Colli Real Estate

Roth IRA vs. Savings Accounts vs. CDs, etc difference?

Hey guys, I’m 26, just married, but currently just a single income income as she’s not working. We don’t own a house yet (very bad credit, combined with low household income going into a mortgage is a non-starter). Anyway, my current savings reserve is $1000, I’ve been “paying myself first” for the past 7-8 months, $50. I’m also paying down credit cards and a loan of credit with a combined monthly payment of about $135 (If I paid minimums only it’d be $70 per month) – all credit cards should be paid off in a year. My question is, at this modest amount, in laymans simple to understand terms, what is the best return for the money? I know compunding is supposed to help in the IRA, but when I do calculators of $1,000 per year for 20 years, the returns are not that impressive. Seems like unless I have BIG money, I might be better off just putting in money into CDs or Bonds/Bills to save for a downpayment on a house in 3-5 years.

You want to put money in a ROTH IRA now – in a no-load mutual fund such as Fidelity’s OTC Fund or Blue Chip Growth AND in an IRA savings account. You want to thoroughly investigate funds from various sources, paying particular attention to any fees charged; the no-load funds have no fees. As soon as the savings reaches the minimum for a CD, transfer it to a CD; repeat.
The big advantage to a ROTH IRA is that while you’re saving “after tax” dollars, you don’t have to pay taxes on whatever it earns so long as you keep it in the ROTH for at least 5 years, plus you can borrow from it – if you pay back promptly. AND, since you can’t touch the money until you’re age 59-1/2 without a 10% penalty, your money will compound AND be tax-free when you cash in. You need to factor in the tax savings to see the full benefits of compounding.
An online account with ING or the like will pay a higher rate of interest; just be sure you investigate thoroughly whatever online bank you might choose to use. And, the money won’t be so readily accessible to you there – which will help you save.
If your employer offers a 401(k) plan, get into it and save at least the amount that qualifies you for matching funds from the company. You’ll be surprised how that will add up over time; and you can borrow up to 1/2 your vested interest in it towards the downpayment on a home and not have to list it on your mortgage application as having taken a loan towards the downpayment since you’ll be borrowing from yourself. Just remember that if you change jobs, your loan will become due and payable immediately.

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