College student new to the world of investing...
February 5, 2011 8:59 PM   Subscribe

Should I go with the stock market? Or perhaps something less risky such as a CD? How much knowledge do I need to thrive in the stock market? Halp!

Me: 22-year old community college student transferring to UCSC in the fall quarter
Current job: Recently got hired as a valet. Attempting to work 15 hours a week without getting poor grades in physics and calculus
Goal: $20k+ for a kit car (I will ultimately be spending $30k+ for the finished product)

Alright, so I have looked at many options. Certificate of Deposit, stock markets, savings accounts, et cetera. Within those options, there are even more options. The amount of options I have are frankly overwhelming. A few years ago, I bought a book called "How to Invest $50-$5,000 9th Edition" by Nancy Dunnan. I skimmed through it years ago and I don't remember much of anything from it at this point in time. There is now a 10th Edition which came out after the huge economic crisis, so I'm not sure if the newer edition carries more relevant information than the previous edition.

In any case, I have $500+ in my bank account right now, and it just seems like a waste to just see it sitting there while being a victim of inflation. I would much rather have that money go towards something with a certain amount of gain (rather, as much gain as possible). The problem is, I'm not really sure where to start.
posted by RaDeuX to Work & Money (24 answers total) 5 users marked this as a favorite
$500? You cannot empty your savings/checking into a CD/mutual fund/index fund/stock because when the unexpected $200 expense comes up, you won't be able to pay for it.

At this point in time, my completely unprofessional advice is do nothing aside from maybe look for a high interest checking account somewhere. You need to have comfortable checking balance, plus emergency quick access fund (many people recommend 2-3 months worth, if not more) before you can even talk about investing.
posted by Brian Puccio at 9:07 PM on February 5, 2011 [1 favorite]

You should save up at least 3-4 months worth of living expenses before you even begin to think about investments.
posted by sanka at 9:07 PM on February 5, 2011 [1 favorite]

Do you have a roth IRA? I'd recommend opening one and putting as much as you can into it (up to $5k a year). Once you have the money in a roth, you could put it into a high risk vanguard 500 fund, which has high risk, but has higher return potentials.

You could also look into higher yield bank accounts (ing or ally for example).
posted by TheBones at 9:09 PM on February 5, 2011

Response by poster: @Brian Puccio: My parents pay for the vast majority of my expenses.

@sanka: I still live with the parental units, and will be financially dependent on them until a little while after I get my bachelor's degree in 2013.
posted by RaDeuX at 9:10 PM on February 5, 2011

Response by poster: @TheBones: My philosophy teacher was talking about the Roth IRA. I should look into that more since it seems like a very useful investment tool. And I'm not too keen on high risk investments, especially in this economy.
posted by RaDeuX at 9:12 PM on February 5, 2011

Your parents may not always pay off your expenses.
First, get a cushion put away, months worth of expenses. If you parents pay all yours, great, it should be even easier. The # of months you can sustain yourself off this should go up year over year.

Right now, you should not invest in anything resembling a stock market.
To truly be in the know to make money as a trader you need to spend a lot of time studying, learning, and trading. These are very uncertain economic times - I'd say stick with cash for the next few years, in the safest banks you can find.
posted by TravellingDen at 9:17 PM on February 5, 2011

Response by poster: @TravellingDen: They won't pay for an expense that they deem unnecessary. My phone bill and automobile upkeep are my two major expenses that I can think of. Yeah, I figured the stock market would be a horrible place to invest in right now. My friend told me I should and I was like "Ehhhhhh..."
posted by RaDeuX at 9:26 PM on February 5, 2011

A Roth IRA would be terrible for your goal, unless you don't want to buy the kit car until you reach retirement age (59.5 for this purpose). Early withdrawal from a Roth IRA generally means you have to pay income tax on the withdrawal and a 10% penalty.

