Lunch Money Investing
by Gary Foreman
Dear Dollar Stretcher,
A few months ago I started saving my change from either not going out to lunch, or by making wiser decisions on where to eat. My question for you is, where is the best place to put this money? I have about $300 and would like to invest it someplace before I end up spending it. I would also like to be able to add whatever "change" I have collected on a monthly basis. Since this is money that I consider I have already spent, I would like to save it for retirement. I am 40.
Thanks for your help.
Good question! And it's one that everyone who wants to begin an investment program will need to answer. When you begin to accumulate a little extra money, what's the best way to get it growing?
The simple answer for Connie is that she should select a mutual fund and begin to make regular contributions to it. The funds provide just the kind of services that Connie will need. They're set up for small initial investments. They'll allow her to add relatively small amounts to her account as often as she likes. Professionals will watch the stock and bond markets so that she doesn't have to. And they'll even do the bookkeeping for her.
OK, but I can hear Connie (and a lot of other people) saying, "that's great, but how do I know which fund to invest in?" And that, too, is a very good question. Unfortunately, it doesn't have the same answer for everyone. But, there are some easy to follow steps that will help you make a decision. And they don't require anything beyond common sense to find your answer. You won't even need a calculator.
Before we start, let's clear up one thing. While this doesn't require any fancy math or an education in finance, it will take just a little bit of work, such as a trip to the library and a couple of phone calls to mutual fund companies. But, unless you're willing to put a little bit of yourself into the process, you're just hoping for a good outcome and leaving the rest up to luck.
The first step is an easy one. You'll need to collect some basic information about the funds. Begin by finding a mutual fund comparison story in one of the major news magazines. Many of them do a report once or twice a year. You can go to your library, but this might be a time when buying the issue for $3 is a good move.
The magazine review will probably have a number of different categories, and you'll find some of the same companies listed repeatedly near the top of the list. Pick three of the no-load companies and jot down their toll-free numbers.
A quick word on load and no-load funds. The 'load' is a sales commission that you pay for some funds. If you're willing to do a little work to find a fund, a no-load fund is your best choice. All of your money goes into the investment. But if you're not going to do the research necessary to find a fund, find a competent financial planner and they'll recommend a load fund for you. You have three choices. You can do it yourself (best choice), pay a commission to have it done (next best choice), or not do anything at all (worst choice).
Next you'll call the fund companies and ask them to send you some information. They'll want to know whether you're looking to receive a steady income from your investment or looking for growth. In Connie's case she'll want growth.
Once you get the brochures and prospectuses, you'll begin to compare the different funds in certain key performance areas. We'll start with a big list of funds. As we go we'll eliminate the funds that are least likely to meet our goals. When we're through any of the remaining funds should be a good choice for our investment.
The first question to ask is whether the fund is trying to accomplish the same thing that I am. Some funds are designed for maximum income. Some for steady growth. Still others are trying to be more aggressive. You'll find the information in the "Goals and Objectives" section of the prospectus. Eliminate all the funds that don't match your objective.
Next take a look at a section in the prospectus called "Investment Strategies." Eliminate funds that are doing things that you don't understand. You really want a fund that will buy and sell stocks and/or bonds. Most of the stuff that the Wall Street wizards create aren't necessary for the average investor and just add additional risk.
Now we'll consider five- and ten-year performances. The performance numbers should show a compounded annual rate of return. That's the return if you reinvest all your dividends and income. It's really best if you can go to your library and get a copy of the Morningstar or Value Line reports. That way you'll be absolutely sure that your using comparable numbers for each fund. Also, try to find out what's the worst year they've had in the last ten. You might find a fund that's had a good ten year average, but had a really bad year or two. Eliminate them. If a fund hasn't been in existence for five years, just scratch it, too. Remember, our goal is to cross out every fund that shows any weakness.
Then you'll want to focus on the actual person that manages the fund. You might need to call the management company to find out who they are and how long they've been responsible for the fund. If a new manager has just taken over the fund and most of that ten year record was earned by someone else, drop them from the list.
Another thing to consider is expenses. The performance numbers should include the effect of expenses. But, if you find a fund that has an expense level that's much higher than the other funds, get rid of it.
Finally, check out the minimum initial investment and the options for reinvestment and additional investments. See how the minimums match your needs. You might need to eliminate one or more because of high minimums.
When you're through you should have a list of just a few funds. Don't get excited trying to find out which one is the exact right fund for you. The fact is that unless you can predict the future, no one knows for sure. But, remember that we've eliminated any fund that looked like it might not perform. The funds that remain on your list stand a good chance of giving you the best performance in the future.
Thanks for Connie for her question. We hope she does well with that investment program. Who knows, maybe we'll get to meet her poolside in twenty five or thirty years!
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
Take the Next Step
- Are you getting the best CD rate? Use our simple CD tool to find out. It's completely private, easy to use and you'll know what rate is available to you in seconds!
- Get the interest you deserve! Compare money market rates with our best rate finder. It only takes a minute and your privacy is completely protected.
- Getting the best return on a small monthly investment.
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save and I could use help dealing with it! or No, debt is not a problem but I am trying to get ahead financially!
More Money Tips & Tools
- 10 places to look for $500 in savings
- 9 savvy strategies to save for a rainy-day fund
- 5 big bills you can cut fast
- Money-saving secrets of the rich and frugal
- The Rule of 72...or how to easily double your debt
- Could paying for kids' college hurt your retirement?
- How not to fall short for retirement
- This week's Readers' Tips