Q: I am 19 years old and would like to know a good place to put my $10,000 so it can grow, and help me finish college or retire.
A: A good way to answer this might be to introduce some investment concepts, and then comment on how they relate to your situation.
Some of the investment issues that should factor into a decision like this are the following:
- Liquidity. This is the availability of money when you need it. Stocks and long-term bonds move up and down too much to be counted on for immediate liquidity. Things like savings accounts and money market accounts provide immediate access.
- Growth. Growth is important to help build up long-term savings and keep their value ahead of inflation. Stocks have traditionally shown more growth potential than bonds or deposit accounts.
- Volatility. This is the risk that the value of an investment might go up or down from year-to-year, or even suffer permanent losses. Stocks tend to have a high degree of volatility.
- Income yield. This is the amount paid out by an investment on an annual basis. Currently, long bonds are paying a little under 4 percent in income, and deposit vehicles less than 1 percent.
- Tax deferrals. Some retirement assets can get you a tax break until you use them when you retire. Traditional IRAs and 401(k) plans allow contributions to be deducted from taxes, and then any investment earnings are tax-free until retirement as well. Roth IRAs do not allow deductions of contributions, but they do defer taxes on earnings until retirement.
- Time horizon. This is the time until you will need to access the money. If your time horizon is within the next few years, you need to emphasize highly liquid vehicles like deposit accounts. If you have a long-term time horizon, you can lean more toward growth investments like stocks.
If you were to start saving for retirement now, you could get a valuable head start on the process. In that case, you would have a long-enough time horizon to consider growth-oriented investments like stocks, and you could also benefit by deferring taxes on your gains via a Roth IRA (chances are, you don't have enough income currently to really benefit from the tax deduction of a traditional IRA.)
The only question is whether you might need any money to complete your college education, or to help you get started in your career. If this is a possibility, you should budget for how much you need, and keep that amount in more liquid vehicles like savings accounts or money market accounts. The remainder you could put in growth investments in a Roth IRA, and get at least a partial head start on retirement saving.
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