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Q. Our college-age daughter has received a substantial insurance settlement. She is using part of it to pay off debts and part to put aside enough money to finish her degree. She would like to place the considerable amount remaining into something relatively risk free because the stock market scares her. We are thinking about CDs and savings bonds. What do you think?
A. It sounds as though your daughter is on track to create a sensible plan. Her next step should be to write down her financial goals and decide how much money she wants to allocate to each of them.
Goals are valuable because they help create a defense against frittering away a nest egg. You don't say how much your daughter received in her settlement, but even really large sums are easily spent, as many lottery winners can attest. Designating money for a specific purpose makes it seem less available.
Here are four goals for your daughter to consider:
1. A retirement fund that she won't touch until she is retirement age. The money can be in a taxable account to start, then funneled into an individual retirement account at the rate of $3,000 a year once she is working. An IRA offers benefits of tax deferral, or even tax avoidance in the case of a Roth IRA.
2. A down payment on a future home.
3. An emergency fund equal to about three months' living expenses.
4. A short-term savings account for extra costs that are not emergencies, such as vacations, car maintenance or even her next car.
Another potential goal might be a fund to cover startup costs for her career, such as a work wardrobe, relocation expenses, training for special certifications or living costs during an unpaid internship.
Her investments should be tailored to each of her goals. A short-term savings account calls for very liquid investments, such as a money-market account or a high-yield checking account. For medium-term goals, such as the emergency fund, housing down payment or career costs, EE U.S. savings bonds would be a good choice, as would short-term bank certificates of deposit.
Saving for retirement offers the most flexibility because that's a long-term goal. Series I U.S. savings bonds, which have a return tied to the rate of inflation, are a good option for long-term money in a taxable account. An individual retirement account can be opened at a bank, mutual fund company or brokerage firm. Since your daughter is risk averse, she might want to stick with a CD ladder, constructed by buying bank certificates of deposit with varying maturities. A diversified stock mutual fund also would be appropriate for her portfolio if your daughter becomes willing to take some additional risk.
Q. I own 12 shares of Prudential Financial stock as a result of having owned a Prudential insurance policy. Recently I received information about a program through which I would either sell my 12 shares or buy 88 more shares so I would own 100. I don't know much about the market. Is it better for me to buy or sell or just keep my 12 shares?
A. If you don't know much about the market, sell the shares and put the money in a mutual fund. Buying individual stocks is a good idea only if you are prepared to spend time researching and following them and if you are committed to putting together a diversified portfolio. Concentrating money in just a few stocks is an invitation to disaster.
Stock analysts who follow Prudential Financial have mixed opinions about the company's prospects. Their ratings range from "outperform" and "buy" to "neutral" and "underweight."
Prudential is considering the sale of its property and casualty business. That is not necessarily bad since the unit's performance has been disappointing. It does mean the company is going through some big changes that bear watching.
Online Money Map
The National Association of Mortgage Brokers (www.namb.org) is promoting two additions to its Web site: "consumer focus" and "market focus." Beyond home buying, the consumer site touches on issues such as phony prepaid phone cards and redemption of frequent flyer miles. The market site focuses on interest rates and the economy.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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