index funds vs savings acct

[bengiswex]

so i'm pretty much a finance noob. i've just started browsing and searching this forum.

lets say i have 15k available that i wish to put away (and add on to it from my paycheck every month). i plan to use this some of this money starting in maybe 5 years for large expenses such as down payments for a home, car, etc...).

in general what are the advantages/disadvantages of using a savings acct vs investing in stocks/bonds (maybe some index funds like is often suggested here)? is it as simple as guaranteed return for the savings account versus the variance but possibility of higher returns of funds? are there fees and such associated with moving money around in one or the other?

does it make the most sense to put some % in savings acct and the rest in index funds?

also, the money is currently in a mutual fund in fidelity. does it make the most sense to make all the moves from within fidelity?

sorry for the noob-ish questions and thanks.

- james

[kimchi]

[ QUOTE ]
is it as simple as guaranteed return for the savings account versus the variance but possibility of higher returns of funds?

[/ QUOTE ]

pretty much, yes.

There are lots of posts like yours that come up on these forums. People will give you many different suggestions, more than one of which would be suitable for you.

There's no cookie-cutter solution for investing.

Here's what I'd do

Since you need this money in 5 years, I would put maybe only 1 or maybe 2K into a broad stockmarket market index fund, 8K in a high-interest CD and the remainder in short-term bonds or gilts.

I'm not familiar with US tax/fund charges so someone else will have to suggest specific funds and tax consequesnces.

[f97tosc]

Largely agree with kimchi although I would say that I would probably put either more in an index fund or skip it altogether - 1 or 2 k is not worth the tax issues and the transaction fees.

Regarding taxes, interest and dividends are taxed basically as income, typically at a much higher rate than capital gains that you get from stock (and index fund) appreciation (assuming you held it more than a year. Also, the capital gain tax triggers whenever you trade, so if you do get index funds, keep them for as long as possible and start taking out money from the other sources first.

[danzasmack]

When you guys say transaction fees -

I signed up for tdameritrade, and got 1000 free trades. So on a small scale stock purchase, am i still paying through the nose?

[Badger]

I just opened an account on Zecco. Not having to pay for trades is quite nice. For the basic level of service I am using it's perfect. I'm just buying some indexes and ETFs here and there and holding for a long time.

Sounds like this might be a good place to put some of your money and to start investing.

[gull]

[ QUOTE ]
is it as simple as guaranteed return for the savings account versus the variance but possibility of higher returns of funds?

does it make the most sense to put some % in savings acct and the rest in index funds?

also, the money is currently in a mutual fund in fidelity. does it make the most sense to make all the moves from within fidelity?


[/ QUOTE ]

Good job for being active with your finances and asking questions. Don't apologize for wanting wisom.

To answer your first question, yes it is that simple. Higher return/risk vs lower return/risk. However, it can be difficult to gauge your future money needs. Sometimes people need the money and can't afford to lose it. For them, savings accounts are best. Other people have a lot trouble dealing with losses emotionally. For them, too, savings accounts are best. But if you have a tolerance for losses, or if you have a long horizon, then stocks are sensible.

If you plan on needing to use some money in the near future, put it in a savings account. If, however, you don't anticipate this, then I see no reason to split the money up. Put it all in stocks.

Since your money is already in Fidelity, then it would make sense to stay within Fidelity if you want less hassle.

[bengiswex]

[ QUOTE ]
[ QUOTE ]
is it as simple as guaranteed return for the savings account versus the variance but possibility of higher returns of funds?

does it make the most sense to put some % in savings acct and the rest in index funds?

also, the money is currently in a mutual fund in fidelity. does it make the most sense to make all the moves from within fidelity?


[/ QUOTE ]

Good job for being active with your finances and asking questions. Don't apologize for wanting wisom.

To answer your first question, yes it is that simple. Higher return/risk vs lower return/risk. However, it can be difficult to gauge your future money needs. Sometimes people need the money and can't afford to lose it. For them, savings accounts are best. Other people have a lot trouble dealing with losses emotionally. For them, too, savings accounts are best. But if you have a tolerance for losses, or if you have a long horizon, then stocks are sensible.

If you plan on needing to use some money in the near future, put it in a savings account. If, however, you don't anticipate this, then I see no reason to split the money up. Put it all in stocks.

Since your money is already in Fidelity, then it would make sense to stay within Fidelity if you want less hassle.

[/ QUOTE ]

thanks for the replies everyone. sounds like the simplest move for me is to put a portion of it (maybe 30%) in a savings account for use within the next few years and the rest in stocks/index funds for a more long term investment. pretty simple plan but i wanted input before doing anything cause i'm like that.

oooooooor i'll just put it all on pstars for the 3/6NL multitabling investment plan. now thats being responsible.

[wray]

if you have a gambler's mentality, take the most +EV route and put it all in index funds. Sounds like you could live if you lost a bit anyways.