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Here's my situation. Not sure if this question has been asked, I think my situation is pretty unique. I am a 22 year old college student living in Tennessee, about to graduate soon with my Bachelor degree. Still live with my parents (dorms are too expensive!) until I graduate, then I will move to Florida to be completely on my own (the way things are going, I predict I will be single then as well), so I am sure I'm in the lowest tax bracket.

Anyway, I have a sum total of about $400 as of now. I currently have US Bank as my bank checking account, I only use my debit card (Visa) and cash on hand. I don't have any student loan or credit card debt or any other kind of debt whatsoever, fortunately. I will soon be getting a part-time job at Target that pays around $200 a week, so I should have at least a couple of thousands saved up in a month or two.

I am looking for a non-retirement investment (I will start retirement investments in a little over a year when I start my career and have more cash coming in). I am not into studying individual stocks and am not an expert. I just want to be putting my money somewhere reliable where I know it will grow and where I can take it out in the relatively short term (for a house, car, and just living comfortably in my 20s, 30s, etc).

I am just lost as to where to go or how to do it. The first thought that came to mind was to just set up a savings account with my bank (I guess a standard savings account). But that's my problem.. That's probably good but I don't know if that's the best thing for me to do. Would a CD with the the bank be better? Or should I even go to a different bank? Or mutual fund or treasury bond, T-bill, money-market mutual fund? Or is there something else that I'm totally unaware of? So, I am not an expert but I would hate for my cash to go down the drain because I chose the wrong thing to invest in.

Like I said, my goals are just to have a reliable, relatively safe (of course I don't want to lose any money) investment for the short term that makes me some good cash to have or save. If anyone has any suggestions, please let me know and anyone else in a scenario like mine.

  • If you are looking for long term growth, you also need to be willing to take on risk and reduced liquidity. Is that within your parameters? – karancan Aug 18 '15 at 23:37
  • It is not in my parameters just yet. I think it's better to save up a decent emergency fund (of about $2000) and short-term everyday spending fund (about $3000) before one starts thinking about the world of investing. Maybe when I have 7 or 8 thousand saved up, at that point I can say I wouldn't mind taking on some reduced liquidity if it of course pays off decent (to compensate for the loss of liquidity). I wouldn't mind taking on some risk then, but I don't want to start gambling or anything. – Chris Koro Aug 19 '15 at 2:34
  • You're a guy who likes passive investing, the way I see it. But there's no easy money anywhere, so if you want to put your money out there on the market, you really need to learn about it, at least the basics. Since you are in your early 20s, you don't need 99.99% safe investments, so ETFs might be the right choice for you. Government bonds, like T-bills are also very safe. Remember, too many people lose money while investing because they were too lazy to study about the stock market, but what they didn't realize is that the ROI of learning about it is very, very big. – Quant Aug 20 '15 at 20:31
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From what you say, a savings account sounds like the most appropriate option. (Of course you should keep your checking account too to use for day-to-day expenses, but put money that you want to sock away into the savings account.)

The only way to guarantee you won't lose money and also guarantee that you can take the money out whenever you want is to put your money in a checking or savings account. If you put it in a savings account you will at least earn some paltry amount of interest, whereas with a checking account you wont. The amount of interest you earn with only a few hundred (or even a few thousand) dollars will be miniscule, but you know that the nominal value of your money won't go down.

The real value of your money will go down, because the interest you're earning will be less than inflation. (That is, if you put $1000 in, you know there will be at least $1000 in there until you take some out. But because of inflation, that $1000 won't buy as much in the future as it does today, so the effective buying power of your money will go down.) However, there's no way to avoid this while keeping your money absolutely safe from loss and maintaining absolute freedom to take it out whenever you want.

To address a couple of the alternatives you mentioned:

  • A CD is as safe as a savings account, but you can't take the money out until a certain amount of time has passed.
  • A mutual fund carries risk and you may lose money.
  • Treasury securities (such as T-bills) can be a reasonable part of an investment portfolio in the long term. They are considered risk-free. However, with the small amount of money you're describing, it probably doesn't make sense to invest in treasuries. You can buy treasuries individually from TreasuryDirect but there is a minimum holding period of 45 days; also, you can only buy and sell them in multiples of $100. You could buy a mutual fund that invests exclusively in treasuries, but the fund would charge you a fee. Even if there were no such practical obstacles to investing in treasuries, with only a couple thousand dollars for a few years, the difference in gains between treasuries and just leaving the money in a savings account would be literally pennies. It makes more sense to use a savings account, because it's much more flexible: you can deposit and withdraw any amount you like, any time you like.

It's good that you're thinking about this now. However, you shouldn't worry unduly about "getting the most out of your money" at this stage. As you said, you have $400 and will soon be making $200/week. In other words, two weeks after your job starts, you'll have earned as much as your entire savings before you started the job. Even if all your cash "went down the drain", you'd make it up in two weeks.

Of course, you don't want to throw your money away for nothing. But when your savings are small relative to your income, it's not really worth it to agonize over investment choices to try to get the maximum possible return on your investment. Instead, you should do just what you seem to be doing: prioritize safety, both in terms of keeping your money in a safe account, and try to save rather than spending frivolously. In your current situation, you can double your savings in one month, by working at your part-time job. There's no investment anywhere there that can even come close to that. So don't worry about missing out on some secret opportunity. At this stage, you can earn far more by working than you can by investing, so you should try to build up your savings. When you have enough that you are comfortable with more risk, then you will be in a position to consider other kinds of investments (like stock market index funds), which are riskier but will earn you better returns in the long run.

