said:

    OR…you can put your money on the Alabama v Arkansas game. That would be easy and fun!! Can you say…saturdaydownsouth.com….

  • Andrew said:


    I would also recommend your suggestion of ING Direct's savings accounts. They usually offer one of the best rates for standard savings accounts and they have zero fees.

    One thing to definitely take advantage of (in Canada) is the Tax Free Savings Account (TFSA). Any interest gained in a TFSA is free from taxes. There is a contribution limit of $5000/year. Open an account as soon as possible and start compounding tax free.

    TFSA are available at any financial institution.

  • Hip Hop Mens Jewelry said:

    Depending on what you’re trying to achieve might well be best to choose 2 or 3 themes at a time (a few months) and really deepen/hammer them. Plus the odd cross-cutting piece (on knowledge, institutional culture etc).