I'm 18 and have 6 grand. What should I do with it?

Question

I'm 18 and about to go to college. Luckily, I don't have to worry about student loans or most other living expenses. I've been working and have over $6,000 (will probably be about $7,000 by the end of summer) in my bank account.

I don't want to just keep all this in my bank account. I'm afraid once I get to college, I'll know I'll have all this money and start spending it all away.
I'd like to put most of it away somewhere. I might end up going to grad school, but I'm not sure yet. If I do, it'd be nice to have some money saved for it, so I thought about putting it in a 529 plan. But I might not end up going to grad school so I also thought about investing it or putting it in a Roth?

I'm definitely not going to be super into the stock market, so I don't want to have to worry about losing all of it by being risky. I could also just put it in a savings account.

What should I do?

Answer 1

A Roth IRA is a great idea. You can only put in as much as you earn (as in, get in paychecks) each year, but that shouldn't be too much of a problem for you right now. You're paying nothing in taxes, or nearly nothing, so you'll have a great opportunity to get some squirreled away in a safe place! And since it's a Roth, you can always withdraw the principal (not the earnings) penalty-free once you go to grad school.

Then you can invest it in the stock market in an index fund (like "VOO" or "SPY", something that's basically "all major stocks in the US" at once); those tend to appreciate over time very well and while they do go down during crashes, they won't totally disappear barring some catastrophic event that's never happened in the US's history, and tend to come back up pretty quickly.

Congratulations on being ahead of the retirement and savings game!

Answer 2

Unlike others, I do NOT recommend putting your $6k into a retirement fund this early. It's a bad idea.¹ If you're overflowing with money after college and don't know what to do with this $6,000 then, you can do the same thing then² (edit: see below³)—this extra 4-5 years of interest or capital gains really isn't going make or break you, but the penalty and your lack of easy access to the funds very well might, given that you likely won't exactly be busy getting rich while in college.

Normally I would have encouraged you to open a high-interest checking or savings account—there are ones that give 3%+ interest on limited amounts that are greater than $6k, just Google around.

However, if you're looking to discourage bad spending habits, you can also consider a high-interest certificate of deposit (CD). They also run into the 3% range I think, but they let you pull the money out with reduced interest, and you'll get full access to the money after a few years, after which you can then start saving for retirement.

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Some "footnotes":

1. Perhaps the most important thing to remember that a CD is a guaranteed interest rate. IRAs and other investments are NOT guaranteed. People here like to pretend you're guaranteed to get back 7%/year, but that's only the average over the long term, not a guarantee and especially not over the short term. If you need to pull out your money after college to pay for that new car so you can go to your job, a bad economy could easily mean that you earn less money than with a CD (or worse). Maybe this is an opinion, but to me this is too much risk—it makes far more sense to get start investing in retirement when you earn a stable income and lacking that $6k isn't likely to break you 40 years before you reach retirement.

2. To make up for what you'd have "lost" by not saving earlier, once you start making real money, you should "pay yourself interest" by investing back the extra amount you would have gained if you had invested in the meantime. For a 7% yearly return after 5 years, that means putting in an extra 40% of that $6,000 (so around ~$8,400) on top of your regular yearly contribution the year after you graduate. Earning interest in the meantime will make this even easier.

3. As someone kindly pointed out in the comments, there is a yearly contribution limit for a Roth IRA, so if you hit that limit, it may not be so easy to play "catch-up" and pay yourself back interest. However, this doesn't mean you'll lose out on compound interest... you can still invest it yourself normally; it doesn't have to be in a special retirement account.
   So ultimately it really boils down to how much self-control you have. But if you're really hitting your contribution limit, that means you have enough self-control to not be spending that money, so there isn't much to be gained there either, unless you somehow expect your self-control to drop as you get older. On the other hand, you're far more likely to actually need access to this money in the meantime (e.g. a car for your first job, pre-payment on rent, etc.), so that's a reason to have guaranteed access to the full amount (+interest) when you finish college.

