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What to Put Your Money Into as a New Investor

Ask Savvy: Should I Invest in a Roth IRA or CD?

Dear Savvy,

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 Roth IRAs are generally used for retirement savings, and the funds in a Roth can be withdrawn tax-free and without penalty if they're used toward purchasing your first home.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.


Join The Conversation
piper23 piper23 9 years
I'm impressed with the fact that you guys are starting so early. I was twenty five before I stopped partying long enough to realize I needed to grow up and start taking some action on my future. So I'm doing catch up and we're being a bit agressive with our savings and investments at the moment. Cuts down on my spending money now, but it will pay off in the end.
aistea311 aistea311 9 years
I have a CD that I do not touch no matter what. I am going to set up an IRA once I am financially secure enough to do so. Thanks so much Savvy!
MindayH MindayH 9 years
Way to go on saving early! If you can do the Roth IRA I think it would be better for the long term and less likely to affect any of your funding for school
shanimalcracker shanimalcracker 9 years
I started opening CDs when I was in high school and opened my Roth IRA my first year of college, which I've been maxing out ever since. Both accounts tie up one's money for a while (giving you less cash), however, I believe a Roth will probably be better in terms of financial aid (since the FAFSA and other services consider how much cash you have and this includes CDs).
bellaressa bellaressa 9 years
Great advice ladies.
princessjaslew princessjaslew 9 years
that's great advice! gd luck! also, in most Fed credit unions or banks, you can always open a Roth IRA CD (and generally the minimum is pretty low).
psychobabble psychobabble 9 years
Before I went to graduate school I opened up a Money Market account and a Roth IRA and put the maximum yearly donation in the Roth ($4000). I had only been out of college for 6 months, so I ended up saving most of what I had made during that time. The key thing to remember is that you can not put federal loans in anything less liquid than a savings account. So, put your money from the summer away, but remember that you can't add anything to it unless you're working. Being in graduate school and living off loans, I haven't been able to add anything to my accounts but at least they've been started and will be there when I get back into the work force. Good luck!
CrysDiaz06 CrysDiaz06 9 years
Very good advice. I didnt know anything about Roth IRA or CDs as well. Thanks for posting this!
syako syako 9 years
When I was in college and making a little extra money every week, I opened up an ING savings account. I got about the same interest rate as a bank's CD - AND I always had access to the money if I should ever had needed it. By the time I finished school I had enough saved to put a 30% down payment on a new car.
syako syako 9 years
If she has an extra $2,500 lying around she could invest in the Roth IRA over at Fidelity
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