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Reader Question: How To Pick An Index Fund With A Low Initial Investment

Written by Brett McKay

Recently, I received an email from a reader of The Frugal Law Student asking a common yet important question for young people just getting started in investing:

I just finished my Masters, and talked my parents into contributing to some sort of mutual fund or index fund, etc. instead of giving me a ridiculous piece of jewelry that I’d never wear (how I wish they’d help me pay down the debt instead! alas!) Do you have any suggestions as to how I should go about picking one that has a low minimum buy-in? I know the very basics but nothing about where to get started.

Great question! This is something that I have struggled with as well.

I think index funds are great, especially for people just getting started with investing. I’ve written about them before, so I won’t bore you here with the benefits of index funds.

What holds many young investors back from investing in index funds are the high initial investment required to start the investment. For example, Trent at The Simple Dollar, is a big believer in Vanguard Index funds, and with good reason. They have solid customer service and a great track record to boot. However, in order to buy most Vanguard funds, the minimum investment is $3,000!

After doing some research, it looks like most index funds require a large amount of up front investment. The range was between $2,5000 -$3,000. If you don’t have this kind of cash on hand, your best option is to save for it. This is what Trent does. He’ll set aside money each month into a savings account. As soon as he has the minimum initial investment, he’ll buy the fund. After you buy the fund, the minimum monthly investment is usually pretty reasonable.

If you don’t want wait to around until you have the money to invest, you can always try actively managed mutual funds. There are hundreds of mutual funds and many have initial investments as low as $250. The drawback on actively managed funds is expense costs are higher than index funds. Also, unlike index funds which generally keep up with the overall market, actively managed funds can tank and not come anywhere near the market average.

How to Screen Mutual Funds

Morningstar is a reliable independent investment research firm, so we’ll use them.

  • Open up Moringstar’s Fund Selector. You’ll now see an app with a bunch of different drop down menus. Since we’re focusing on low cost investments, we’ll filter the funds accordingly.
  • Under “Fund Type”, we’ll select balanced. Since this is a first time investor, we’ll keep things simple.
  • Moving on to Cost and Purchase, we’ll set the minimum initial investment for less than or equal to $500. We also need to choose whether to have a load or no load fund. A load fund means that there’s a sale charge when you buy shares in the fund, no load means there’s no charge. We’ll select no load to keep costs down. We’ll select the lowest expense ratio at .5%.
  • Finally, we’ll pick the risk. This is the famous Morningstar Rating you hear investors talk about. We’ll set it for 4 and 5 stars.
  • I didn’t mess with any of the return filters. I wanted to see the results for the 1 yr, 3yr, 5yr, and 10yr returns.
  • Hit show results.

Fascinating. Many of the suggested funds are held by American Funds, the company that I do investing with. They all look to be solid investments. You can click on each one to get a detailed description of the fund. Most just require $250 to start an investment.

Once you select the fund you want to invest in, you can go to that fund’s website and open up an account with them. American Funds is super easy to start an account with. Additionally, they have a great online account management service that makes buying, selling, or starting automatic investment plans easy.

What do you all think? Did I miss anything? Don’t agree with me? Have any better ideas? Drop a comment in the comment box and add to the conversation!

How the College Cost Reduction and Access Act Affects Law Students

Written by Brett McKay

This is a guest post from Philip G. Schrag, professor at Georgetown University Law Center

[Yesterday] morning, President Bush signed the College Cost Reduction and Access Act of 2007 (H.R. 2669), which includes two provisions that will make it much easier for law students who graduate with high educational debt to have long-term public service careers.  The bill includes a section creating an income-based repayment (IBR) plan that enables graduates to make much smaller monthly payments when their incomes are low: the IBR formula caps repayment at 15% of (AGI minus 150% of the federal poverty level).  Interest not paid because of the IBR limit is capitalized for later payment, but if any funds are still owing at the end of 25 years, that amount is forgiven by the federal government.

Even more important, if the borrower spends ten years in full-time public service while paying through IBR, the remaining debt is forgiven at the end of those 10 years rather than 25 years. The new law defines public service in terms of a long list of types of jobs, plus a catch-alls that include all government jobs and all employment by all 501(c)(3) tax-exempt organizations.  Loans that qualify for IBR payment and forgiveness include nearly all the loans that most law students use: Stafford loans and Grad PLUS loans, whether they are government-guaranteed or government-extended.  If the borrower has government-guaranteed (FFEL) loans, they must be consolidated into a federal direct consolidation loan before a repayment counts toward the ten years of IBR repayment before forgiveness occurs.  For federal direct loan recipients or those who have consolidated into federal direct consolidation loans, the ten years can start on Oct. 1, 2007, but the IBR formula doesn’t start until July 1, 2009.  Meanwhile, graduates may use income-contingent repayment (ICR), which also qualify for forgiveness.  ICR payments are higher than IBR payments but much lower than standard ten-year repayment requires.

I have written an article for the Hofstra Law Review explaining this new law in depth and criticizing two of its features.  It is posted at http://www.law.georgetown.edu/news/releases/documents/Forgiveness_000.pdf and also on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014622

Students and graduates may compute exactly how the law will affect them by consulting the calculators at http://www.finaid.org/calculators/ibr.phtml (IBR) and http://www.finaid.org/calculators/icr.phtml (ICR).

