Is an Income Mutual Fund a good alternative to a savings account?
"The value will certainly fluctuate up and down (but on average gain more than a savings account), but so long as you have enough liquid assets for emergencies, then yes, it's a perfectly good alternative to savings accounts. how risky, in general, are Index Income Funds. How are you defining ""risk""? If you mean ""probability that I'll lose it all"" then it's virtually zero.  If you mean ""how much the value can fluctuate"" then it's certainly not risk-free, but it has less volatility that individual stocks.  If you take the S&P 500 as a proxy, you might expect the change in value over any given year to fluctuate between -30% (like 2008) and +40%, with an average change of around 8%. There will be funds that have less volatility, but produce less return, and funds that have more volatility but higher average returns." Risk. Volatility. Liquidity. Etc.  All exist on a spectrum, these are all comparative measures.  To the general question, is a mutual fund a good alternative to a savings account? No, but that doesn't mean it is a bad idea for your to allocate some of your assets in to one right now. Mutual funds, even low volatility stock/bond blended mutual funds with low fees still experience some volatility which is infinitely more volatility than a savings account.  The point of a savings account is knowing for certain that your money will be there.  Certainty lets you plan. Very simplistically, you want to set yourself up with a checking account, a savings account, then investments.  This is really about near term planning.  You need to buy lunch today, you need to pay your electricity bill today etc, that's checking account activity.  You want to sock away money for a vacation, you have an unexpected car repair, these are savings account activities.  This is your foundation.  How much of a foundation you need will scale with your income and spending.   Beyond your basic financial foundation you invest.  What you invest in will depend on your willingness to pay attention and learn, and your general risk tolerance. Sure, in this day and age, it is easy to get money back out of an investment account, but you don't want to get in the habit of taping investments for every little thing. Checking: No volatility, completely liquid, no risk Savings: No volatility, very liquid, no principal risk  Investments: (Pick your poison) The point is you carefully arrange your near term foundation so you can push up the risk and volatility in your investment endeavors.  Your savings account might be spread between a vanilla savings account and some CDs or a money market fund, but never stock (including ETF/Mutual Funds and blended Stock/Bond funds). Should you move your savings account to this mutual fund, no.  Should you maybe look at your finances and allocate some of your assets to this mutual fund, sure.  Just look at where you stand once a year and adjust your checking and savings to your existing spending.  Savings accounts aren't sexy and the yields are awful at the moment but that doesn't mean you go chasing yield.  The idea is you want to insulate your investing from your day to day life so you can make unemotional deliberate investment decisions.
I like the way you framed this question.  There is no single right answer for what to do with your savings, but there are some choices that are wrong in the sense that they are dominated by other choices you could make.  Of the choices you listed, there are two that fall into that category.  The ones that seem like a bad idea to me are: Putting it into your Roth 401(k).  You can't do this directly anyhow, but you could do it indirectly by increasing your contributions and using the growth fund to cover the hole in your budget, but that's a lot of work for a relatively small gain.  You would essentially be exchanging one long-term investment for another long-term investment.  You would pay capital gains taxes on the investment when you sell it today, in order to not pay taxes on its earnings when you eventually withdraw it.  There is some benefit there, but it's a long way off, not that large, and probably not worth the effort.  Things that might change your mind:  If your 401(k) was a traditional 401(k) (paying tax at capital gains rate today to get a deduction at your normal income rate is likely to be a win).  You're not contributing enough to get the full company match (always try to get that match if you can). Putting it into your emergency fund.  Once again, you are likely to pay capital gains tax if you do this, and you will be putting it into an investment that is likely to get a lower return than your current one.  It isn't really necessary to incur these costs, since if you encounter an emergency that you can't cover with your existing emergency fund, you could always liquidate the growth fund then, when you know you need it.  Now, a growth fund is going to be more volatile than what you would normally want for an emergency fund, but the risk isn't that bad, if you think about it.  Say your emergency comes up and you find that the growth fund is down 20% (which would be a pretty horrible run).  That's $600 less that you have to deal with the situation.  Keep in mind that you already have $2000 (and building) in your current emergency fund.  Is that $600 going to make the difference between meeting the need and not?  It's not likely.  Better to leave the investment where it is and keep building your emergency fund week by week.  Things that might change your mind: Your level of risk aversion (if having that money in a more risky investment is keeping you up at night, move it).  You face significant job uncertainty (if you have reason to think your job is at risk, it might be a good idea to top off that emergency fund sooner rather than later.) Your other two choices both seem like solid options under the right circumstances.  If it were me, I'd leave the investment in place rather than use it to pay off the student loan.  The investment is likely (though of course not guaranteed) to earn more than the interest rate even on the highest-rate loan, especially when you consider that the interest on the student loan is probably tax deductible.  