mutual funds or high yield savings account

I would use some of the money to fund your ROTH to the legal max. If you ever really need the contributions you can get them out with no tax (earnings have to stay in). So top the ROTH out for 2006, and in January, put the limit in for 2007, and do that every year. Now, as to what to invest in, no one, including the vast majority of fund managers, is able to do better than the market as a whole over the long term, but *you* _can_ do as well as the market, beating those same managers, by simply buying the whole market. Just invest in an SP500 or Wilshire 5000 fund and wait

First, I'd note that with a gross income of $32K, you are in the 15% bracket after you standard deduction/exemption. Based on that, I'd suggest you keep the 401k deposit to capture whatever match your employer offers, but not more than that. As a saver, you are likely to retire in a higher income bracket, and the best savings account for retirement would be the Roth IRA.

After reserving about 6 months' worth of living expenses in Money Market funds or CDs, I'd suggest starting to invest in index mutual funds. I lean toward the S&P index funds, as a large portion of account, and then an overseas fund, and small cap, to not be too large cap weighted.

JOE

For what purpose are you investing? E.g. a new car, a downpayment on a house, a wedding (hopefully an economical one), retirement, something else?

Do you have any debt (credit card, car loan, student loan, other)? If so, what are the terms (timeframe and interest rate)?

Do you have health insurance?

How much of your 401(k) contribution is matched by your employer?

Meanwhile, please consider exploring the free online "asset allocation" tools linked at