Junior in college looking for investing advice!
November 20, 2006 3:23 PM   Subscribe

Hi, I am a junior in college and from my past internship have some money laying around. Ive decided to finally get my head around the investing side of things, I need reccomendations on investing 500 - 1000 bucks.

Is it feasible enough for me to actually look around at online discount stock brokers with 500 bucks. (With fees and other stuff.. how much will i actually gain)

Another thing is if i should just invest in a IRA or just a money market account like the one offered by virtual bank.

Thanks in advance!!
posted by radsqd to Work & Money (12 answers total) 9 users marked this as a favorite
I too am in this situation, but with 2000 dollars as a freshman.
posted by phrontist at 3:26 PM on November 20, 2006

It really depends on what your purpose is in investing the money. Are you going to need it in the next few years, or do you want to put it away where it will be difficult to touch until retirement? Are you looking for the highest return possible regardless of risk, or do you want to minimize risk? Do you want it to be accessible in case of an emergency in the short-term, or do you already have an emergency fund and can afford to have this money out of reach?

If you don't already have an emergency fund, I'd put this money in an FDIC insured savings account like ING Direct or something similarly high yield so that you're earning interest, but can access it. You don't want to be in a position of having to go into debt if your car breaks down or you need to move in a hurry or you need to buy some new clothes for a spiffy new job. Always have a savings cushion.

Assuming you have that taken care of, a Roth IRA would be a good plan if you want to save for retirement. If you plan to need the money in the next few years, I'd still go with ING or the like, or possibly a CD, as you probably won't be able to earn enough extra in the stock market to justify the risk. My financial advisor told me that unless you have at least $10k, it's generally not worth it to invest money you're going to need within 5 years in anything risky, because you don't have time to earn the money back if the market takes a temporary dive.

So I'd either invest for retirement in a Roth IRA, or I'd buy a CD for the amount of time you can afford to have the money unavailable. If you need the money accessible, ING or another high interest rate savings account is the way to go.
posted by decathecting at 3:37 PM on November 20, 2006

First thing to know is that you should put the money in a Roth IRA. IRA has nothing to do with the sort of investment vehicle you're using; it's simply a way the government gives you to evade all future capital gains and income taxes on your money (up to a contribution limit, which is currently $4K per year.)

Now a money market account is a kind of investment vehicle. It pays interest. Obnoxiously, if the money market account is not held within an IRA, the income is taxable. If you get 5% on $1000, you've then had an income of $50 for the year and have to screw about calculating your $13 of taxes on it. It's not worth your time, and deprives you of the magic of compounding.

Unless you want to establish a monthly defined contribution, most places won't let you start with less than $2000. Also, if you're wanting to buy stocks, it's pretty annoying to pay even an $8 commission (Ameritrade) on a $500 trade. In order to buy and sell you'd be paying $16; that means the first 3% of your return goes to the company holding your account. In effect your money's working too hard for them and not hard enough for you.

If I were you I'd try to scrape up $2000 and open a Fidelity account. I have IRAs at Fidelity and it's great to manage them there.

If you search askme for the IRA, money, and investment tags you'll find lots more good info.
posted by ikkyu2 at 3:38 PM on November 20, 2006

If I'd had the wherewithal of you youngsters when I was in college [/old lady voice], I'd go for a Roth IRA (assuming that the money is earned income from a job and not a gift or leftover student loan money, which I believe would disqualify you from opening a Roth). You've got 40+ years for the interest to compound. A steady contribution every year from then on can add up, literally, to hundreds or thousands or even a million dollars or more. I'm in my late 30s and have only started to get serious about my retirement planning in the past couple of years, and I cannot possibly tell you how much I wish done that at your age.

On preview: I agree that you should first make sure you have a savings cushion for an emergency, and that you're getting a decent interest rate. Citibank is now offering 5% on e-savings accounts.
posted by scody at 3:42 PM on November 20, 2006

Dude, it's not worth your time opening a discount brokerage account with $500-$1000. That's going to buy you something like 30 shares of Microsoft, and won't provide much more in the name of financial education.

I would put $500 in an online savings account (I use HSBC, ING Direct and Emigrant Direct are also popular) and then spend the remaining $500 on Amazon.com...buy investing books so you don't have to ask these questions in the future.

