Christmas Bonus Bonanza
One of the best problems to have at this time of year is how to spend your Christmas bonus. Don't blow it all. Spend a percentage on something you'd really enjoy and use the rest to get your financial house in order or to add to your current investments. Also, friends might offer you good advice, but unless you become educated on the nuances of investing, the advice can be more confusing than helpful.
By Barbara Eisner Bayer (TMF Venus) and Ann Coleman (TMF AnnC)
November 28, 2000
["Ask a Fool" is a new format we are trying out here in the Foolish Four area. It's a fun way to address the general investing questions our Foolish Four readers have always come to this area for. We'd love for you to submit questions for the column (click the bylines for email), but if you want an actual answer anytime soon, we suggest you pop over to the Ask a Foolish Question discussion board and post there as well. Although we are soliciting questions of general interest to answer here, we can't answer them via email. That's private investing advice, a big no-no. This way, if we screw up, someone will notice, tell us off, and we can print an abject, groveling apology, hopefully before you take our advice and start buying gold coins from telemarketers.]
Q: What is the best way to invest your holiday bonus?
A: What a nice problem! (We should all be so lucky.)
Don't yield to temptation by buying that Paloma Picasso daisy brooch or a rhinestone studded Italian lamb coat. (The brooch is a dog. Appearing in a rhinestone and leather coat might score you a tackiness ticket from the Fashion Police -- requiring a three-hour defensive fashion class before you are allowed to dress yourself again.) Instead, consider how this income fits into your overall financial plan.
First, there's nothing wrong if you want to use a percentage of the bonus for yourself -- spend it on something you'll really enjoy. Your employer is rewarding you for a job well done and you deserve the giddy intoxication of frivolous spending for some of your bonus. Decide the percentage in advance and stick to it.
Indulge yourself, then put the responsible you in change of the remaining windfall. Do you have any debts? Pay them off! There's no better Christmas present than going into 2001 released from the spending of Christmases past.
How's your emergency fund doing? If you don't have three to six months of liquid living expenses, add cash there. You might be surprised at how good that feels. It's better than a gift certificate to Elizabeth Arden.
If you're blessedly debt-free, look for ways to make that money grow with an eye toward more abundant future holidays. The best way to invest is tax-free, if you can. Even if you contribute to your company's 401(k), you might still be entitled to open up a Roth IRA, the gift that keeps on giving -- and you get to keep it all.
What about Educational IRAs for your kids? Those have to be set up and funded by the end of the year if you want your deposit to count for 2000. If you send the money in after December 31, you lose your chance to put in another $500 for 2001.
For suggestions on stocks to put in those IRA accounts, or a brokerage account, may we modestly suggest Fool.com as a great source of ideas that won't cost you a penny, unless, of course, you happen to stumble into FoolMart which has a treasure trove of investing books, research reports, and the ever-popular jester hats.
There are hundreds, if not thousands, of great stocks that would be excellent choices for your accounts, and most of them appear to be on sale right now. We don't have any favorites, but we do have a place where you can start learning how to find good stocks: The 13 Steps to Investing Foolishly.
Finally, if you're feeling philanthropic this holiday season, spread the love by donating some of your bonus to your favorite charity or to our Foolanthropy Drive. Even Scrooge smiles when you invest your Christmas present in a great Christmas future for yourself and others.
Q: I am 24 years old, have finally accumulated $5,000, and more importantly paid off my high-interest-rate credit card debt. I want to invest my nest egg in a vehicle that will be aggressive. Some of my friends recommend a ROTH IRA, some recommend a mutual fund, and some just say trade online. Which do you recommend? Or should I look into all of them?
A: A mighty woo-hoo to you for paying off your debt. But, quick question: Do you still have some low-interest-rate credit card debt? Thought so. What about student loans? What else?
I don't want to dampen your enthusiasm for investing, so let's make a deal. I'll answer your question and "let" you invest that $5,000 now, if you'll promise to pay off all debt except mortgage and car as soon as possible -- no minimum payments. Put as much as you can into those debts every month. Get used to those high payments, then when the debts are paid off, you will be primed to put the same amount each month (OK, at least part of it) into your investment account. Sound good?
Investing aggressively requires education. Without it, your money can be swallowed alive by financial ignorance. So, tell Ross and Chandler that you're going to take some time to learn about investing before you decide what's right for you.
The good news is that, if you qualify for one, you can make all your friends happy by opening a Roth IRA, investing in mutual funds, and trading online. There's nothing mutually exclusive here. A Roth IRA is just a type of account. You don't invest in a Roth, you use it to hold your investments like a bank account holds your cash. But, a Roth is limited. You can start one now and put in $2,000, then add another $2,000 in January. The rest of your nest egg will have to go into a separate account or... remember those other debts?
Friend #1 was right about the Roth -- it's a fantastic deal if you like tax-free things. You can set one up fairly quickly with an online broker. But, you've got to do something with the money you put in it.
Enter the mutual funds. An index fund is a great place to stash your cash while you learn how to pick those aggressive stocks you dream about. Even better than an index fund (unless you are planning to add money frequently) are index shares or "exchange traded funds."
Index shares in the Nasdaq 100 <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: QQQ)") else Response.Write("(AMEX: QQQ)") end if %> might satisfy your desire to invest aggressively. They are down more than 40% from their high last March, but they almost doubled in 1999. Or maybe that's a bit more fun than you had in mind. S&P Depositary Receipts <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, a.k.a. Spiders, follow the S&P 500, a tamer ride.
I hear you -- when do you get to trade online? You said you wanted to invest aggressively and that is fine. You are young enough to recover from a disaster, but in the interest of avoiding a disaster instead, start here: Investing Basics. Take a couple of months or even a year to educate yourself, and then start thinking about trading stocks online. Your Roth IRA account will be right there, ready for online trading if you set it up now with an online brokerage instead of a bank or mutual fund company.
You're 24, so this probably won't make much of an impression, but I have to say it. Go slow. The market isn't going anywhere, but your money might if you start investing aggressively before you are ready.
