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.