Philip G. Schrag

Georgetown University Law Center


Who Takes Care Of the Finances In Your Family?

Written by Brett McKay

Ideally, both people in a marriage should contribute equally to managing family finances. However, it usually one person in a relationship takes more responsibility of keeping track of family money.

During the times of Leave It To Beaver, tracking personal finances was a matter of traditional gender roles meaning men usually took care of the money. They would pay the bills and give their wife an allowance for groceries depending on the family’s need. I know some couples that still do this. The husband takes care of all the financial decisions and deposits money into their wife’s account for groceries and clothes for the kids.

Growing up, it seemed like my mom took care of most of the financial upkeep in our house. She’d pay the bills, budget for Christmas and school shopping, and go to the bank. It made sense. My dad was gone a lot with his job, so he probably didn’t have much of a clue when bills were due or even what bills we had. Of course when there was a big financial decision that involved a lot of money, my parents would consult with each other.

In my own family, I’ve taken on the job of keeping track of Kate and I’s finances. I go to the bank to deposit checks and keep tabs on our accounts. While I do a lot of the ministerial things, my wife and I constantly communicate about money. If I notice we’re overspending in an area, we’ll discuss what we can do to remedy it. If either of us wants to make a big purchase, we’ll discuss it with each other and make sure we can afford it. It seems to work for us. I enjoy planning and scheming on how to save and make more money. I also find going to the bank to be extremely satisfying. So taking on this job hasn’t been a burden at all for me. Kate’s happy with the arrangement as well. She’s not a big fan going to the bank and paying bills.

For those of you who are married, who takes care of the finances? The husband or the wife? Or have you figured out a way where both contribute equally? If you’re not married, who took more of the responsibility in keeping tabs on the family’s finances? Your mom or dad?

Han Solo Your Credit Cards

Written by Brett McKay


I’ve written about controlling impulse spending by practicing tantric shopping. Well, if that’s still not helping, here’s a fail safe way to control your impulse buying, especially with credit cards. I call it the Han Solo frozen carbonite method. If you’ll remember, in Star Wars: The Empire Strikes Back, Han Solo is frozen in carbonite and delivered to Jabba the Hutt. In Return of the Jedi, Luke saves him.

How To Han Solo Your Credit Cards

We’re going to do the same thing to your credit cards that Boba Fett did to Han Solo. Round up all your credit cards. If debit cards contribute to your impulse spending, get them, too. Throw them all in a plastic bag and fill the bag up with water. Now, put them in the freezer and walk away. Instead of carbonite, your credit cards will be frozen in a couple of inches of solid ice. When the urge to spend comes, you’ll have to wait a few hours while the ice containing your cards melts. This gives you some time to think over whether you really need make the purchase.

How Much Cash Do You Carry Around?

Written by Brett McKay

I like to use cash for most of my expenses. Unlike using a debit card where your money is converted into a bunch of 00110011’s, using cash is tangible. When I spend money with cash, I guess you could say I feel it more when money leaves my pocket. But how much cash should I carry around?

I read some guy wanted to be rich, so in order to get himself used to being rich, he started carrying around big wads of cash with him because that’s what rich people do, I guess. I don’t think that’s such a great idea for two reasons. One, you might be really tempted to spend that money and two, what if you lose it or get it stolen. I remember when I was in Mexico, I had a ton of money on me and got mugged. Thankfully, I was able to talk the guy out of finishing the job. The idea of losing all that money still freaks me out. (By the way, my mugger and I became friends after our initial meeting.)

My philosophy is to only carry around enough cash for what what I need during that day. For example, if I know I’m going to the grocery store, I’ll bring enough money to get the groceries. If I know I’m not going to spend any money that day, I simply won’t carry any cash with me. By using this philosophy, I reduce the temptation to spend money and I don’t have to worry about losing it.

What’s your philosophy on carrying cash?

Don’t forget to enter into my Chambermaid giveaway! Contest ends September 13!

3 Personal Finance Habits I’m Trying To Develop

Written by Brett McKay

I’ve been slacking when it comes to my personal finances. I’m not out spending money frivolously, but I feel I’ve stagnated when it comes to being on top of my finances. Here’s a few habits that I’m working on that should help me kick my financial life into the next gear.

  1. Review my accounts weekly.I can’t remember the last time I checked my accounts. I don’t even know what my balance is right now. Doing a weekly money review should take less than 30 minutes and the payoff from evaluating my spending is well worth the time investment. I’ll probably start doing this on Sunday when I do my weekly review for my planning.
  2. Keeping track of spending.I’ve done this off and on a couple of times, and the times I’ve done it I really felt it helped me control my spending. Keeping track of your spending will help you see where the “leaks” are in your financial life.
  3. Use the envelope system. My wife and were doing this during the summer and then we fell off the wagon. The envelope system is a simple budgeting system that uses envelopes. Figure out what you usually spend your money on. In our case it’s groceries and eating out. Label two envelopes “groceries” and “eating out.” We then withdraw cash and divide it among the two envelopes. When we run out of money, that’s it. No more spending. I’ll have to see if this is something my wife wants to do again. It is kind of a pain in the butt to go get the cash.

What personal finance habits are you trying to develop? Drop a line in the comment box.

Don’t forget to enter into my Chambermaid giveaway! Contest ends September 13!