Answer 3

First, it's great that you're considering these options at all, and that you're trying to be responsible and forward-thinking about planning for your future.

I'm also going to break with the consensus and point out 2 things:

1. $6,000 is better than $0 or being in debt, but it's really not a lot of money. Depending where you live it's "2-4 months' living expenses." If you decide to move across the country to SF or Seattle after graduation & rent a 1bdrm apt, you will wipe this out. If this seems like a lot to you, and you're worried about blowing it on stupid stuff, it could help you to learn how to budget & have it around but not spend it.

2. Yes, you could potentially benefit ~50yrs from now by starting to save/invest at such a young age, but you will do better if you ensure you avoid debt in the near term. Just as compound interest can giveth greater retirement savings, compound interest from credit card debt & other loans will taketh away your financial flexibility for the decades between now & then.

A Roth IRA is a good idea to start sooner rather than later, but first ...

Maximizing interest rates for retirement in 2065 is not your greatest immediate concern. You'd do well to plan for 5yrs out (you can do 10, 20 & 50yrs too if you want, but start closer): How will you cover rent & basic necessities once you're out of the dorms? A shorter-term CD or T-Bill could be part of this.

Learning to live within your means & keep your credit intact when you have little/no income is a skill that will serve you well, but it might not always be possible to avoid debt. That $6K cushion is a good thing to have, but if your alternative is putting $1000 debt on a credit card w/a 30% annual interest rate, you're likely better off dipping into savings to cover it. This means keeping at least part of it liquid & accessible.

If you're worried about self control, and the mere idea of having a little bit of money inspires you to blow it on frivolous things, then you'd do well to learn how to have money and how to budget. You need to keep some in the bank to learn how to ensure you keep enough in the bank every month to cover your expenses.

Even if you're not worrying about living expenses right away (by living at home, in a dorm w/a meal plan, etc), you will still need to plan & budget for those things in the next few years. Start building those habits now. Make a budget & pay your own bills. Learn how to avoid debt before you have to. (Btw, should you need a student loan, DO NOT take private student loans!!).

My suggestion:

• Keep ~$500-1000 in a (free, ideally) checking/debit account for your weekly/monthly expenses. Automatically deposit future paychecks into that account. Try to keep its balance steady, never negative, and below ~$2000 to prevent a large loss in the event of debit card theft/scams.

• Put the remaining ~$5K in an interest-bearing savings account (with the same bank for convenience, or with whoever's offering the highest interest rate). Forget it's there. This is now your emergency fund.

  • When you have income going into the checking account & you've accounted for "fixed" (mandatory) expenses, put whatever's left you can afford to here & keep building it up.
  • Down the road, once you have more/steady income, you can "pay yourself first" into a Roth IRA or savings, and then pay bills, etc, but initially focus on covering expenses first.
  • Sure, you could do a CD or T-Bill, but the interest rates still suck (< 2%) and you lose access to the money should you need it in an emergency (medical, homelessness, natural disaster, etc). You'll get ~1.5% from a decent savings account anyway. If interest rates ever get back to 4-6%, sure, go for a CD.

• OPTIONAL: Once you've built a budget & know your expenses and income, if you're fine w/advertisers knowing what you buy, get ONE credit card that actually pays you back something (cash, Amazon points, etc). Use it to pay for groceries, gas, phone, utilities where possible, and other purchases, but ONLY to the point where you can pay it ALL off that month. DO NOT carry a balance.

  • The goal is to get cash back or points for buying the stuff you would've bought anyway w/a debit card or cash. Use it just like a debit card, and NEVER max it out.
  • Set up autopay to pay off the full balance every month from your checking/debit account. If you're meticulous about making your payments in full & on time, it will help you build your credit score. (Some people say it's better to carry some balance, but I haven't found this to be true. Just don't ever miss a payment).
  • Amazon's Visa card is good, as it has no fee and you earn significant points you can use for almost anything they sell. Saves us $100s every year.
  • Again, DO NOT buy stuff you can't afford or pay off immediately. Of course, if you're philosophically opposed to targeted marketing & companies tracking your purchase habits, skip this & pay cash.

