Listeners: Bonds, Savings and Young Investors

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Madeleine Brand shares money and finance questions from Day to Day listeners with personal finance contributor Michelle Singletary. Singletary also writes the syndicated column "The Color of Money" for The Washington Post.


Each Tuesday we bring you financial advice from Michelle Singletary. Michelle writes the syndicated column, The Color of Money, for the Washington Post. She's with us now to answer some of your money questions.

Hi, Michelle.

Ms. MICHELLE SINGLETARY (Personal Finance Columnist, The Washington Post): Hi.

BRAND: Well, first this question. If someone wants to invest in savings bonds, which would you suggest?

Ms. SINGLETARY: I like the I Bond. It's technically called the Series I Inflation-Index Savings Bond, or I Bond. And it's issued by the U.S. Treasury, and they're sold at face value, so you pay $100 for a $100 bond. But the earnings is a combination of a fixed interest rate, and the rate of inflation. So, this is a good bond if you want to keep pace with inflation, but you're concerned, if you say, look, I don't want to play in a market, or I just want something safe. And you can buy an I Bond from any banks or credit unions or savings institutions, or over the Internet at And here's the good news. Currently, I Bonds are paying 6.73 percent through April 2006.

BRAND: And that is a very good rate. Much better than the current interest rate, which may lead us to our next question. The listener writes, I live in Virginia and my grandchildren live in Texas. I am tired of sending them money which gets spent on useless toys. Are there still any old fashioned savings account passbook accounts, where I could make a deposit at my branch, and where they would not be able to withdraw the money?

Ms. SINGLETARY: I would recommend that this grandma or pa put the money in a 529 Plan. If you want to save for something, find a vehicle that has a tax advantage, which a 529 Plan does, and also will be geared toward something, and the kids or their parents can't touch the money until it's time for them to go to college. So, it's a 529 Plan, they can set it up in whatever state they live in, or not. You can use any state plan, and set it up for your grandchildren. And you may want to check, because you could get a state tax deduction depending on where you live. When you do that, the money you put in grows tax free, and when it comes out, it's tax free, which is a good benefit for the children. And that way, they won't spend it on all those useless toys.

BRAND: And finally, Michelle, we have this. I am 23 years old with a small understanding of investments. I would like to start investing as soon as possible. I want to invest for the long-term, but I would also like to have a separate account for short-term investments. What are my options, and how do I begin?

Ms. SINGLETARY: I love it when young people write to me, and they're ready to invest. I just get all giddy. And at 23, oh, my gosh, they have so much time on their hand. But I'd like them to start, if you're 23 or young, actually anybody, to start with building up your emergency fund first. You need to have at least three months, ideally six months, of living expenses. That's everything it costs you to run your household for a month, for three to six months.

At the same time, I'd love for this person to start saving for their retirement. And if their working, it's most likely they're gonna be eligible for a 401k Plan with their employer, and I hope there's a match, because if there is, then this person should definitely contribute to their 401k. That's the best way to begin investing.

Now, when I say short-term, investing isn't normally for short-term. You want to look past five years. But say they want to save for a house. They certainly could put some money in a mutual fund, index fund, anything like that. That's the best way for the average person, I think, to invest today, is to get a mutual fund. And most important, while you're saving and investing, keep your debts down. That will free up more money for you to invest for your future.

BRAND: Michelle Singletary is our regular guest on matters of personal finance, and she writes The Color of Money column for the Washington Post. Thanks, Michelle.

Ms. SINGLETARY: You're welcome.

BRAND: And if you have questions for Michelle, please send them in. Just go to our Web site, You can then click on the contact us link that's at the top of the page, and be sure to include Michelle in the subject line.

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