Expert: Gina Boykin - 9/6/2009

Question
Hi, I am a 23 year old college student with big plans for the future. I am very interested in investing now to prepare for the future but am unsure as to what I should be looking into: stocks, bonds, IRA's or mutual funds.I would like to do my investing through an online trading company but will probably only start off with about $500 until I learn more about how things work. I want to put some money into something long term that I can use later on when I have a family. I also want to see if I can accumulate some immediate cash within the next few months. Can you provide me with some advice or tips for making the right choice? Thanks a lot!

Answer
Accumulating some cash for emergencies maybe the best thing you can do as a first step, before investing.  Your need for emergency money will depend on your situation - if you're staying off campus, you need money to pay bills in case you lose your job (if you're also working) or if your scholarship money is late.  You can set aside just enough so you don't have to turn to credit cards.  If you're on campus and your books and meals are also covered, you probably don't need much of an emergency fund at all.  Remember this going forward, though, because once you graduate and begin working, you will ALWAYS need an emergency fund.

Now, onto investing. The best place to start is with education.  In the same way that you are going to college to prepare for your career, a financial education prepares you for becoming a savvy investor.  If you have not already, read a few websites, or check out a book from the library, so you can at a minimum learn the basic investing terms.  Great websites include younginvestor.com and investopedia.com.

For someone that is a beginner and is starting small, investing in a mutual fund or ETF (exchange traded fund) with one of the big discount brokers would probably work best.  Fidelity, Charles Schwabb, and Vanguard are some examples. They all have programs where you can invest a small amount each month or quarter to build your account.  They all also have a large variety of mutual funds and ETFs to chose from.  These funds can consist of small company stocks, international stocks, a group of stocks in one particular industry, corporate bonds, government bonds, a mixture of stocks and bonds...there are several possibilities.  If you begin to research and find it overwhelming, you may want to look into index funds, which are a type of mutual fund. They offer the most diversity. For example, there is a "Total Stock Market Index Fund" that holds more than 3,000 stocks.

With regards to the type of account you should open, that depends on your situation as well.  In general, the best type of account to open is a Roth IRA if you are investing long-term.  A Roth IRA is a retirement account where your money grows tax-free! In addition, you can withdraw your contributions anytime without penalty, so even if you need to use part of the money for a home down payment several years from now, you have access to the money.  You do have to leave any gains in the account until retirement age, though.  The one catch for you is that you must have earned income to qualify for a Roth, and you can only contribute up to the amount of your earned income (up to a maximum of $5K this year).  So if you are a full time student with no income, you can't do a Roth right now.  However, even if you made income from a summer job, you qualify.

If the Roth is not an option, then you will have to do a regular brokerage account, which means that you will have to pay taxes if your account makes money.  Once you begin to work, you can open up another account that is a Roth and invest there first. If you have more than $5K to invest in any one year, you can put the remainder in your regular brokerage account.