Expert: Paul Henneman - 6/9/2004

Question
Hello,
I'm a student that wants to go to school abroad (India) and I'm wondering if I could live off a small savings I have. I'll have less then $10,000 saved by the time I leave.
India is amazingly inexpensive to live (as little as $25 a week) I was wondering if you had any good ideas for living off of this small amount. Maybe living off the savings or investment profits.

Thanks
William


Answer
William,
  Thank you for your question!
  I think it is great that you want to travel abroad. I also travelled while in school, during college. It was a unique time in my life that I will never forget. I spent most of my time in eastern Europe in the mid 1990's, not too long after the fall of the Soviet Union. It was an interesting time to be there.
  I'm not sure what to advise regarding your savings and how to best use this. I can provide some simple information for you to think about and make the best decision based upon your needs and wants.
  Investing your savings is risky. To get a meaningful return to cover you living expenses you do not necessarily need to take big risks, but you would need to invest in mutual funds or stable stocks. The problem with this is that while over the course of many years you are assurred of adding to your savings, shorter time periods are less secure. For example, while it is almost certain that you will do well over a 5 to 10 year period, the market can just as easily go down over the next year as it could go up. There is a chance you could lose 20% or even more if there is a pullback in the market during the next year or two. This would be terrible for what you are trying to do since you need the money.
  I think there are two possible ways for you to consider proceeding.
1.  Money market accounts are absolutely safe (as long as you work with a reputable bank). The interest you will earn will be very small, but it will be locked in. There is no risk of losing money. One of the best money market accounts I am aware of is with www.NetBank.com  They offer the highest return, about 2%. This would give you about $200 a year for your $10,000 investment. Not much, but if your $25 a week estimate is correct for living expenses then this adds 2 months of expenses. NetBank is FDIC insured by the government, if you go with another banks money market account, make sure that they have this FDIC insurance. It means they are reputable and even if the bank goes under (this is very rare), your money will be reimbursed by the government.
2.   Investment in mutual funds and some stocks. As I said before, this could lose in value or gain in value. But, if you are more of a slight risk taker, you could earn up to 20% or more on your investments. This would add $2,000 a year, and based on your living expense estimates, cover all of your living expenses. But again, if you go this way you need to have a plan in place in case your investments do not go your way.
  If you decide on the second course of action, the question becomes what stocks to invest in. There are fees to buy and sell mutual funds and stocks, and your investment is fairly small, and you will be out of the country, so you need to look for stocks and mutual funds that you think will perform well for the next full year or more. You don't want to have to buy and sell every month to adjust your investments as it will cost you in fees and take away from the enjoyment and adventure you are planning on. The million dollar question is what stocks or mutual funds to invest in.   Here you must research. As much as you can to make an educated decision. Start right away by opening a free account on finance.yahoo.com where you can enter a portfolio of stocks and mutual funds, and track what your ideas do in terms of performance. Consider it a 'dry run', practice!  Read all you can, here are some resources to look at:
www.morningstar.com  the best known source for mutual fund information
www.motleyfool.com for stock ideas and information
The book "Investing for Dummies", available at Amazon and most major book stores.
These should give you some ideas to investigate, be sure to approach everything you read with a critical mind.

Before you even start the above however, I recommend making an important decision: Do you want a perfectly safe invesmtent with very small returns that can simply add 2 months or so of living expenses, or do you to take some risk with the possibility of covering all expenses, but also have to plan in case the investments do not go well?
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.
www.ValuEngine.com