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Starting out savings
Question: I am a 23 year old college student who is starting to discover the wonders of public radio and paying attention to the news on a daily basis. In the face of such a grim economic situation, I would like to prepare myself for the future to the best of my ability. Currently, I am able to save 25% of each paycheck and I keep that 25% saved in an online savings account which earns 2.2% APY. I do not have the capital required to make the minimum investment in items such as stocks and the like. I am also concerned that my 2.2% APY on my savings account is not enough to keep up with the rate of inflation. My goals are to save and possibly invest my money for 10+ years, but still have access to it in the case of an emergency. What should I do to help my money grow? For now, is keeping my money in a savings account my only option? Dennis, Cherry Hill, NJ
Answer: Welcome to the world of public radio! Yes, the economic news is grim, and likely to get worse in the coming months. Right now, I'm impressed with how much you're setting aside out of every paycheck. Frankly, I like what you're doing with the money at the moment. You are keeping up with the rate of inflation at the moment (at least as measured by the producer price index and the consumer price index). And if inflation does start to climb the shift will be reflected in higher interest rates on your savings in the online account.
It' isn't your only option, but the savings account is a good one. The reason I like what you're doing is that you'll have savings to tap when you graduate. That money will buy you flexibility and time when it comes to getting a job. You won't feel the pressure to use a credit card, either. When you do get that job, participate in the retirement savings plan and make an automatic withdrawal from your checking account into savings every month, say, $25, $50, $100. Personal finance is basically establishing good money habits, and you're well on your way.
Other thoughts on saving for Dennis?
About the author
Christopher Farrell is economics editor of Marketplace Money, a nationally syndicated one-hour weekly personal finance show produced by American Public Media.
Hi Dennis,
I am not much older than you, so I can give you a few pointers that may help. You might look for a higher yield savings account. I use emigrantdirect.com which currently provides a 2.5% APY (last year it was over 5%, but then you know what happened to that). As far as a roth IRA, I use troweprice. They have a "deal" where if you agree to contribute a minimum of $50 to the roth each month, they waive the minimum investment. Good luck!
Dennis,
Congratulations on starting to think of your financial life early. Since you are able to put 25% of your paycheck into savings, I would take a little bit of it and start a Roth IRA. You can put as little as $50/month in certain institutions and you will harness the awesome power of compounding tax-free. All the best!
I was also going to suggest saving in a Roth IRA.
You need to check with a tax professional, but I believe you can withdraw your contributions from a Roth at any time and pay no taxes on the withdrawal. You can't take any of the interest or earnings, but you can access the principal with no penalty.
