I started saving up for retirement/or something. I am currently a college student with a job, and I have been putting aside a fraction of my paycheck money each month. So far, I have just over $1K.
What should I do with the money? I have been looking at CDs, although I thought I would ask here for suggestions.Are there any stable places to put my money for the long term (5 years) in which I can get some sort of return? Are CDs a good choice? What about bonds?
The first step would be to actually open a retirement account. Because I am assuming you do not have a lot of income currently, it may be best for you to open a Roth IRA rather than a traditional one due to the fact that the deduction for a contribution to a traditional IRA would not benefit you very much since you are in a low tax bracket. A traditional IRA contribution goes in pre tax (ie you deduct it from your gross income when you file your taxes) and is taxed when you withdraw the money; a Roth IRA contribution is made from after tax money (ie no deduction on your return) but the proceeds are not taxed when you take them out after reaching retirement age. If your work has an employer sponsored retirement plan though you should generally use this (especially if they match!).
However, if this is the sum total of your savings you should really think of this as an emergency savings account rather than retirement. Planning and saving for retirement is very important and it is great that you are thinking about it so early, but placing all your liquidity into a relatively inaccessible account can bite you in the ass if a major or unexpected expense rears its ugly head. If this is the case, you probably want to park the funds in a high interest savings account at ING or HSBC or someplace similar. This will keep them liquid and accessible and at least earn you a couple of bucks a month in interest.
It all depends on what you really want to do with it.
If you’re looking to save for retirement, and only retirement, you should look in to starting an IRA. The only problem is that you won’t be able to touch that money until you actually retire (unless you want to pay ungodly fees).
CDs might be a good choice, but not many institutions offer a good rate on CDs for only $1K. The promotional rates you see most places pushing lately (5-5.50%) are usually rates for $10K starting deposits. However, if you need the money for an emergency you’ll have to pay more fees to break the CD.
I really wouldn’t recommend bonds right now. I never really do, but that’s just me.
Really I’d recommend going with an online savings account. I myself have one at ING Direct (4.30%, $250 initial deposit). That way if you have any emergency the account is totally liquid, and it gives you a rate as good as a CD at most brick and mortar banks.
My advice is to first save up a buffer so you don’t pay interest on debt. The interest you will pay on debt is almost always higher than you will receive on savings. You should have a tiered buffer that you fill up in order of urgency and only after the earlier levels are filled should you start saving for retirement. The only exception is if you get matching contributions from an employer or some other great benefit.
Only after you have enough in savings to cover an emergency like car repair or home repair should you consider longer term assets like bonds or CDs. If you have to carry a balance on a credit card or take out a short term loan it will eat up all of the extra money you have gotten by putting your money in less accessable investments. It will also hurt if you have to pay penalties for accessing money from a CD or similar investment early.
Only after you have enough in investments that can be withdrawn in a few months to cover major expected expenses, such as buying a car, should you being using investment vehicles like an IRA. You will likely lose more money on interest on your car than you make by using an IRA.
Also, if you have a mortgage, it is likely to be a much better deal to put money towards the mortgage than most any other medium to long term investment you can find.