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Savings and a summer internship

Question: Hey Marketplace Money, I'm a 20-year-old college student studying computer science. I recently accepted a paid internship offer at an investment bank for the summer. After taxes, I will make around $10,000. How should I spend, invest or save this money to best prepare myself for life after college? Zach, Binghamton, NY

Answer: Congratulations on the summer internship. What do you think of taking a "barbell" approach with the money?

At one end of the barbell, you put a chunk of money into an online savings account, a credit union savings account, or something along those lines. The reason for keeping the money in a boring, safe, short-term account paying almost no yield is that you'll probably need the money when you graduate. There are costs typically associated with launching a career after graduation, from moving into an apartment to getting a wardrobe. The good news is that you won't have to whip out a credit card with savings to tap.

At the other end of the barbell, I would open up a Roth IRA -- a retirement savings account. You're in this account for the long haul. You'll harness the compounding power of time. Your contributions into the Roth are with after-tax dollars. You won't pay taxes on any gains when you withdraw money during retirement. The maximum contribution for 2012 is $5,000, but you can put in less. You can't take any investment gains or earnings out of your Roth before age 59 1/2 without paying ordinary income taxes on the withdrawal and a penalty.

However, an additional attraction of the Roth is that it's also an "emergency" emergency fund. You don't want to take money out of your Roth. But in a pinch you can withdraw the amount of your contributions -- not any investment gains -- tax-free and penalty-free.

If you like this strategy, I would play with the numbers and see how much you want to put in short-term savings and how much should go into long-term savings.

I don't know if you have student loans, but if you do, another use of $10,000 is limiting how much you borrow to finish your education. I would still set aside some money into savings to pay for your transition from college to job and use the rest to cut down on borrowing.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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