Investment habits for a college student?

August 2, 2009 6:13 PM

What are the best investment habits for a college student with decent income to get into, in order to maximize yield in 3 years?

I am going into my sophomore year of college.

I recently opened an Orange Savings account with ING Direct and set up an automatic transfer of $30/week into it. It was what I felt safe with at the time. However, while I am glad that it's putting the money somewhere that I don't regularly see it or contemplate withdrawing it, I'd like to know if there are other better options. If my math is correct, the savings account, in the course of three years, will gain around $100 from interest, and I feel like there are better ways to invest my money out there that I just don't know about.

I don't know much about the stock market, but I do have a Scottrade account. I used it to invest quite a bit of money a couple years ago into a penny stock which dropped significantly; but I still have faith in it, and I have no need to withdraw, so I am leaving it to see what happens (rather than taking a significant loss by pulling out). However, this didn't completely scare me away; I just want to be sure, next time, that I do something MUCH less risky and something more universally accepted as a good investment practice, not 'gambling', and that I know when to stop or when to pull out before I lose too much again.

I've heard terms such as mutual fund, index fund, S&P 500, money market... I don't know what any of these are, and I've also heard that some things require minimum deposits. The largest minimum deposit I would be able to make would probably be around $2000, and I'd really like to know that my money will be safe if I do that.

Also, bonds and CDs... Are there any that last only 3 years? I'm not particularly sure what they are either.

So, as you can see, I probably need to take a course on investment, maybe in the spring semester, but for now I feel like I have too much money just sitting in my savings account doing nothing, not even collect a significant amount of interest. My last interest payment was $0.06. What tips can you give me?

And as I've said, I'm hoping for something that I can take out in 3 years, around the time that I graduate, though I'll also take long-term investment tips. And something automatic (on a regular schedule) would be nice! I like the idea of my accounts transferring and saving my money for me, because I know I would neglect to keep it up. Anything in my checking and savings account is fair game for spending, and being a computer science student, I am always drooling over the latest technology.

Thank you!

posted by Ricket to work & money (12 comments total)

When you're talking about a term as short as three years, the stock market (which includes mutual funds) is much too volatile a place to invest your money. You're just as likely to be up 10% as down 10%, no matter what stock or fund you pick. For that time period, you want something with a guaranteed return. A high-interest savings account like your ING one is a very good choice. A CD is probably one of the only alternatives, but you may find that they don't offer you a better rate than your ING account, and you may pay a penalty if you need to take that money out before the CD expires. If you decide to look into CDs, a CD ladder may help maximize your return while minimizing the length of time you would have to wait to get access to your money.
posted by autojack at 6:25 PM on August 2 [1 favorite has favorites]

You should be maxing out your Roth IRA as soon as you can get a job (that's $5000/y). If you do this and invest it reasonably in low-fee funds, you will be lightyears ahead of anyone else.

Short-term investment tip: make a budget. Figure out how much you want to spend (incl after graduation) and just padlock the rest.
posted by gensubuser at 6:30 PM on August 2

In order to get a better return, you need to take more risk. If you're going to need the money very soon (and three years is very soon), more risk is a bad idea, because you could very easily lose a significant portion of the money in that timeframe. Interest rates are very low right now, so find a money market account or CD returning above 2%, park your money in it, set up automatic deposits, and cross your fingers that inflation stays low until you graduate. If you're counting on this money, you don't want a get rich quick scheme, you want a guarantee that the money will still be there when you need it, and there's no high-return scenario that can promise you that.

I'd also recommend picking up some beginner books on investing and the stock market so that when you are ready to invest for the long term, you know how to do so wisely. That means understanding what you're investing in and diversifying your holdings. No more throwing money at single stocks!
posted by decathecting at 7:48 PM on August 2

Maximizing return with a 3-year investment horizon means minimizing your loss. Invest safely: CDs or similar, and going further on the "minimize your loss" theme, make sure you have enough money in the account to avoid any monthly fees.

Regarding the penny stock, whether you sell or not, you have already lost money as it is down.

It is probably better to take the money out of that stock and put it in the same safe investment you put your other money in.
posted by zippy at 9:42 PM on August 2

I disagree with Zippy on his last comment.

If you have already written off the money in the penny stock as a lose (mentally) and don't have any desires to use the money else where or to invest in a different financial vechicle I would leave it there.

