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I have quite a lot of cash on hand, but I'm discouraged that I haven't been able to make my money work for me.

  • I have no debt and live well within my means.
  • I have an emergency fund in a savings account (earning 0.10% apr) which covers about 8-10 months of living expenses.
  • I put 10% of my after-tax salary in a traditional IRA every year (earning 0.60% apr). Next year I will be receiving retirement contributions from my employer (after being with the company x number of years, they start contributing a percentage of my salary).
  • I have about $60k in CDs, but they aren't earning much (0.20% apr).
  • I'm just shy of 30 with no dependents.
  • I rent and do not own any real estate.
  • I have a 14 year-old car (bought used), so it's likely that I might have to replace it in the next few years if it gets too expensive to repair. (I'll buy used again, rather than new).

I tend to be somewhat risk averse, so I'd rather not invest in something too volatile or go into debt in order to invest in something (such as real estate). But on the other hand, safe investments like CDs just earn a few bucks a year, which is rather disappointing considering the amount I've been able to save up. Plus, the interest probably isn't even covering the rate of inflation.

I can't really ask any of my peers, as things are tight with most of them and as such, don't really have any investment advice.

Any suggestions/recommendations?

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just to clarify, you are not covered by a retirement plan at work (e.g. 401(k))? –  user102008 Feb 25 '13 at 7:09
    
I'm currently not covered by a retirement plan. –  emoney Feb 27 '13 at 1:17
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2 Answers

You're losing money. And a lot of it. Consider this: the inflation is 2-4% a year (officially, depending on your spending pattern your own rate might be quite higher). You earn about 1/2%. I.e.: You're losing 3% a year. Guaranteed.

You can do much better without any additional risk. 0.1% on savings account? Why not 0.9%? On-line savings account (Ally, CapitalOne-360, American Express, E*Trade, etc) give much higher rates than what you have. Current Ally rates are 0.9% on a regular savings account. 9 times more than what you have, with no additional risk: its a FDIC insured deposit. You can get a slightly higher rate with CDs (0.97% at the same bank for 12 months deposit).

IRA - why is it in CD's? Its the longest term investment you have, that's where you can and should take risks, to maximize your compounding returns. Not doing that is actually more risky to you because you're guaranteeing compounding loss, of the said 3% a year. On average, more volatile stock investments have shown to be not losing money over periods of decades, even if they do lose money over shorter periods.

Rental - if you can buy a property that you would pay the same amount of money for as for a comparable rental - you should definitely buy. Your debt will be secured by the property, and since you're paying the same amount or less - you're earning the equity. There's no risk here, just benefits, which again you chose to forgo. In the worst case if you default and walk away from the property you lost exactly (or less) what you would have paid for a rental anyway.

14 years old car may be cheaper than 4 years old to buy, but consider the maintenance, licensing and repairs - will it not some up to more than the difference? In my experience - it is likely to.

Bottom line - you think you're risk averse, but you're exactly the opposite of that.

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The rent vs buy - OP needs to analyze the numbers for his area. In some cities the rents are so high, they pay the mortgage and then some, in other places, not no much. Whatever he decides, the analysis is worthwhile. –  JoeTaxpayer Feb 25 '13 at 1:45
    
Buying is a good idea in general terms, assuming you will be in the home for a while, because inflation actions on your mortgage payment (ie a stream of fixed payments becomes worth less in real terms over time), but not on your home's value, since that rises over time. Over the short term however, the transactions costs of owning are significant. –  JAGAnalyst Feb 25 '13 at 23:52
    
Wow, quite the interesting response about inflation. Never quite thought about it that way. Online savings: At one point I was considering ING direct, but then the interest rate dropped to nothing, so I didn't think about it again. I'll certainly take another look. IRA: What else is there if I'm left to my own devices for saving for retirement? I've seen 401k funds charge fees $10/mo up to $50/mo, which would result in a monthly loss. Rental: I'm not ready to deal with the costs, headaches, and time needed for my owning property yet--nor be tied down by it. It's a big life changer. –  emoney Feb 27 '13 at 1:26
    
@emoney $10/mo out of how much? Mutual funds/ETF's generally have expense ratio which is a percentage of the investment. IRA can be invested in anything you want, I don't understand the comparison to 401k prices - no relation whatsoever. Apples and oranges, entirely. Re the interest - the lowest I can remember ING Direct giving is 0.75%. Way above what you currently have. Don't know what you're talking about. Seriously, you don't even bother to learn. –  littleadv Feb 27 '13 at 1:29
    
A monthly fee to keep an account open. The only way I'm aware of how to gain access to a 401k is through an employer or Fidelity--that's about the extent of what I know about 401k's. Beyond that, it's a big mystery box to me. When I looked at ING Direct it was at 0.50%, then dropped to 0.20% soon after that. Now it's not even ING Direct any more. –  emoney Feb 27 '13 at 1:34
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First off, you have done very well to be in your financial position at your age. Congratulations.

I first started investing seriously about 10 years ago, and when I started, I had a similar attitude to you. Learning how to invest is a journey, and it will take you a while to learn both the intellectual and emotional sides of investing.

First off, there is nothing wrong with having a chunk of cash that you aren't investing effectively. It is far better to be losing earning power WRT inflation that it is to make a bad investment, where you can lose all your money quite quickly. I have perhaps 15% of my capital just sitting around right now because I don't have any place where I'm excited to put it.

For your IRA, I would look at the options you have, and choose one that is reasonably well diversified and has low costs. In most cases, an index fund is a reasonable choice. My 401K goes into an S&P 500 index fund, and I don't have to worry about it.

Beyond that, I suggest spending some time learning about investing, and then making some small and conservative investments. I've learned a lot from the Motley Fool web site.

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Where would I go to possibly invest in an index fund? The banks I use only appear to offer IRAs or Money Market accounts. Anything related to the stock market is pretty much just a big mystery box to me (not to mention a little scary, considering I'm always reading about people losing everything they own). –  emoney Feb 27 '13 at 1:29
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