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Ask Dave

Best Way to Invest?

If Katie's not going to need the money for college for the next five years, then she should fund a Roth IRA. Otherwise, she should stock up her emergency fund.

QUESTION: Kate wants to know the best way to invest right now with some of the income that she will not have much longer.  She will not need the money to get through school – her parents are paying for school, she’s living at home and basically has no expenses.

ANSWER: If you might need the money in less than five years, you should pile up any extra income in an emergency fund.  If you’re not going to need the money in less than five years, then you should do a Roth IRA in a good growth stock mutual fund with at least a five-year track record.  To do a Roth IRA you have to have an earned income and file taxes on that income up to the amount that you put into the Roth.  The maximum amount you can put into a Roth for 2004 is $3,000 and the maximum for 2005 is $4,000. 

The Roth IRA is a great plan because you’ve got some money that’s going to grow for many years, tax free.  You can also stop putting money in at any time and then start again when you have an income again.

Just make sure you have your fully-funded emergency fund before you start investing.