Roth IRAs are a great way to save for retirement (hence the name: Individual Retirement Account). They are not a good general purpose investment vehicle.
posted by jedicus at 9:35 PM on February 5, 2011

Response by poster: @Jedicus: I was just reading stuff about the IRAs, and it seems like a bad idea for short-term investment. So my options are narrowed down to a CD or a high-yield account, it seems.
posted by RaDeuX at 9:48 PM on February 5, 2011

What about a mutual fund? You get diversification AND professional management. You can also buy and sell funds any business day, so your money is not tied up or inaccessible.

My husband and I started out with mutual funds in college. They're a great starter investment.
posted by Ostara at 9:49 PM on February 5, 2011

The first question to ask when thinking about saving is "how soon will you need it back?" Looking at 20k for a kit car, my guess is the time horizon is far too short to bother with. The stock market is up something like 20 percent year over year. It could just as easily be down 20 percent next year -- do you really want to risk it? High interest checking or maybe a short term CD, if you really don't need the money. If you must, a Roth IRA is a good thing to start early, since there are benefits after the account is 5 years old. They are flexible, in that you can pull out contributions any time. But all that interest and earnings has to stay in until retirement or a qualifying event after 5 years. None of those events are "buying a kit car".

And frankly, unless you've got budgeting down tight, 500 is a pretty much a bare minimum. You don't want to be dirt poor when you show up at UCSC. Landlords are going to ask for security deposits (one or two month's rent), and there's going to be unanticipated expenses. Financing that out of your savings at 0 percent interest is still better than negative percentages paid to credit card companies.

Also, on an unrelated note, have you figured out how you'll insure the car?
posted by pwnguin at 9:49 PM on February 5, 2011 [1 favorite]

Response by poster: @Ostara: I'll look into that option as well.

@pwnguin: Yeah, stock market == bad idea for now.

Well it's at $500+ right now. It'll grow in size as I work more hours, obviously. Apartment fees will be paid by my parents, so I'm perfectly fine in the expenses department.

I'm currently insured under Farmer's, and they will insure a kit car. I might move to NC after I graduate, so I'm not sure if Farmer's in NC is the same as the one in CA. Pretty sure they are though.
posted by RaDeuX at 10:02 PM on February 5, 2011


Anyway...When I started uni (4 years ago) I out all my savings (~CAD$800) into a mutual fund from ING. Primarily because they charged me no fees.

Acording to me, if $500 is all plan on investing, just put it towards a high yield CD with auto re-investing of interest and forget about it till 2013 atleast.

If you don't plan on withdrawing, go the mutual fund route and forget about it for atleast 5-10 years.

Don't mess with ETF's, stocks etc,
- you need to active management for good gain.
- brokerage fees can negate any capital gain.
- larger capital base is needed usually for adequate diversification

Do your parents have someone managing their investments? If so, ask them if you can add your savings to their pool. This will give you exposure to professional management and MAY get a higher ROI.
posted by glambo at 10:36 PM on February 5, 2011

Response by poster: @glambo: Right now I have $500+ saved up, but I'm going to add more money in as I get more paychecks. I will probably withdraw my money 3 years from now, so if mutual fund is still a good way to go, then I'll consider it.

My dad has a Merrill Lynch account and has an "economist" taking care of his money. When the Great Recession hit, he lost a couple hundred thousand dollars. To think that a portion of that could go to my kit car... Oh well.
posted by RaDeuX at 10:41 PM on February 5, 2011

Investing in the stock market does not make sense for short term investment goals, like your kit car. Mutual funds count as investing in the stock market. That said, it also doesn't make much sense to buy mutual funds even in the long term, since even experts can't reliably beat the stock market. Better to invest in low fee index funds.

