Question: I am 21 years old and a first year graduate student. My grandparents set up a CD for me quite a few years ago which now has close to $13,000 and they have decided that it is time to put that money in my name rather than having it in their name and promised to me. I have a stipend that covers my living expenses and I do not foresee needing to use the money for at least another 5 years. I'd like to keep it somewhere it will keep growing, rather than re-investing in a CD with a miniscule interest rate. What are my options? Katherine, Durham, NC
Answer: A theme of these posts is that focusing on what do you want to do with your savings usually determine your best investment options.
For example, if you think you might tap the money in the next couple of years I would keep it in a safe parking place for money despite low yields. You could put it in an online savings account or shop around for the best short-term CD rate. The money will be there when you need it.
Also, if your career after graduation is a risky one, with lots of potential for upside income gain and downside earnings disappointment you might want to keep it safe for now. The money will be there to help anchor your finances while you launch your career.
Alternatively, let's say you're willing to let the savings grow for a longer period of time or that your job will come with a reasonable amount of income security. In that case, I would consider investing in a broad-based low-cost balanced mutual fund (typically 60% stocks and 40% fixed income) or an equity index fund.
Of course, if you do that you will watch the value of the investment go through some wild rides--like now. The growing uncertainty about the economy is pushing stock values down and bond prices up. But if you can look past the stomach churning moments like now it can be a savvy financial move.