Saturday | November 07, 2009
By
11 April 2008
Q: I am a 23 year old graduate student at NC State. Recently, I’ve been able to save about three grand. Woohoo! However, I’m afraid I have a $3,500 credit card debt at an interest rate of 17%. I know it’s smartest to pay off the debt first, but I’m stubborn and have never traveled.
I would like to invest $1,000 into something that is relatively safe, but will have accumulated a bit more in two to three years when I decide to see the world. In the meantime, the rest of my savings will go towards the credit card. Do you have any advice on where to invest?
A: Congratulations on your savings! I agree with you that your first strategy should be to pay down some or all of your credit card debt with a 17% interest rate. That should be your first priority. You might also shop around for a credit card that offers a more favorable rate, particularly if you do not pay off your balance every month.
In terms of investing your $1,000, you have several alternatives. You indicate that you want something safe and that you will need the money in two to three years. In light of your desire for safety relatively short time frame, I would suggest a certificate of deposit, a money market account, or a bank savings account. Unfortunately, none of these will pay a very high return in this interest rate environment, but they are safe types of investments.
Another alternative would be a Treasury bill or Treasury note. Both of these can be purchased in denominations of $1,000 and are backed up by the full faith and credit of the U.S. government.
If you are willing to take a bit more risk, you could invest in a diversified stock fund such as an index fund. Some of these will allow you to open an account for a relatively small amount, i.e. $1,000. Look for a no-load account with a low expense ratio that is rated as having "low risk." If you do invest in a stock fund, there is a greater risk of losses, but you could get a higher return over time than with some of the safer types of investments noted above.
As with any type of investment you should consider three factors before making your decision. First, when do you need the money? Second, what kind of return are you looking for? And third, what is your tolerance for risk?
Answer provided by Dr. Susan Coleman, Professor of Finance at the University of Hartford and Educational Advisor to The Hartford’s Playbook for Life program. To download or request a Playbook for Life and get more tips on everything from taxes to insurance to evaluating job offers, visit www.playbook.thehartford.com.
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pp said:
i had never knew this type of investment deeply before reading this site,it’s a very interesting ideas to invest also,but ma problem is that i’am from india and i don’t khnow where to invest my money |
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sciencewhiz said:
The best investment is by far to pay off the credit card. If we assume you are currently making minimum payments on the credit card, and managed to save the $3000 over the course of 2 years ($125 a month). If you were to put all of it in a savings account or CD earning 3%, in 3 years you would have 8k in savings and a credit card debt of around 2.2k for a net total of 5.8k. If you were to put it all into the credit card, you’d have a balance of $500, which could then be paid off in 4 months. At that point, putting $125 into savings for the next 32 months plus the $60 credit card minimum payment gives you around 6.2k. That leaves you with a net gain of $400 to travel with. putting some to the credit card and some to savings will leave you with something less then $400 gain. |
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.. said:
I agree with . CoDs are a bad idea in today’s market. Find a good no-load and no annual fee mutual fund that invests in stable products. |
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YoungNvested said:
I would agree with the science whiz. There is no repeatable way to make up for the 17% interes you are paying on the credit card. If you had at least $20,000, and a $20,000 credit balance, I could offer some strategies to more then surpass 17% |
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con crow said:
theres also a good chance that hes making over 125$ a month? |
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hello said:
The best investment he should do is to pay back his credit card because he is assured to get a rate of 17% This investment is not risky at all and 17% is excellent. Just to clarify: if he puts his money in an other investment it would cost him 17% of 1000$ per year to have 1000$ over on his credit card. That would cost him 170$ while his investment might return 50-100$ ( 5-10% of 1000$ invested). The net is 100$-170$ = -70$. This means he is loosing 70$ per year. If he pays back his credit card, his return would be: 0$ ( from no investment) - 0$ ( from no interest chages) =0$ You are better of if you pays your credit card since a 17% rate of return is not realistic. |
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Top Investor said:
CD are a bad choice because of inflation. For example, A hamburger that cost $1 now could cost $2 in 10 year, but if you put $1,000 in a CD for 10 year at a rate of 5%, you would get about $1,600. In other word, you would only have $1.6 per hamburger when it cost $2. I say you should invest in mutual fund with a low expense ratio, no-load, and maybe no transaction fee. Look for mutual fund that focus on energy, technology, and basic material. |
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narf said:
First, call your credit card company and have them lower your interest rate to something around 10% or less (it’s very possible, do some research on methods). Then, pay off as much of your credit cards as you can. That will net you your interest that you would have been giving up to creditors. Lastly, SAVE SAVE SAVE. Put aside 10-25% of your income every month (as much as you can). The monthly payments you were making to your credit card should now be redirected to your savings account. Do this until you are ready for your trip. Enjoy. |
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Roselani said:
Good afternoon. What you do speaks so loud that I cannot hear what you say. Regards |
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CoDs are bad idea’s in today’s market. With the increasing inflation rate you actually lose about 2-3% if you were to invest in other areas.