Question:
I am a mid-twenties PhD student graduating this year with about $60,000 in a money market account and no debt. Since the money is making almost no interest, I am looking for ideas for ways to invest it or otherwise save it. However, because I have been a graduate student, I also have no retirement account yet. What is this best thing to do with these savings I have been accumulating? Although I will be graduating soon, I have a job for at least the following year, so my income should be steady and even increase from $25,000/year currently to around $50,000/year.
Response:
Carmen Wong Ulrich Dec 29, 2013 Former Host
Congratulations on your upcoming degree! And to spend that much time and energy on education but not have student loans or debt, that’s a double bravo. What I say to anyone sitting on a substantial wad of cash is to ask this first: What do I need this for? And to answer that question, you should know what both your long-term and short-term goals are that carry a price tag.
For example, let’s say that you start your new job and you’ll need to move and pay more in housing costs, like rent. Some of that cash would need to go to work for you very soon, in two ways. First, you’ll need a security deposit, first month’s rent, maybe realtor fees plus moving costs. How much will that cost you? Take that sum and keep it in cash because you’ll need it soon. Next, you’ll need a cash emergency fund as a kind of insurance should you lose your job at any point. Figure at your level, I’d be most happy with six month’s worth of living expenses held also in cash. Don’t worry about growing this money. That’s not its job. It’s real work is offering you insurance and keeping you out of high-cost debt should your income go away you need you pay bills. It also protects your future savings–your retirement savings. Assuming that you don’t have any other big purchases or expenses in the near term–or even goals, such as buying a home–definitely put away some of this money into a retirement account. At your income level, you should have access to a Roth IRA (which has income caps). Find out more about how Roth IRA’s work and their limits at IRS.gov. Go with a low-fee or no-fee IRA provider with lots of access to information such as Fidelity or Vanguard. Or, you can try out a slightly pricier service like Betterment.com which can invest your funds for you on an assessment of your goals, future deposits, time frame and stomach for risk. Remember, not all your money needs to grow for you — some just needs to get to work, now!
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