Reader Stressed About $120K Stash

By Manisha Thakor, MBA, personal finance expert for women

Q: Help! I'm about to graduate from college and head to veterinary school, but I'm living paycheck to paycheck—even though I have $120,000 stashed

away. It's my house fund and I refuse to touch it. But I really want to figure out my savings and retirement. What should I do?

A: Wow, most students I know would have dipped into that $120,000 cookie jar by now. High five to you! But you're right; you should use part of that nest egg to build some security for yourself, stat.

First, living paycheck to paycheck puts you at risk of going broke, because you don't have a cushion for emergencies.

Add up your basic monthly living expenses and multiply by six. Let's say you're living on $1,200 a month: Take $7,200 and put it aside for emergencies in a money market fund at Vanguard, Fidelity or Charles Schwab (basically a savings account, with withdrawal limits).

Next, assuming you will earn at least $5,000 this year, take $5,000 and open a Roth IRA at the same institution (it makes managing your accounts much easier). To keep your life simple, I recommend investing that money in a target date 2050 fund (a mix of stocks and bonds that will gradually get more conservative, as you approach age 65). You don't have to keep it there, but that's a start.

What happens to the remaining $107,800?

If you're not sure when you'll buy a house, I recommend this keep-it-simple formula for the rest of your assets. Put 50% in a money market fund to give you flexibility on the timing of buying your home—that could be part or all of the down payment.

Then, invest the remainder in low-cost index funds in a regular, taxable investment account (i.e. not a retirement account). For your age I'd recommend investing 75% of the money in a total stock market index fund and 25% in the total bond market index fund.

These two index funds track, or mirror, the U.S. stock and bond markets, and most investment companies offer these funds—although the names and ticker symbols vary from company to company.

I am a big fan of these three investment firms: Vanguard, Fidelity, and Charles Schwab. They will work with investors at virtually any asset level—i.e. you don't have to be rich. And they'll happily walk you through the surprisingly easy process of transferring your assets over—literally, a few forms and a phone call or two. On top of it, all three institutions have in-house staff who will answer questions and talk to you about your investment goals.

Charles Schwab—866-232-9890
Fidelity—800-343-3548
Vanguard—800-319-4254

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