Moreover, the size of the investment isn't enough to fully repay the loan, so putting it toward the loan won't even improve your cash flow for some time to come.  However, there is always a chance that the investment will perform poorly and some people prefer the guaranteed return from paying off the loan.  It depends on your personal risk tolerance.  The one thing I would recommend is to think of putting the money toward the loan not as a debt repayment, but as a fixed-income investment with a yield equal to your loan's interest rate.  If you would still consider buying it then, then go ahead.  If not, then stick with what you've got.  In my experience people get way too emotional about debt; try to take that emotion out of your decision making if you can. "(Congrats on earning/saving $3K and not wanting to blow it all on immediate gratification!) I currently have it invested in sector mutual funds but with the rise and fall of the stock market, is this really the best way to prepare long-term? Long-term?  Yes! However... four years is not long term.  It is, in fact, borderline short term.  (When I was your age, that was incomprehensible too, but trust me: it's true.) The problem is that there's an inverse relationship between reward and risk: the higher the possible reward, the greater the risk that you'll lose a big chunk of it. I invest that middle-term money in a mix of junk high yield bond funds and ""high"" yield savings accounts at an online bank.  My preferences are HYG purchased at Fidelity (EDIT: because it's commission-free and I buy a few hundred dollars worth every month), and Ally Bank." Depends on how urgent your need for the emergency savings might be. If the money market account allows you to get your money in the same amount of time as the savings account then there is no real downside, but if the account takes a few days for you to access and you need your money sooner then you probably shouldn't. Also money market accounts DO give more interest than most savings accounts, but the interest rates are generally still pretty low, so it might be an improvement, but probably not a huge one When you are saving for money you need in 5 years or less the only real option is a savings account. I know the return is nothing at this point, but if you cannot take the risk of losing all of your money that's the only thing I would recommend.  Now you could try a good growth stock mutual fund if, when you look up in 2 - 3 years and you have lost money you wait it out until it grows enough to get what you lost back then buy your house. I would not do the second option because I wouldn't want to be stuck renting while waiting for the account to recover, and actually thinking about it that way you have more risk. 3 years from now if you have lost money and don't yet have enough saved you will have to continue paying rent, and no mutual fund will out preform that. First of all I recommend reading this short e-book that is aimed at young investors. The book is written for American investors but they same rules apply with different terms (e.g. the equivalent tax-free savings wrappers are called ISAs in the UK). If you don't anticipate needing the money any time soon then your best bet is likely a stocks and share ISA in an aggressive portfolio of assets. You are probably better off with an even more aggressive asset allocation than the one in the book, e.g. 0-15% bond funds 85-100% equity funds. In the long term, this will generate the most income. For an up-to-date table of brokers I recommend Monevator. If you are planning to use the money as a deposit on a mortgage then your best bet might be a Help to Buy ISA, you'll have to shop around for the best deals. If you would rather have something more liquid that you can draw into to cover expenses while at school, you can either go for a more conservative ISA (100% bond funds or even a cash ISA) or try to find a savings account with a comparable interest rate. "An alternative to a savings account is a money market account.  Not a bank ""Money Market"" account which pays effectively the same silly rate as a savings account, but an actual Money Market investment account.  You can even write checks against some Money Market investment accounts. I have several accounts worth about 13,000 each.  Originally, my ""emergency fund"" was in a CD ladder.  I started experimenting with two different Money market investment accounts recently.  Here's my latest results: August returns on various accounts worth about $13k:  - Discover Bank CD:  $13.22  - Discover Bank CD:  $13.27  - Discover Bank CD:  $13.20  - Discover Savings:  $13.18  - Credit Union ""Money Market"" Savings account:  $1.80  - Fidelity Money Market Account (SPAXX):  $7.35  - Vanguard Money market Account (VMFXX):  $10.86 The actual account values are approximate.  The Fidelity Money Market Account holds the least value, and the Credit Union account by far the most. The result of the experiment is that as the CDs mature, I'll be moving out of Discover Bank into the Vanguard Money Market account. You can put your money into more traditional equities mutual fund.  The danger with them is the stock market may drop big the day before you want to make your withdrawl... and then you don't have the down payment for your house anymore.  But a well chosen mutual fund will yield better. There are 3 ways a mutual fund increase in value: Here's how three of my mutual funds did in the past month...  adjusted as if the accounts had started off to be worth about $13,000: Those must vary wildly month-to-month. By the way, if you look up the ticker symbols, VASGX is a Vanguard ""Fund of Funds"" -- it invests not 100% in the stock market, but 80% in the stock market and 20% in bonds.  VSMGX is a 60/40 split.  Interesting that VASGX grew less than VSMGX...but that assumes my spreadsheet is correct.  Most of my mutual funds pay dividends and capital gains once or twice a year.  I don't think any pay in August." Over a period of time most mutual funds do not perform better that an index fund.  