Money Market Accounts and Other Investment Ideas With High Interest Rates for Graduate Students
I have more money than Bill Gates. What should I invest in?
Well, you probably should not be getting your investment advice from here. This article is geared towards graduate students with our low but steady income. As graduate students, we are in the interesting financial position of being in a low tax bracket now, but potentially in a very high one once we graduate and find real jobs.
So how much money should I have before I start investing?
The general rule of thumb is that you should have enough cash to cover six months worth of expenses remadily available for emergencies like sudden illness, injury, or lab mouse rebellion. Grad students do have a very stable income and could get away with less, but I would not recommend it.
What if I still have student loans from undergrad? Shouldn’t I worry about paying those off first?
I suggest that you look at the interest rate. If your loans are deferred or the rates are very low, you might as well keep that money around. You could earn a higher interest rate than what you would have to pay. For example, if you consolidated your loans before June 2005, the government had a great offer where you would only have to pay a 2.5% interest rate. With money market rates already paying around 3 – 3.7% interest rates, it makes more sense to keep that money around in a conservative investment and earn the extra difference.
If your interest rates are high, however, or if you have credit card debt, you should definitely concentrate on paying those off first. Paying off a $10,000 loan with a 15% interest rate does the same for your net worth as investing $10,000 at a 15% interest rate. (In general, I do not believe in keeping credit card debt. You are just throwing your money away on interest.)
I don’t want to risk losing my money in the stock market, but I want to earn more than just at the bank. What should I invest in?
The easiest way to earn a higher return on your money would be to put it in a money market account. They are just like a savings account in that your money is liquid, and you can take your money in and out as you please. Also, most bank money market accounts are FDIC insured which means that if the institution goes bankrupt, the government will refund you up to $100,000 (which is also why you should not have more than $100,000 at any institution). Money market accounts offer a higher interest rate than standard savings or checking accounts. While a regular savings account at Bank of America earns only a 0.5% APY (annual percentage yield), a Bank of America money market account earns up to 4% APY. And, if you search on the internet, you can even find rates up to 4.9%. Why the big difference? Basically, a money market account invests in a short-term treasury note fund with maturities of less than one year. But, who really cares how they can give an awesome yield as long as they do, right?
So, I should go for the money market account with the highest rate?
When looking for a good money market account, you should look for similar features that you would want in a good savings account. One that requires low to no minimum (minimum amount of money in your account before they charge you fees) will allow you to be more flexible about where you keep your money. One trick is to have two money market accounts with 0 minimums and move your money into the account which has the highest rate at the time. Beware of accounts that charge fees. Sometimes they will give you high rates, but get their money back with loads of charges on simple transactions. Some will also have catches like a high interest for only a limited time or a large closing penalty.
You should also find an account which will match your lifestyle. If you are on the internet constantly, maybe you could trade-in phone transactions for a higher rate and online-only access. Many online institutions require you to have an established checking account to transfer your money from. Most importantly, if you want a guaranteed investment, you will need to find an FDIC insured institution. Check the credit rating of the institution too. Even if the place is insured, it will be a big hassle getting your money refunded and take a long time. Most large banks should be fine.
A good place to start looking is http://www.money-rates.com/mmarket.htm. The site ranks money market accounts by their yield, lists their minimums, and has a handy link to the accounts’ websites. APY is a normalized rate so you should use that for direct comparison of accounts. My personal recommendation is ING Direct for its user-friendly interface and competitive rates. I have had an account there for several years and have been very happy with it. So, yes, more money is good, but beware the potential trade-offs.
Any other “safe” investments besides MMAs?
For less liquidity but higher returns, you could try CDs where you promise to keep your money at a bank for a certain amount of time and are compensated with a proportional interest rate. If you take the money out earlier than promised, they do punish you by knocking down your interest rate or by charging fees. However, as most CDs are FDIC insured, you are guaranteed to get your money back as long as you leave it in as promised. http://www.money-rates.com/cdrates.htm has a good list of CDs ranked by yield, term, and minimum.
Other alternatives include treasury savings bonds which are state and local income tax-free and federal tax-deferred. (Tax deferral means you pay tax only when you take the money out, so you can accrue interest on the tax portion in the mean time.) I and EE bonds are currently offered though there is a limit to how many you can buy each year. I bonds help protect you from inflation by offering a composite rate composed of a fixed rate plus an inflation rate that increases with inflation. EE bonds recently changed to be fixed rate only, so I would suggest waiting a while to lock in higher rates as most of the market expects rates to rise. Treasury bonds have a small penalty for cashing out within the first 5 years, so like CDs, they are less liquid than MMAs. Their main asset is their tax advantages and inflation protection (in I bonds).
http://www.treasurydirect.gov/indiv/products/tbills_glance.htm is a safe place to buy treasury bonds and to get more information. If you begin accruing many treasury bonds, the Savings Bond Wizard is a handy computer program that automatically keeps track of rate changes, current redemption value, and more and can be downloaded for free at http://www.publicdebt.treas.gov/sav/savwizar.htm.
Even though being a graduate student can mean late nights at lab, frustrating experiments that just won’t work, and constant pressure from professors, it does not mean that we have to go penniless. Pat yourself on the back if you are already saving money. There is no better feeling than logging into your accounts to see that you have made money by doing nothing but park it in a good place.
Everybody’s situation is different. There can be a range of graduate students from those that are in debt up to their ears to those who are independently filthy rich. Your investment plan should really be geared towards your own needs. This article mainly outlines a few investments which are less risky and almost guaranteed, but obviously will not garner miraculous returns. Stay tuned for tips on more aggressive investments.
Disclaimer: The writer takes no responsibility for personal investment decisions. For any investment decisions, readers should do their own due diligence. Investments should be based on individual tax bracket and financial conditions. However, any large gains in fortune, you can totally blam
