Lemondrop

The girl: Erin
Age: 26
Job: Lemondrop community editor
Where she calls home: The Northeast

Her sitch: Erin has been saving money since she was 10 years old -- babysitting, jobs in college, and now as a working adult. She's amassed nearly $32,000, and now she's not sure what to do with it. "I'm ready to start investing, but I have so many questions!" she says. "How much should I invest long-term? What can I do with my short-term investments?"

Erin is entirely debt-free, and she has about $5,200 saved for retirement. She hopes to buy a house, do some major traveling, hit grad school and possibly get married over the next decade. But she's not sure she's doing everything she's supposed to be doing.

"I hear things like, 'Open a Roth and put $200 in it per month and you'll be a millionaire when you retire,'" she says. "Is that true? What the heck is a Roth, even?"

The expert's take: She's doing all the right things, says Boston financial planner Cheryl Costa. "She's to be congratulated on having this much money at the age of 26 and no debt," she says. "She's light years ahead of other people her age." She just needs to make a few adjustments.


Erin's Financial Makeover

Designate an emergency fund.
Erin already has an emergency fund hidden somewhere in her $32,000 of cash; she just needs to figure out how much to earmark. She should have emergency money equal to three to six months of her must-pay living expenses. (That's rent, utilities and basic groceries, not travel and movie tickets.) "If her job is secure, then three months is fine," Costa says. "Otherwise, aim for that longer range of six months."

Put it somewhere earning more money.
Right now Erin's keeping all of her cash in a bank account earning about 0.5 percent interest. Capital One has an account paying 1.35 percent, which more than doubles the interest she's getting now. That would be a better place for her emergency money. (For an up-to-date list of the latest interest-paying money market and savings accounts, visit Bankrate.) She might also look into SmartyPig, which offers 2.15 percent for its savings account -- but SmartyPig is a slightly different animal, requiring users to set goals and meet those goals before withdrawing money, so she should read up on how it works first.

Set a realistic goal timeline.
Erin has a lot of aspirations: house, travel, wedding, grad school, you name it. If she expects to do any of those things soon (in the next year or two), she can't afford to be too risky with her funds. (Translation: savings or money market accounts or short-term CDs.) But, Costa says, "If all of those potential expenses are closer to the five-year mark, she can invest that money somewhat more aggressively than straight cash." Her recommendation: Open a brokerage account at Vanguard and put those savings (minus the emergency fund) into the Vanguard STAR Fund, a mutual fund mix of stocks, bonds and short-term investments. "It puts her on autopilot with reasonable growth potential, but it's not too aggressive," Costa says.

Put 10 to 15 percent of her salary into retirement.
"She's fortunate enough to work for a company where there is an employer match," Costa says. "That's just free money she's collecting." In a perfect world, Erin would contribute enough to her 401(k) to get the match, then put an additional $5,000 (the max) into a Roth IRA. (Quick lesson: A Roth IRA is a retirement account that you fund using post-tax money, so when you withdraw money in retirement, everything -- including earnings -- is tax free. Most financial planners are big fans.) If the combination of those two strategies doesn't get her to 10–15 percent of her salary, she should bump up her 401(k) contributions until it does.

For example: If she makes $60,000 and her employer matches the first 3 percent of 401(k) contributions, she could contribute 3 percent to her 401(k) and $5,000 to a Roth, and the two together equal just over 11 percent of her salary overall.

But if she makes $80,000, a 3 percent 401(k) contribution plus a $5,000 Roth contribution only add up to about 9 percent of her salary. Bumping her 401(k) contribution to 4–9 percent would allow her hit the 10–15 percent overall goal.


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Kate Ashford is a freelance journalist who writes about personal finance and health (and other things). Without online shopping, she wouldn't own anything. Her work has appeared in Money, Health and Glamour. For more, check out Her Two Cents.