Let it sit until you feel there is 1) not a significant chance of it turning around or 2) you want to sell it and take the write off on your taxes or 3) have a different investment you feel strongly about.
posted by crewshell at 10:42 PM on August 2

To get to the bigger personal finance issue, I audio-booked "a random walk down wallstreet," and it seemed to contain good information. OTOH after chastising everyone for participating in bubbles he was big on owning your home in the 2007 edition, which got kinda lulzy. That one pretty much got everyone, and he's old, so I give him a free pass there. The front third of the book is why not to buy penny stocks on a gut feeling, the second third is REALLY why not to do that, and the back third is decent personal finance advice, including some advanced topics.
posted by a robot made out of meat at 4:22 AM on August 3

Take a look at Ramit Sethi's book, I Will Teach You to be Rich. That will give you some basic investment tips and get you started.
posted by chiefthe at 5:01 AM on August 3

Technically, you are supposed to put your money in a six month emergency fund first. But being young, I understand the opportunity cost of losing out on doing something fun. If you want to take your money out in three years, you'll have to invest in fairly liquid, safe assets like CDs or savings accounts. However, since interest rates are so low, you probably won't make much money in three years. It's probably more important to keep making money and stay frugal. Keeping your savings in a separate account is a good psychological barrier to spending it.
posted by qmechanic at 5:03 AM on August 3

Thank you for all the advice! I'll try to acknowledge most of the above answers here.

I agree that a guaranteed return is a good thing. Thank you for the CD ladder link, I will probably do this when I have chunks of money to invest in CDs, later on in life. It's certainly a great idea.

gensubuser: I have a 401k, that's similar to a Roth IRA if I understand correctly. I am currently taking advantage of the full employer-matched amount, plus a bit extra. 9%, if I remember correctly. After college when I'm at a full-time job I'll adjust it higher, but for now I want those few extra % in spend money rather than locked away until I need a mortgage or I retire.
A budget doesn't help me much, because chances are good I won't keep track of it or stick with it. That's why I'm trying to just figure out my own allowance, basically. I want the automatic transfer to take extra money away from me that I would otherwise needlessly spend because of my lack of budget; then later I can sit down and be smart about the saved-up money.

decathecting: "No more throwing money at single stocks!" I know! I've learned my lesson the hard way. :( Good thing is, I have a whole university research library at my disposal. I'm sure there's probably a whole floor dedicated to finance, as it's a big business school, and I'm sure to have access to lots of knowledge when I'm ready to sit down and learn about it.

zippy: I agree with crewshell, it was a good chunk of money but I have plenty right now to live on (thus the reason I'm trying to put the rest somewhere!) so I am just treating it as if it doesn't exist. I'm going to do as crewshell said and basically ride it out, either to the bottom or the top. The thing is (and I'm intentionally leaving out the specific stock and the amount of money), though it is a penny stock, it has real potential, and whether this potential will turn into actual profit can't be known for another year or two. So I'm holding out and crossing my fingers that it will recover (and then some).

chiefthe: yea... but then I'm just helping him get rich! :-P - I wouldn't be surprised if the book said, "Write a book about how to get rich. It's a popular topic these days!"

qmechanic: do my parents count as an emergency fund? :)
posted by Ricket at 12:08 PM on August 3

I have a 401k, that's similar to a Roth IRA

They're very different. The money that goes in a 401k you don't pay taxes on today, but if you take it out before retirement age you pay taxes + 10% penalty. Money in a Roth is after-tax, so you can withdraw your contributions for any reason at any time without penalty. The earnings (the interest or capital gains) on those contributions have to stay in, though, or there is a similar penalty.
posted by a robot made out of meat at 4:59 AM on August 4

Oh, wow, that sounds very advantageous. What is the downside compared to the 401k then? I guess the fact that my employer wouldn't match any amount I put into a Roth (or I don't think so anyway)... But other than that?
posted by Ricket at 3:12 PM on August 4

A 401k contribution decreases your tax liability right now, and a Roth doesn't. If you are in a high tax bracket now relative to retirement, that can be a substantial advantage. 401k contribution limits are also quite a bit higher, so you can put more total money away with that mechanism. Because a 401k severely penalizes early withdrawals, it can put a little more backbone into not touching it until retirement.
posted by a robot made out of meat at 4:06 PM on August 4