You should invest your money in CDs or high interest savings accounts. A popular option is ING Direct (if you decide to open an account, send me a message and I'll send you a referral link for a free $25). At this point there is so little inflation that your money will earn only about 1% in a savings account, but it's still better than nothing.
posted by zxcv at 2:34 AM on February 6, 2011

I'm gonna put in a plug for the stock market. Something like an S&P index fund (as opposed to stock picking) isn't as bad a choice for your time horizon as some might think. It's absolutely not impossible that the market is down three years from now, but when I look at the historical trends, I like your odds, especially with the alternative right now consisting of earning not much more than 1% (and unlikely to rise much, in my opinion; I'd advise differently if the rate were back at 4%, or likely to be anytime soon).
posted by troywestfield at 4:39 AM on February 6, 2011

Yeah, there is no magic bullet when it comes to short-term savings. The magic of compound interest is really only noticeable after many years (decades) of investment. In the short-term, the biggest contributor toward the growth of your savings is simply adding more of your income to it on a regular basis. Your best bet for accruing enough money to reach your short-term goal is to do as you said: regularly contribute more to your savings as you earn more. Figure out what is a reasonable percentage to set aside from every paycheck, and do it. Automate it as a recurring transfer, if possible, so that it's harder to neglect. Any interest you can earn will obviously help, but it won't be all that significant over just 2-3 years given the current rates. If you're confident you won't need emergency access to the funds, then a CD may be the way to go. Some banks offer CDs that you can add to over time. Or you could start a CD ladder. Otherwise, an online savings account is probably better. I would not personally invest in anything related to the stock market (including mutual or index funds) for a short-term goal such as this. As someone not terribly older than you, my only stock market investments right now are my retirement funds (IRA and 403b), and I have 30+ years to go before I retire.
posted by Nothlit at 4:46 AM on February 6, 2011

At 22, you absolutely want to be in the stock markets in the long term. The annualized return on investment for US markets over the last 60 years or so has been about 11% (7% adjusted for inflation). That means your money is doubling about every 7 years. However, for your kit car, the stock market isn't a good plan, as you can experience some pretty huge swings from year to year. pwnguin made the comment "up 20% one year, down 20% the next". To give you a feel for what that volatility looks like, the S&P 500 (a weighted sum of the 500 largest companies whose stocks trade actively in the U.S.), the returns over the last four years have been: +5.46%, -37.22%, +27.11%, +14.32%.

I did pretty much what you are asking when I was 26 and got out of grad school -- I had just graduated, had a little bit of money, and instead of putting it into a reserve fund for emergencies, I put it all in the markets. I wouldn't recommend doing that if you are on your own financially. Since your parents are your financial safety net for things like car or health problems, then I would say go with an S&P index fund. Not because it is the optimal path to your kit car, but because assuming a good job when you graduate and some financial stability, you'll be investing there over the next couple of decades, so setting up a brokerage account and buying an index fund is a good first step.

If you really, really want the kit car and can't bear to lose any of that $500, then a money market account or a CD is the way to go. The problem you'll have with a CD is that there are usually minimum requirements in the thousands of dollars. These sorts of things vary bank by bank and state by state. For my particular bank in my particular state, the money market account requires a minimum of $100 and is yielding a little over 1% annually. CDs at my bank start at $2500 minimum. There are a number of other more exotic funds and indexes that let you dial your risk between a money market and something like an index fund or an individual stock and/or adjust for inflation, but many of them have minimum investments beyond what you've got right now, so I won't bother mentioning them here.

As you get closer to your goal and/or start earning more money, a pretty typical setup is to have three or four accounts:

- a checking account tied to your ATM card for everyday purchases;
- a money market account, possible linked to your checking account, that you set up for direct deposit of your paycheck; this account can be used to cover emergencies like unemployment, car problems, etc.
- a brokerage account for your long term investments;
- eventually a second brokerage account for your 401K (will initially be with your employer, but as you change jobs over the years, you'll want to roll them into one account).

A brokerage account like what your dad has is probably not appropriate for you; as you accumulate more money, there are more services available and more fees around those services. An account for someone who has $1M invested usually has a different set of fees and services than someone who has $10K invested. I would suggest starting out with a big box brokerage like Schwab or e*Trade that has a lot of self-serve options and access to a very large universe of funds and investment vehicles (as opposed to your bank's brokerage services).
posted by kovacs at 6:02 AM on February 6, 2011

I'm going to go against the current here and suggest that based on your situation, you are in a position where you can treat that $500 like play money where you can afford to take a risk, at odds that are certainly better than Vegas or the lottery. A lot of young people your age will drop $500 once or twice a year on something that will be worthless in 5 years (an iPad, a big TV, etc.). You can instead choose to drop some money on something that, yes, could be worth less in 5 years, but might also be worth a great deal more.