$500 in books will provide you with more education than $500 of stock will.
posted by unexpected at 3:42 PM on November 20, 2006

ack! "A steady contribution [...] can add up, literally, to hundreds or thousands..." should, of course, read "hundreds of thousands."
posted by scody at 4:21 PM on November 20, 2006

Dude, it's not worth your time opening a discount brokerage account with $500-$1000. That's going to buy you something like 30 shares of Microsoft, and won't provide much more in the name of financial education.
posted by unexpected

I have to disagree with this wholeheartedly. I'm 22 and I just made my first investments (in a Roth IRA, which I set up initially with only $300 dollars through Bank of America because it was painless and I already had a bank account with them, though in retrospect wasn't necessarily the best option in the longrun). Reading a lot will surely help, but nothing teaches like doing, even $500 worth will start to get you in the habit, which with as much time as we have is incredibly important.

I myself have gone with index ETFs are mutual funds you can buy like stocks (which means trading costs, but no minimum amount to invest). Indexes are passively managed funds that tie themselves to something like the S&P 500, the total stock market, or innumberable other benchmarks. So if the stock market goes up an average of 10% for the next 40 years, you get (nearly) a 10% gain as well. Read up about indexing.

Part of the reason I disagree so wholeheartedly is the power of starting early. A famous attribution to Warren Buffet is that the only thing he wishes is that he started earlier. The power of compound interest cannot be overstated. What I use to remind myself is this simple and I think, very attainble attainable figure--

$500 invested now, with $500 added annually, with a 10% yearly gain, over 40 years = $266,055.53

Change that to the Roth IRA maximum of $4000 initially and $4000 more a year and that fourty year tally changes to $2,128,444.27. Hell, 500 just invested ONCE at 10% a year is 22 grand by the time you hit 60.

Of course none of those numbers matter unless you see them written down in your brokerage account in 40 years, but they serve to motivate me. Play around with this compound interest calculator to get the figures I was citing. Also this one gives you a nice, sexy animated graph based on your input (and it'll even peg when you would theoretically hit your first million, and each subsequent one!)

Can you tell I've been spending a lot of time lately thinking about the exact same thing you're asking about?
posted by haveanicesummer at 4:39 PM on November 20, 2006

I've got about $1,500 tucked away in an ING account. It rolls over pretty respectable interest rates, and you can get your cash out quickly if need be. f they're still running the program, I think if you sign up through me you get $25 and I get $10 or something along those lines. Let me know if you're interested (email should be in my profile).
posted by craven_morhead at 5:21 PM on November 20, 2006

If you want to go with an investment account of some sort (I'm a Roth IRA fan) try Sharebuilder. They have a $4 commission for automatic investments (they bundle all their clients' purchases together and buy at one time to save on commissions), and you can hold fractional shares of stock. Best of all, they'll give you a $50 bonus for opening an account, which means you get a 5-10% return right away, which ain't chicken feed.
posted by kindall at 8:08 PM on November 20, 2006

Response by poster: wow thanks a lot guys, awesome advice.

I might just stick with Roth IRA and CD's for now
Anybody have any experience with Virtual Bank


Thnks Again
posted by radsqd at 9:02 AM on November 21, 2006

Hi, there was a similar thread recently about this as well (even though I now see you may not be investing directly in stocks, oh well):

posted by ml98tu at 10:40 AM on November 21, 2006

VirtualBank's money market rates are about a half percent lower than the market leader GMAC Bank (5.3% currently). Which reminds me, I should open an account there, I have the bulk of my money at HSBC currently...

If you want some quick cash in the form of bonuses, you might try this affinity offering from Netbank. They give you $75 for opening a savings account, which on $500 is 15% and much more than you'll get anywhere else. There are account inactivity fees and also a fee to close the account, which is bigger if you have it open for less than 6 months, so what I did is kept $500 in the account for a month to earn the bonus, then moved all but a buck to my HSBC account. To avoid the inactivity fees I just transfer money back and forth from HSBC once a month (HSBC lets you schedule this to happen automatically). So I'll just leave the checking account open indefinitely.

I also grabbed the other two NetBank bonuses -- the money market account I'll close after 6 months, since I could be earning more with that money elsewhere. However, the CD's very competitive interest-rate wise, so I might even add to it when it's up for a renewal in a year...

Also, Bank of America will give you $100 for opening a checking account online. (You need direct deposit to avoid fees, but any ACH deposit from another bank or even PayPal counts... do this during the 2 months you have the account open, then close it.)

So, you can pretty easily make $175 just by opening accounts at BofA and NetBank. Then you can open an account at GMAC Bank and move most of your money there for their interest rate, close the BofA account, and occasionally transfer a buck to and from the NetBank account to avoid inactivity fees.

Hit FatWallet, there are probably other banks offering account opening bonuses. I got $75 in Amex Gift Cheques from WaMu last year, for instance.
posted by kindall at 11:36 AM on November 25, 2006

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