How Should I Start a Savings?


The very first thing you should do, and something you can do right now, is to set up a savings account, and an automatic transfer into that savings account.

Yes, a savings account will likely only earn you a pittance.

However, having an automatic transfer of money to elsewhere, which you don't touch, will get you into the habit of saving. That alone is a huge step.

You say that your income is about $4100/month, and your expenses are up to about $1500/month. Subtracting $1500 from $4100 leaves $2600 that you could, in principle, invest each and every month. So set up an automated transfer of, say, $2500 per month into that savings account (leaving a bit of a buffer), with a recurrence matching your pay period. Now try to live for at least a few months without even considering that this money exists. If your numbers are accurate, this should not cause any change for you and you should not need to dip into those savings.

For the first few months, don't do more than this in terms of actually investing the money anywhere. You want to get a feel for what life is like living with an actual disposable income of $1600/month rather than $4100/month. You can spend this time looking for and learning more about alternative investments if you want to. This site is a great, free resource to do that; your local library's personal finance section is another.

Since you're currently on a temporary contract that expires in half a year, that's your initial investment horizon. With such a short investment horizon, preservation of principal becomes an overwhelmingly important factor. Once you actually know that your financial future is a bit safer than this, then you can start putting money into other asset classes, such as stocks or bonds.

In general:

Mutual funds are not an investment class of their own. Mutual funds is just another way of buying the underlying type of security; for example, stocks or bonds.

Always mind the cost of an investment. For example, look closely at the expense ratio and trading fees. You can't know how any given investment will perform in the future, but you can know what it costs to buy, hold and sell. Actively managed investments are almost always more expensive than a similar investment that simply tracks an appropriate index, while rarely having a better return over any appreciable period.

Figure out a reasonable asset allocation. For long-term investments, a rule of thumb is to subtract your age, in years, from 100, and that's the percentage of stocks you should have in a stocks/bonds portfolio. At 22 years old, you therefore should have about 75-80 percent stocks and 20-25 percent bonds. This isn't an exact science by any means; it's based on long-term past performance, and is meant to give you a reasonable risk-adjusted return, but if you're risk averse, it may be too aggressive, in which case you reduce the percentage of stocks and increase that of bonds (which tend to be a lot more stable, but return less). Split this into a reasonable mix of local and international investments.

Look up what investment accounts are offered by your bank. Look at their fees; whether they are tax advantaged or not; and whether you can freely withdraw money or not. Set one up, poke around, maybe put some money into it to play with (and expect to lose it at first).

Picking individual stocks is hard. Unless you're willing to spend a considerable time tending to your investments, it's probably better to avoid this, and just go with an index fund of some kind instead. If you want to give stock-picking a shot for real, consider having some separate money that you can "play" with.


Simple answer: I think the best "starter investment" is a conservative mutual fund. I suggest you talk to your bank or an investment company (like Fidelity or T Rowe Price or any of many others) about what sort of fund is best for you. My first investments were in a fund that is designed to be low-risk. In bad years, it rarely loses more than 1% or so. Sure, in good years it rarely makes more than 5%, but that's the trade-off. I still have that account and today I think of it as my "savings account", though most of my money is now in funds that are riskier but which in the long run perform better.

If your company has a 401k or Simple IRA or similar retirement plan, you should definitely look into this. Many companies will make matching contributions. Matching 1/2 of the first 6% of your salary is common, i.e. if you put in 6% they'll put in 3%, if you put in 4% they'll put in 2%, etc. A deal like this means you get an instant 50% return on your investment, which is pretty tough to beat.

Investing in individual stocks is riskier. I have less than 10% of my money in individual stocks. It's risky because you're putting a higher percentage of your money into one company. A typical mutual fund is invested in hundreds, maybe thousands of companies. If one company goes broke because they made a stupid decision, it's a small percentage of the total. But if you invest in individual stocks, you probably can only afford a handful, maybe 10 or 20. If one goes broke, that's a significant portion of your investment. Not to scare you off from individual stocks, as I say, I have some money invested like that myself. But it's riskier.

That said, there's no need for you to "keep up with" automated trading. You decide to buy or sell a stock. What stocks others are buying affects you indirectly: when there's a lot of demand it drives the price up, and vice versa. But whether you are buying from some other small investor or from some billionaire or from a trading house using automated trading doesn't make any difference to you. I've seen some discussions of the impact of automated trading on how markets move, but it's complicated and debatable and not something that need really concern the average small investor.


I would deal with uncertainty with diversification.

For instance, 20% of the portfolio in six-month high-yield bonds, 20% of the portfolio in one-year government bonds, 20% of the portfolio in intermediate duration investment grade bonds, 20% of the portfolio in gold, and 20% of the portfolio in stock index funds.

And if the bank will make the loan then buy a one-bedroom apartment that can be lived-in now and rented-out later.