Of course, the first thing you need to do is educate yourself about investing. Retirement investing, stock investing, etc. Motley Fool is a good place to start. Plan to spend a few months just reading about investing and investment strategies. Then, open up an account with a low-fee online trading site like Sharebuilder or Zecco and start making investments in $500 blocks. If I were you, I'd set a goal of putting in 5 such chunks of $500 into some different stocks, and then switch back to a stabler savings vehicle as you prepare to graduate and wean yourself off parental dependency.

People who have the balls to invest in an unstable or down market are the ones who make the biggest returns. (And as part of your reading on investing, you will surely learn that markets recover before the general economy recovers, so you need to separate out vague media phrases like "these uncertain economic times" from what is actually going on in the market.

Said Warren Buffet in 2008, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. ... I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
posted by drlith at 6:19 AM on February 6, 2011

I've been very happy with the online bank, ING Direct. You need a checking account at a brick and mortar bank first, I think, but you should be able to get one without many fees because you are a student. ING Direct doesn't have limits on the amount required to open a CD, so you could open a new one every few months, staggering the dates that they mature. Then just make sure they are all mature when you are ready to buy your kit car. The ING Direct CDs aren't earning much these days because interest rates are low everywhere, but they are definitely competitive. Or you could just keep your money in an ING savings account for now.

Also, a good place to learn basic personal finance is Get Rich Slowly (a great blog by metafilter's JD Roth).
posted by semacd at 6:33 AM on February 6, 2011

I didn't see it mentioned here so I just thought I should point out that most mutual funds have minimum initial investment amounts that are higher than $500. I think Vanguard's lowest is the STAR fund which is $1000 minimum, for example.
posted by ghharr at 7:32 AM on February 6, 2011

If I've learned nothing else about the stock market, it's that investing requires a great deal of your attention. If you have a lot of other things that require your attention, put your money in the bank, or hire someone who will pay attention for you.
posted by Obscure Reference at 7:44 AM on February 6, 2011

My advice would be to split the difference. Save everything you can save, and put half into a fully liquid account like interest bearing checking or something. Put the other half into the stock market, using the advice from above. I would also split that half, and put one half into a conservative investment, like an S&P 500 fund or something, and put the other half into something more risky.

Important: skim profits relatively often. If the stock half of your savings is up 20% at the end of the year, let 5 or 10% continue to ride, and skim the rest into your savings account. The goal is always to profit more than you lose. If you have 30 years, letting it all ride makes sense. In your case, with a short time horizon, you want to make sure you hedge losses. If you are lucky enough, you might be able to fund the car completely with profits, and the principal will remain to generate more profits. Or use it to start a retirement account.

Say in three years you have $10k in the savings, and $20k in the stock. If the market farts the week before you graduate, the stock can go down to $5k and the whole experiment will be a loss. Having skimmed profits, you might instead be at $15k savings, $10k stocks. The same market fart leaves you with $15k and $2.5k.
posted by gjc at 8:50 AM on February 6, 2011

drlith: "So if you wait for the robins, spring will be over."

The challenge is, what should the proper price:earnings ratio be for stocks? Right now, the S&P is trading at an an estimated P:E of 24 (The historical average is closer to 15). This translates to a return of 4.16 percent (the historical average is 6.66 percent). In comparison, the ten year treasury is paying 3.68 percent. Is the one percent bump worth the massive volatility kovacs illustrated? It seems clear to me that you've missed the spring. Either there's more losses to come, or there's been a fundamental change in the natural rate of equity returns.

For comparison, my credit card charges 12 percent interest. Unsubsidized student loans (ie your parents are wealthy) have a fixed 6.8 percent interest.
posted by pwnguin at 9:14 AM on February 6, 2011

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