I'm a college freshman and I took Economics about 2 years ago and I vaguely remember my teacher advising we should invest some money into a Roth IRA or CD. I don't have a job right now, but this summer I'm definitely looking to work for as long as I can. How would this affect my financial aid eligibility in school? What is the difference between the two and the pros and cons? Lastly, What should I do?
To see my answer just
Before I get answering, pat yourself on the back for thinking about investing at such an early age. A lot of young adults (some of my friends included) talk about investing but don't actually do anything because it becomes confusing and therefore frustrating. So, in order to keep your investor momentum going I'll answer your question regarding which investment is best for you. As for the summer job affecting your financial aid, that's one question I cannot answer and it's best to discuss any concerns with your school's financial aid office.
Roth IRAs and CDs are two very different investment / saving vehicles and choosing which is best for you depends on your goals. Roth IRAs are generally used for retirement savings, and the funds in a Roth can be withdrawn tax-free and without penalty if they're used toward purchasing your first home. A Roth IRA is an account composed of other investments, while a CD is an investment in itself.
CD, which stands for Certificate of Deposit, is a generally low-risk investment that is guaranteed by the bank. Think of it as a savings account that forces you to leave the money where it is for a certain period of time (unless you want to pay an early-withdrawal penalty) and earns a set interest rate for the term of the investment.
You'll be eligible to invest in a Roth IRA once you start earning a paycheck, but some banks require minimum initial investments or minimum contributions. There are typically minimum investments for CDs and the interest rates vary according to the term of your investment — generally the longer the term, the higher the interest rate.
In your situation, if you don't already have an emergency fund worth about three months living expenses, I'd open a high-yield savings account and build some readily available savings first. And if you have any credit card debt you should try and pay off those bills with your summer income before you even think about investing. Once you have those things squared away, a Roth IRA is probably the smartest place for you to start investing but you need to weigh your options carefully and consider your individual financial needs and goals.