Okay Kenyon, so I trust you’ve all gone out and followed my advice from last week (if you haven’t that’s okay too, our government officials are good role models). This week your financial advisor is back with tips on how to make your money work for you (again if you do not wish to save or make more money, follow this link).
Certificate of Deposit
Commonly known as a CD, these are essentially loans to your bank. You loan the bank a certain amount of money for that bank to make loans with or invest until the CD matures, when the bank has to pay you back the principle plus an interest payment. The advantage to a CD is that your money is safe and you make some interest. The disadvantage is that your money is locked up for certain amount of time, and you can’t touch it without paying a substantial early withdrawal penalty, however, you are compensated for this by a slightly higher interest rate than a savings account. Unfortunately, like the savings account, the interest rates on CDs are very low right now. Typically, I might recommend taking a chunk of your money (say $1,000) and putting it in a CD that would mature in a year. However, since rates will likely get better in that time, buy a three or six-month option. You can do this with a substantial portion of your money because you likely won’t need a lot all at once while at school, but come summer your CD will mature and you can use it for rent/gas/food/whatever you don’t get supplied for you at Kenyon.
For the armchair investor with a little more money, I highly suggest indexed funds. These funds generally invest exclusively in certain markets, like the S&P 500. You buy into the fund with a certain lump sum (typically a couple thousand dollars). These funds follow the general trend of the stock and/or bond market. Since these markets typically increase in value each year, so will your investment. Simple indexed funds often actually have higher annual percentage returns than hedge funds. The risk is that, unlike an insured savings or checking account, your investment can decrease in value if the market does.
Okay now this is getting into serious investment territory for the novice, but I want to be thorough. Investing directly in the stock market only takes an online account with a company like E*Trade or Scottrade, a few hundred dollars and a little patience and time. These online brokerages charge a small fee (usually around $7) to process any trades you’d like to make. Investing in the stock market is incredibly risky so it is important to never invest any money that you aren’t prepared to lose. That being said, it is a rewarding and educational experience, and can be quite profitable. As a novice I recommend investing in staid and stable US companies like General Electric. Another advantage to a stock like GE is that it pays a dividend, meaning you will earn a percentage of your total share value just by holding onto the stock; these dividends can be higher than the interest you’d make in a savings account. There is risk in direct investing, but it can be a good experience and teach you lot about the ups and downs of financial markets.
So this is really exclusively for seniors who are going to be employed next year. Get involved in your company’s 401k program as soon as possible (if they have one). Many companies will match your contributions to a 401k program up to a certain percentage of your salary. Thus if you save 3% of your salary and your company matches it with another 3%, making it as if you are earning an additional 3%. Plus the money is taken out of your pay PRE-tax so that you do not pay tax on the amounts contributed to your 401k. Currently you can contribute up to $17,500 per year tax deferred, although your employer may only match a small percentage of that. Typically, 401ks can not be accessed until retirement, so your money will be accruing interest (or value if you invest in a stock-based 401k plan) every year until you retire, which can really add up. Another advantage of a 401k is that they roll over from one job to the next, providing you with a retirement account that will follow you wherever you go.
Disclaimer: Once again it must be remembered that The Thrill takes no responsibility for any money lost by following these suggestions. These are guidelines and should not be taken as gospel. This post was written by an aspiring economics major, not a licensed professional.