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So I'm a college junior taking on my first actual paying internship this summer. I'll be making between $3000-$5000 a month. I know NOTHING about investing money, or what I should do with money period. I want to try to put a good portion of my income (maybe half?) away in things that build interest so that the money accumulates over time. Ideally I'd like to have some money saved up for grad school at some point down the line.

Should I stick it in a savings account? Should I buy stocks? Where is the best place to put this money?

Also, where can I get more information about this stuff so I could start becoming more self-sufficient? I feel totally lost.

  • What are you goals? – MrChrister May 24 '11 at 20:31
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    Never pay for grad school. If you can't get someone to subsidize it, this is a sign of both the field and your own limitations. – jldugger May 24 '11 at 20:57
  • Well, I'm only planning on a terminal masters, which I know is pretty hard to get funding for. – Casey Patton May 25 '11 at 8:40
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    Casey: You may feel totally lost, but the fact you are thinking about this already, and seeking advice, is an awesome start. I wish more folks would take your approach when starting to make real money rather than waiting until they are a lot older and must play catch up. Good for you - a little thought and effort now could look pretty sweet in years to come. – gef05 May 25 '11 at 17:57
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Fool's 13 steps to invest is a good starting point. Specifically, IFF all your credit cards are paid, and you made sure you've got no outstanding liabilities (that also accrues interest), stock indexes might be a good place for 5-10 years timeframes.

For grad school, I'd probably look into cash ISA (or local equivalent thereof) -the rate of return is going to be lower, but having it in a separate account at least makes it mentally "out of sight - out of mind", so you can make sure the money's there WHEN you need it.

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    mpenrow: IFF stands for "if and only if" -reason for that, is IF you do have outstanding liabilities with interest rate, it's almost always a better idea paying those off – Silver Dragon May 24 '11 at 13:13
  • Yeah; paying off loans is one of the best investments ever. It's basically a guaranteed return, almost certainly a better return than you'd get on a Treasury bond, and unless you were deducting that interest from your taxes (e.g. a mortgage) it's essentially a tax-free return as well. Ka-ching! – fennec May 24 '11 at 15:18
  • Fortunately I have money to pay off my student loans, and I'm planning to do that ASAP. Thanks for the reference, that seems like it will be a helpful read! – Casey Patton May 26 '11 at 0:03
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On the one hand, it's a great idea to open a Roth IRA now, once you've got the cash to contribute. It's a tax designation sounds like it would fit your meager earnings this year. The main reason to open one now rather than later is that some types of withdrawls require the account be aged 5 years. But you can also withdraw the amount you've contributed tax free any time.

Student loans right now are pricey, so if you're carrying a balance at say 6.8 percent fixed you should pay that down ASAP. Beyond that, I'd keep the rest liquid for now. Having that kind of liquid cash is extremely reassuring, and many of the biggest returns on investment are going to be in your personal life. More fuel efficient vehicles, energy efficient appliances, computer backups, chest freezers and bulk meat purchases, etc.

One example I see every six months is car insurance: I can pay for six months in full or I can pay a smaller monthly bill plus a small fee. That fee is well above current market rates. You see this everywhere; people searching for lower minimum payments rather than lower total costs. Save your money up and be the smart buyer. It's too damn expensive to be broke.

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Fund your retirement accounts first. Even as an intern, it is still worthwhile to open a Roth IRA and start contributing to it.

See my answer to a similar question: Best way to start investing, for a young person just starting their career?

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If I may echo the Roth comment - The Roth is a tax designation, not an end investment, so you still need to research and decide what's appropriate. I recommend the Roth for the long term investments, but keep in mind, even if you feel you may need to tap the Roth sooner than later, all deposits may be withdrawn at any time with no tax or penalty. Roth is great to store the emergency money for many if they aren't 100% sure they have enough cash to save for retirement. As you get further along, and see that you don't need it, change how it's invested to longer term, a mix of stocks (I prefer ETFs that mimic the S&P)

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Your attitude is great, but be careful to temper your (awesome) ambition with a dose of reality. Saving is investing is great, the earlier the better, and seeing retirement at a young age with smooth lots of life's troubles; saving is smart and we all know it.

But as a college junior, be honest with yourself. Don't you want to screw around and play with some of that money? Your first time with real income, don't you want to blow it on a big TV, vacation, or computer?

Budget out those items with realistic costs. See the pros and cons of spending that money keeping in mind the opportunity cost. For example, when I was in college, getting a new laptop for $2000 (!) was easily more important to me than retirement. I don't regret that. I do regret buying my new truck too soon and borrowing money to do it. These are judgment calls.

Here is the classic recipe:

  1. Eliminate all debt other than student loans ( I assume no mortgage)
  2. Setup an auto deposit of $200 or so into an IRA. (Vanguard STAR fund if you need a place to start)
  3. Create a savings account for your goals: have direct deposit into that savings account for that vacation / computer / wardrobe / library late fees.
  4. Spend the rest of your check on normal stuff like rent and good times.

Adjust the numbers or businesses to your personal preferences. I threw out suggestions so you can research them and get an idea of what to compare.

And most importantly of all. DO NOT GET INTO CREDIT CARD DEBT. Use credit if you wish, but do not carry a balance.

  • Well, I'll definitely screw around with some of the money! But 10-12,000 for a summer is a pretty large chunk of change, and I figure there's enough to have fun as well as invest for the future. – Casey Patton May 26 '11 at 8:08
  • @Casey - great attitude, I just want to help you develop a sustainable habit of saving. If you can save 50% for the rest of your life you will greatly benefit, but if you get frustrated and stop saving that you will suffer. Congrats are your attitude and wisdom regarding your future. – MrChrister May 26 '11 at 17:34

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