Once you've gotten used to NOT spending your money, it's easier to not spend it. If you get a raise, put the difference into savings. Get a better new job, put the difference into savings & keep your expenses the same. Take the time to build good habits & learn what your real expenses are & how to handle them w/o feeling compelled to impulse buy. That way you'll be ready after college when the real world shows up. ... Honestly, at that point I'd spend it on traveling and enjoying life before spending decades behind a desk hoping to one day travel & enjoy life ... There's a lot to be said for that approach too.

Answer 4

You're asking, where do I put this money? Generally, you want to maximize tax laws to the greatest extent possible. To that end a Roth IRA might make a lot of sense for you because it lets you put money in to an account that lets you keep the earnings derived from that money without paying income tax on them.

Your option of a savings account is logical (though I think Bob Baerker's CD ladder suggestion is even better). You'll put this $6,000 in to a savings account, say earning 1.5%. At the end of the year you'll have made $90 in interest. You'll owe income taxes on that $90. But, thanks to the standard deduction, it's not likely you'll have income that would be subject to income taxes anyway. So, practically speaking, there's no difference between a regular taxable account or a Roth IRA (or other tax preferred vehicle).

Since this money is likely to be tapped while you're still in school, I'm not sure how much tax benefit you'll actually realize with a Roth IRA wrapper. However, your earnings will be locked in the Roth IRA until you attain retirement age. For simplicity, let's say you put $5,500 in to a Roth IRA. Over 5 years at 1.5% APR you'll earn roughly $425 in interest. After that 5 years you can take your $5,500 back free and clear BUT the $425 of interest would be subject to a penalty of $42.50 and income taxes up to the extent that you have a taxable income at all. The penalty can be avoided a couple of different ways like first time home purchase or if the account is less than 5 years old, qualified education expenses. If this was outside the Roth IRA wrapper there would be no such penalty and depending on what sort of income you'll be generating while you're in school there might not have even been a tax benefit to the Roth IRA wrapper anyway.

This answer got away from me, but you really just need to think about whether or not you'll be working while you're in school because tax preferred investment vehicles are only beneficial up to the extent that you're paying income taxes at all and generally put restrictions on the money which are subject to a penalty you otherwise wouldn't have exposure to.

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It might make sense to broadly explain some relevant concepts that you may not have ever really encountered based on your age.

Income taxes: In a very basic sense you get something called a standard deduction (which for illustration purposes let's just call this $10,000 though the amount changes annually). Say you make $15,000 in 2018, you get to apply this standard deduction of -$10,000 to your income leaving you with $5,000 in taxable income.

Earnings: Generally, any money you earn in a year is taxable, including interest or dividends from investments. There's two ways to make money from an investment, interest/dividend payments or capital appreciation.

Interest/Dividends: If you have a savings account or own stock that pays a dividend, you'll receive a periodic payment, that payment is income.

Capital Appreciation: If you buy something for $100, and sell it for $120, you have a $20 capital gain. If you sell after you've owned the asset for a year, that's a long term capital gain, which receives favorable taxation; under 12 months is a short term capital gain which is considered income.

Capital Losses: If you buy something for $100 and sell it for $80, you have a capital loss of $20, which can be deducted against any gains you have.

Answer 5

Beginning to invest at an early age is a good idea but investing has risk.

Since you don't want the risk of investing, since you think you might fritter the money away during college, and since you might need the money during college and possibly grad school, my advice is that you consider putting the bulk of it in laddered 1 year certificate of deposits/term deposits (CDs).

Figure out how much you want as an emergency fund then divide the balance into several CDs. For example, if you are comfortable with $1,000 available as an emergency fund with access to half of your money every 6 months, put $3,000 in a one year CD now and $3,000 in another one in 6 months. As each CD matures, if you don't need the money, open a new one year CD.

If you want access to 1/3 of your money every 4 months, open three one year CDs with $2,000 (one now, one 4 months from now and one 8 months from now). Again, as each CD matures, if you don't need the money, open a new one year CD.

