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I’m 24 years old and have just started making real money in an
information technology job. But I’m about to change careers to become a
state trooper. All my friends and family say I’m crazy to do this. I
will be taking a severe cut in pay. I believe I can live on my
trooper’s salary, but I want some money available in a reserve if
something unexpected comes up that I need. I have about $2,000 to
invest now, but I’m not comfortable investing it because I know so
little about it. How should I invest while I’m a trooper? And can you
recommend a good book on basic investing?
Paul's Answer:
To answer your last question first, I suggest you get a copy of
“Investing for Dummies” by Eric Tyson. It’s really quite good despite
its title, and it will steer you in many of the right directions and
away from many of the wrong directions.
Second, I beg to differ with your friends and family. I don’t think
it’s crazy at all to be a state trooper if that is what you want to be.
That profession needs the best people it can get, and it’s an honorable
profession. We all benefit from having smart, honest people doing that
job, and it’s nothing to be ashamed of in the least. There are a lot of
things in life that are more important than making money, and following
your calling is one of them.
Since you have only a small amount of money to start with, I won’t give
you a bunch of mutual fund recommendations showing you how to diversify
a $500,000 portfolio. You’re not there yet – but if you do everything
right, someday you can be there.
You have to start with where you are, which is having $2,000 available.
I’d assign two main jobs to that $2,000, and they are both very
important for you.
Job 1 is to create an emergency/opportunity fund, as you requested.
Start this with $1,000, and regard it as money that should be available
for a rainy day or for some great opportunity that comes your way. Your
first priority with this money is to protect it and make sure it’s
there for you. That means investing it conservatively. I’d suggest you
put it in a short-term bond fund such as Schwab Short-Term Bond Index.
That is one of relatively few such funds that will let you open an
account with as little as $1,000.
Keep adding to this emergency fund every year to build it up gradually
until it’s worth perhaps three or four months of your take-home pay.
Don’t worry if that seems to take a long time. And I’d like to see you
establish a rule for yourself that if you take money out of this fund
for any reason, your first priority must be to restore the money you
took out plus 10 percent.
Job 2 is to get you started investing for your retirement. I recommend
you establish a Roth IRA with your other $1,000. Many fund families
want more than that before they’ll open a new account, but fortunately
there’s an exception, and it’s a family that would be worth investing
in even if it had much higher minimums.
Put your $1,000 into a Roth IRA in the TIAA-CREF Growth Equity Fund
(tigex). It’s a relatively new fund, but TIAA-CREF has been investing
retirement money for teachers and other public employees for more than
80 years, and these people know what they are doing.
Try to add another $2,000 to your Roth IRA each year from your
trooper’s pay. If you do that every year in addition to your initial
$1,000, and if you achieve a compound annual investment return of 12.5
percent over the years, your retirement fund will be worth $500,000 by
the time you’re 53 years old. And by the time you’re 55, it would be
worth about $640,000.
Eventually, you’ll probably be able to add more than $2,000 a year, and that will put you farther ahead.
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