Picking and buying individual stock can be a great learning experience. i think emergency fund should be in a more liquid account (like regular saving or money market) so you can withdraw money any time, while your regular saving can be tied up in a long term CD, bond or an investment account. Unless you plan to sell your home and live in a box during your retirement I wouldn't consider it an investment that is a viable replacement for a retirement account. Consider this: Even if housing prices DO go way up, you still need a place to live. When you sell that house and try to buy another one to live in, you will find that the other houses went up in price too, negating your gain. The only way this might work is if you buy a much bigger house than you will need later and trade down to pull out some equity, or consider a reverse-mortgage for retirement income. CDs or money market funds. Zero-risk for the CD and ultra-low risk for the money market account; better return than most savings accounts. "There are mutual funds oriented toward kids or that are suitable in some way (e.g. they have low minimums). Here are two articles with mention of some of them: Of those only USAA First Start Growth is explicitly for kids: http://quote.morningstar.com/fund/f.aspx?t=UFSGX or https://www.usaa.com/inet/pages/mutual_funds_reports Another fund aimed at kids is Monetta Young Investor http://quote.morningstar.com/fund/f.aspx?t=MYIFX or http://www.younginvestorfund.com/ The diversified funds (with fixed income) like USAA First Start Growth, Vanguard STAR, Pax World Balanced, etc. have the nice property that they won't be as volatile and may spend less time ""underwater,"" so that might better convey the value of investing (vs. an all-stock fund where it could be kind of depressing for years on end, if you get bad luck). Though, I feel the same principle applies for adults. Kids may appreciate intangible aspects of the funds, e.g. Pax World Balanced invests in sustainable companies, Ariel Appreciation also has some social parameters and I think the guy running it does charity work with kids, that type of thing. There should be quarterly and annual reports on mutual funds (or stocks) that would give kids something to read and think about related to the investment. Disclaimer: none of these funds are recommendations, I have not researched them in any detail, just giving you some leads." No, SPDR ETFs are not a good fit for a novice investor with a low level of financial literacy.  In fact, there is no investment that is safe for an absolute beginner, not even a savings account.  (An absolute beginner could easily overdraw his savings account, leading to fees and collections.) I would say that an investment becomes a good fit for an investor as soon as said investor understands how the investment works.  A savings account at a bank or credit union is fairly easy to understand and is therefore a suitable place to hold money after a few hours to a day of research.  (Even after 0 hours of research, however, a savings account is still better than a sock drawer.) Money market accounts (through a bank), certificates of deposit (through a bank), and money market mutual funds (through a mutual fund provider) are probably the next easiest thing to understand.  This could take a few hours to a few weeks of research depending on the learner. Equities, corporate bonds, and government bonds are another step up in complexity, and could take weeks or months of schooling to understand well enough to try.  Equity or bond mutual funds -- or the ETF versions of those, which is what you asked about -- are another level after that. Also important to understand along the way are the financial institutions and market infrastructure that exist to provide these products:  banks, credit unions, public corporations, brokerages, stock exchanges, bond exchanges, mutual fund providers, ETF providers, etc. "I'll start by saying accounts that require a certain number of transactions are a horrible place to put any savings and, in fact, I'd stay away all together. However, you've asked a lot of questions here and are clearly more in-tune with this topic than most.  If I was young again and just starting to try to pile some money together, I would absolutely chase the highest interest rates by taking advantage of accounts like this.  If you have the discipline to hit the transaction counts and maintain the minimum balance AND leave your savings funds alone, do it. If for a single second you think you'll go out one Friday night and blow your emergency fund, put it somewhere else.   I used to keep really elaborate spreadsheets of my spending and savings with goals set and progress charts, etc.  I see the argument that the transaction count is not worth the gain in interest, but you've said you're not dealing with big numbers and 5% of $5,000 is about $255 after a year.  It's not a lot but it's 5x more than a ""normal"" no transaction hoops high-yield savings account; you get five years of interest each year.  So, yes, this is an amount of money you could probably generate by frequenting starbucks less, but presumably you're already doing that.  Obviously you would keep this to an upper account balance of $5,000 and put the rest in a vanilla high-yield savings; then when administering the transactions becomes too much work close the account." Well for a start funds don't pay interest.  If you pick an income-paying fund (as opposed to one that automatically reinvests any income for you) you will receive periodic income based on the dividends paid by the underlying stocks, but it won't be the steady predictable interest payment you might get from a savings account or fixed-rate security. This income is not guaranteed and will vary based on the performance of the companies making up the fund. It's also quite likely that the income by itself won't cover the interest on your mortgage.  The gains from stock market investment come from a mixture of dividends and capital growth (i.e. the increase in the price of the shares).  So you may have to sell units now and again or cover part of the interest payments from other income. You're basically betting that the after-tax returns from the fund will be greater than the mortgage interest rate you're paying.   3 facts: If you're comfortable with these 3 facts, go for it. If they're going to keep you awake at night, you might not want to take the risk. There are quite a few options. Suggest you put a mix of things and begin investing into Mutual Funds.