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    On the other hand, investing some money -- even with some risk -- at this stage might still be a good idea. Not to earn anything substantial (as it is really impossible with those amounts, without winning a lottery or something of the sort), but because he can just get acquainted with various investment vehicles. At this stage, the risk seems neglible, even if he loses 100% of his investment, since he doesn't have much to lose, and know-how and familiarity is, at this stage, really more valuable than anything might/not be earned from the investments. – tomasz Aug 18 '15 at 14:13
  • +1 for a savings account. It's admirable that you want to start investing in your future, but at this point, you just don't have enough saved up in an emergency fund to cover your tomorrow. The possibility of having to take out a loan for a financial crisis will quickly defeat any financial gains with how little you have to invest. – rlb.usa Aug 19 '15 at 21:55
  • True and know-how is important I know. I take it that it's first priority to establish a decent emergency fund before I mess with investing (investment gains would be insignificant with this small sum of money). How much would you recommend to have in an emergency fund? I'm thinking $2k and 3k just for life's expenses. After that, I will most likely put some money in a short-term index fund (I hear they're good - less fees and better than actively managed mutual funds) with Vanguard and I'll have to think about the Roth IRA – Chris Koro Aug 20 '15 at 4:47
  • @ChrisK: The usual recommendation is to measure the emergency fund in terms of months of expenses. You want enough money in the emergency fund that you could live off of it for 3 to 6 months. – BrenBarn Aug 20 '15 at 4:58
  • Thank you and everyone. Looks like I (or someone in my situation) just needs to save for a little while (several thousands, maybe about 10k) before taking on any real investments except maybe to familiarize myself. I think it would be best to invest in a simple beginners' investment book for now. Then when I have more cash I'll think about some of the investments you guys suggested (index funds, Roth IRA, social lending, etc). And true, I am sort of a passive investor, I don't want to be a full-time professional or anything, but still want to do the best I can and make the most possible. – Chris Koro Aug 25 '15 at 6:43
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BrenBarn did a great job explaining your options so I won't rehash any of that.

I know you said that you don't want to save for retirement yet, but I'm going to risk answering that you should anyway.

Specifically, I think you should consider a Roth IRA.

When it comes to tax advantaged retirement accounts, once the contribution period for a tax year ends, there's no way to make up for it. For example in 2015 you may contribute up to $5,500 to your IRA. You can make those contributions up until tax day of the following year (April 15th, 2016). After that, you cannot contribute money towards 2015 again.

So each year that goes by, you're losing out on some potential to contribute.

As for why I think a Roth IRA specifically could work well for you:

  • You will be in a very low tax bracket. Roth contributions are money you have already paid taxes on (and then in retirement, you don't pay taxes on them again), so it's advantageous to contribute to a Roth account while you're currently paying very little in taxes.
  • An IRA is not tied to specific employment, so you can start one now, choose your provider, choose your investments.
  • You can withdraw your contributions at any time, penalty free. This isn't true of any earnings, just the amount you've put in yourself.

I'm advocating this because I think it's a good balance. You put away some money in a retirement account now, when it will have the most impact on your future retirement assets, taking advantage of a time you will never have again.

At a low cost custodian like Vanguard, you can open an IRA with as little as $1,000 to start and choose from excellent fund options that meet your risk requirements.

If you end up deciding that you really want that money for a car or a house or beer money, you can withdraw any of the contributions without fear of penalty or additional tax.

But if you decide you don't really need to take that money back out, you've contributed to your retirement for a tax year you likely wouldn't have otherwise, and wouldn't be able to make up for later when you have more than enough to max out an IRA each year.

I also want to stress that you should have a liquid emergency fund (in a savings or checking account) to deal with unexpected emergencies before funding something like this.

But after that, if you have no specific goal for your savings and you don't know for sure you'll actually need to spend it in the near future, funding a Roth IRA is worth considering in my opinion.

  • Very helpful. So it sounds like it wouldn't necessarily make much sense to put my money into a savings account (like at US Bank) as of now with such a small amount of money, the cash made from interest would be negligible (definitely wouldn't make any sense to do risky investments now). Just keep it in my checking account as savings / emergency fund. And then the Roth IRA is a good option, being in a low tax bracket (and of course 401k when my job offers one). Roth IRA kind of serves as a savings account as well, because you can withdraw anytime (of what you put in yourself) without a fee. – Chris Koro Aug 18 '15 at 5:36
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Both of the other posters have some really good points worth remembering about the stability/liquidity of a savings account and the often overlooked fact that you can withdraw any money you put in to a Roth IRA because it's already been taxed.

I'm 28 and found myself in a similar situation as you about a year or so ago. I wanted a relatively liquid place that I could store and grow some money. CD's and Savings accounts just weren't getting a high enough rate to make a return work for me, especially with only a little money to start. I would highly suggest checking out a social lending platform like Prosper.com or Lendingclub.com. I use Prosper.com and this platform will give you some really nice benefits:

  • You can start with as little as $25
  • You can add more money any time
  • You can choose your risk level
  • returns range from about 4% up to 20% depending on how much risk you want to take on.

Here's a good article that can explain more about it and get you started: http://www.financialsamurai.com/investing-in-peer-to-peer-lending-with-prosper-com/ just keep in mind that while there is some liquidity here (you can resell the notes you invest in) generally speaking expect to hold on to those notes for at least 3 years (your share of the paid principal gets paid out to you in addition to the interest each month.)

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