No-hassle mutual fund accounts right for teens

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Q: You wrote a recent column about a junior high school student who had $100 to invest. You recommended that he try mutual funds, but cautioned that many funds have higher minimum investment amounts (such as $1,000). You might as well have told him he needs $10,000, because either way the amount is way out of his and most people's reach. The way I'm doing it and the way that other really small investors can as well is in DRIPs (dividend reinvestment programs). If that kid really wants to invest, he can buy the stock directly from the company in increments as small as $20 with no loads. He can also buy online for $2.99 per trade at some Web sites. What do you think of that?

A: I've written in the past about DRIPs and direct stock purchase programs. In addition to the hassle of completing lots of paperwork, these programs do charge fees, and in my book are far from no-load.

I recommended to this teen-ager that he look into mutual funds that allow for automatic electronic monthly transfers from a bank account some for amounts as little as $50 per month without having to meet the fund's normally required initial investment minimum. In addition to being able to buy into many mutual funds without any transaction fees or loads, a fund investor also benefits from diversification, professional management and good account service.

Consider that even if this youngster bought through an Internet service charging $3 per transaction, that $3 fee amounts to 6 percent of the amount invested not unlike the levy on a load fund. Many of the direct stock purchase and DRIP plans you reference charge transaction fees higher than $3. In the long run, these transaction fees will end up costing an investor with a small amount to invest more than the ongoing management fees on efficiently managed mutual funds.

A direct stock purchase investor will not be able to build a diversified portfolio with so little to invest. He will have to track the companies he invests in and decide the right times to buy and sell certainly not something a teen-ager is capable of doing well!

Q: I am 35 years old and would like to start investing. I have had credit problems, and a judgment has been brought against me on my student loan ($16,000 outstanding, including principal and accrued interest.) I am currently up-to-date with my loan, making payments every month. I have a low-income job (under $20,000 per year), rent an apartment and would like to start setting money aside anyway, increasing it over time. If I wait until the loan is paid off and my credit is perfect, I'll be 47! What should I do?

A: In order to increase your ability to save money, you must reduce your spending and/or increase your income. In order to reduce your spending, you should begin by figuring where you currently spend your money. Get out your checkbook register, credit-card statement, recent income-tax returns and anything else that can help you with documenting your spending. For cash purposes, you can either estimate where that money goes or carry a notebook with you for a week or two to track it.

You should assess your total spending over at least a three- to six-month period. Once you've gathered this data, you need to decide where you're most willing and able to make spending reductions. (For ideas, please see my book "Personal Finance for Dummies, 3rd edition.")

As for making more income, you can either work more (which isn't palatable to most people already working hard) or gain additional education and training to launch yourself into higher-paying jobs. Also be sure to look around and see what others doing similar work are making at other employers. Especially in this tight economy, employers know that good help is hard to find.

Eric Tyson is the author of "Investing for Dummies" and "Personal Finance for Dummies."

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