Expert: Paul Henneman - 8/27/2006

Question
I am a lunch lady earning 7,500$ a year.  Thanks to Habitat for Humanity I have a beautiful home at 0% interest.  I receive 500$ a month in child support.  In 9 years my youngest child will be 18.  10 months ago my grandfater died leaving me an inheritance of around 20,000$  I almost blew the whole thing on a gazebo and hot tub.  Yesterday i had a eureka moment and decided to put the money away for when I would need it down the road.  I think I'll put it in cd's.  Any ideas?  Any risk scares me to death.  I appreciate your help.

Answer
Thank you for your question! Yes, I am very pleased that you did not go with the gazebo and hot tub! Definitely not necessary, and the $20,000 can be used to so much better ends.
The short answer to your question is yes, if you are very worried about risk then CD's are an excellent investment medium. The best way to invest in CD's is through a staged approach. For example, invest one third this year in a two or three year CD, whatever gives you the best percentage return. Then next year invested the second third, and the third year invest the final third. Then each year, one third of your investment matures and is accessible, usually you would simply reinvest it again into another three year CD. However, if an unexpected expense comes up, you do have access to one third of your investments each year without penalty.
In 9 years your youngest will be 18, which could mean two things. First, I imagine that your child support will end, so you need to accomodate that into future budgets. Secondly, are there plans for this child to attend college? That brings up a whole new set of expenses, should you desire to help with this.
A longer answer to your question is to take a good long look at all of your finances and to develop a real plan going forward. Everyone can greatly benefit from this, no matter how much or littly you make. The idea is to live below your means, to spend less each month than you make. On a limited income this is more difficult, but it must be done. It is the only way to financial security. If you can contribute $50 or $100 a month to your investments, you will do so much better in the future.
This depends upon your other expenses, for example credit card debt, car payments, or other monthly expenses. Do your best to reduce the amount and number of monthly expenses as much as possible. Drive inexpensive cars and finance them for as short a time as possible, then keep the car as long as possible after it is paid off. If this is not feasible, then consider public transportation. Cars are expensive to purchase and maintain.
The main problem that so many have in this country is how matieralistic everyone is. Always name brands, the nicest cars, all the things that are really simply status symbols and have no bearing on the comfort or enjoyability of your life other than bragging rights. Avoid this, buy what you need, but things that meet the purpose and nothing more. Save, save, save! It take patience and discipline. Saving just a little bit a month means little in the short term, but after years or decades of doing so, it can add up to truly give you a solid retirment in an enjoyable setting. Keep the long term goal in mind.
Start with whatevery you can, even $20 a month. Adjust your monthly expenses  and lifestyle so that you can accomodate that amount without going into any debt or using credit cards. Then increase it to $40, adjust, find ways to save a bit of money here or there.
Finances should be a continuous hobby, requiring constant attention. This is the only way to slowly get ahead over the years.
I do recommend picking up a copy of "Investing for Dummies". It is available at most major bookstores, and on www.amazon.com  It has a section on CD's and most other types of investments, this will give you a full understanding of the basics, to ensure that you are making the right decision. Additional sources are provided should you wish to do more research in any particular area. The only other thing that may be appropriate for you is a money market account. If you do decide to do the staged approach I recommended in regards to CD's, you could keep the remaining portion that is not yet invested in CD's in a money market account while you ramp up the CD's during the three year period. This will earn you some interest as well, and is completely safe if you choose a bank that is FDIC insured. I recommend NetBank (www.NetBank.com), they have the highest yields on mutual funds that i have seen at just over 5% currently.

I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
ValuEngine.com