Personal Finance Q & A

Mutual Funds Are Not for the Short Term

Fees on a bank-managed trust can be cut by moving some assets elsewhere

Q I'd like to buy a bigger house next spring. Should I save the money in mutual funds? And what percentage should I save for this and my three-year-old son's college?

- H.C.

A For short-term periods of five years or less, use money-market accounts, not mutual funds that can decline in value, says Suze Orman, a certified financial planner in Emeryville, Calif., and author of "You've Earned It, Don't Lose It," (Newmarket Press, $22.) Shop for the highest yields.

"Assigning percentages [for savings] is difficult because we don't know your income level and the cost of housing in your community," she says. But "your first priority is to buy the house." The house will provide you a source of equity that you can tap down the road if you need to, such as to help finance college. "But once you are in the new house, start saving for your child's education," Ms. Orman says. She suggests you save under your name for purposes of control.

Q My wife and I have set up a living trust where we need separate accounts to avoid probate. The bank's fee is $400 a year to manage each account, plus 0.8 percent of the [asset] value. The latter fees could be avoided if the bank didn't buy or sell anything. Is there a better way?

- A.T., Rockford, Ill.

A The trust accounts sound fine, but you could cut fees by removing assets that may not require the bank's active management, "such as US government bonds, municipal bonds, certificates of deposit, or money-market accounts," says Ellie Clinton, author of "The Smart Woman's Guide to Spending, Saving and Managing Money," (Harper Paperbacks, $5.99). You might shift those into "in a living trust with a broker, or preferably, a discount broker."

Shop for low commissions, since bonds, for example, might need to be replaced some day. Meantime, fees would drop because the total investments managed by the bank, like stocks, would be lower.

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