Answer 6

If you want a place to put your money that is secure with a decent interest rate, but have good availability, consider buying T-Bills from the US federal government.

If you set up an account at Treasury Direct, and buy a T-Bill with 4 weeks maturity, you'll make earn an interest rate comparable to a bank certificate of deposit.

Because it has a short maturity, if you need the money you can get it pretty quickly, less than a month. It has an interest rate above inflation, and is a secure investment.

Answer 7

My advice would be to seek professional advice.

• Take maybe $150 and hire a financial adviser for an hour or two to sit down and go through your options personally with you. Ask them to help you make a plan for some big purchases you might be wanting in the future (e.g. mortgage/car) as well as have enough for short term beer/partying/etc.

• Banks often have advisers you can talk to for free, they'll offer you their products of course but you can go to several for very little cost.

I would not suggest making any investment with the fruits of years of your life on the opinions of some people you've never met on the internet, no matter how reputable they may be on this site.

Answer 8

That's awesome that you have that much money already saved! Since your monthly expenses are already taken care of then you essentially have $6000 to do something with.

I suggest keeping $1000 in a checking account in the bank. It's always nice to have a certain amount of money in an account that you can access it any time of day without a penalty of withdrawing it. You never know if you need to fix something on your car, need a bus/plane ticket, or everyday expenses.

With the remaining $5000 I feel like you could wait until you're making a larger regular income before setting up a retirement account/plan. Also, since you want to shy away from the stock market then your options are a savings or money market account and a CD (certificate of deposit). I would put X amount of money into a savings account and Y amount into a CD. See if your bank has these things or shop around to find a bank that offers the highest interest rate on those accounts.

A savings account is nice because your money earns interest, but you can only withdraw up to 6 times a month from it if need be. A CD earns more interest, but you're not supposed to touch it until it matures (6 months, 1 year, 5 years, etc.). Nerd Wallet is a good site to compare accounts: https://www.nerdwallet.com/banking/best-savings-accounts

Answer 9

If you're going to college, you are going to have expenses which you will need money for. It's altogether a good idea to put it away where you won't be able to spend it, but if you have legitimate costs coming up, you will need to be able to access your money.

... Usually, index funds outperform professionally managed investments, once you take into account management fees.

... in an index fund ... you'll lose some money, maybe a lot of it, if the stock market as a whole goes down. But it's still a lot less risky than other investments that have decent returns.

... the OP said she's off to college--so she will be able to withdraw it all anyway [from a Roth IRA] (to pay for college).

... she'll be living on her own within a few years at least, when she'll be needing everything from furniture to a car (?) and only a starting salary to pay for it.

... get established in life first, then worry about the future (just don't wait too long).

... Americans complain how Americans don't save for retirement, then other Americans encourage "blowing it all" right away--like it's some sort of crime to say "no" to a salesman or not spend your tax refund check right away. You can't have it both ways.

Answer 10

Cryptocurrency, I've already seen there was one answer downvoted to hell with this suggestion, but trust me, this is that kind of stackexchange community. People here mostly understand fiat, debt based economics. Concept of deflationary currency is uncomprehensible here. Put it some research into it and no more than 20% or however much you feel comfortable. It is definitely worth the time looking into, its the future man ;]

Answer 11

Buy a few gold and silver eagles and put them in a safe. Seriously. Precious metals have been the method of choice for saving for thousands of years.

Precious metals hold up well against inflation and are free of counter-party risk (bank defaults, etc). So whatever happens with the banks or the economy, your coins will keep their value.

Furthermore, precious metals are currently undervalued, so they might do better than just keeping up with inflation in the next years.

If you go this route, make sure to buy investment-grade coins (bullion) and not collectible coins, as collectible coins have an often unjustified markup.

Edit December 2020: Gold is up 48% over the last 3 years, whereas the S&P is only up 38%. Many experts are currently warning folks that stocks are in a bubble, while gold is still relatively cheap. Take care!