This is a series of articles brought to you by the executive board of the Boston College chapter of Smart Woman Securities (SWS). Â SWS is a national investment education organization for undergraduate women. Â Through instructive seminars, mentoring initiatives, and meetings with successful investors, SWS provides resources upon which women can build greater knowledge of personal finance topics and the financial markets. Â For more information visit us online, follow us on Twitter, or send us an email.
Now that you have cut back on your spending and adjusted your budget to ensure you are contributing to your savings, it’s time to take your extra cash out from under your mattress or sub-par savings account, and make it work for you.  Money that’s idly sitting around is subject to inflation, which means its losing value over time.  Money that’s invested, on the other hand, has the potential to earn interest, beat the inflation rate, and compound.  Sounds good, right?
1. Determine your risk tolerance
Before you start investing, it’s important to consider how much risk you are willing to take in order to meet your financial goals.  The younger you are, the more risk you should be willing to take because you have a longer time to recover from any losses you experience.  Likewise, if you’re 50 years old and planning on retiring in 10 years, you’ll want to be a much more conservative investor because you’ll be living off of your savings in the near future.
2. Understand different types of investment vehicles
Stocks: When you own a stock, you own a piece of a public company.  The piece of the company you own increases with the number of shares of stock you own.  As the business grows, the company’s stock price grows to reflect that.  Many companies also pay their shareholders dividends.  Your investment return from owning stocks therefore equals the dividend payments you receive on the number of shares you own (current price of the stock-price of the stock when you bought it).  Instead of spending $100 on a pair of yoga pants at Lululemon, think about purchasing two shares of the company, whose stock price has tripled since last year (LULU).
Pros: You can sell your stock at any time, so if the company whose stock you purchased is a high-growth company, you can get fast cash from the sale of stock. Take Lululemon for example: if you had purchased 5 shares of LULU stock in January at $33.60/share, and sold them on Tuesday at $53.89/share, you would have made $101.45 in less than a year from that one transaction.
Cons: High risk.  Today’s gain could easily be tomorrow’s loss.  And the stock market is unpredictable, so it’s not always easy to determine the optimal time to buy or sell a stock.
Perfect for:Anyone.  If you have a low risk tolerance, you might want to invest in a large company with a consistently growing share price and proven financial strength such as Apple (AAPL).  If you have a high risk tolerance, maybe you’ll want to invest in a start up company or a small company with positive, albeit unsecured, prospects.
How to get started: Research stocks at finance.yahoo.com, then buy them through online brokerage firms like E-Tradeand Fidelity.
Bonds: Think of a bond as an I.O.U that can be issued by a corporation (corporate bond) or a state or federal government (Municipal or U.S. Treasury Bond). Â You expect the initial loan amount will be returned to you at the end of the loan period, in addition to periodic interest payments paid to you by the bond issuer throughout the period.
Pros: Bonds are less risky than stocks.  Unlike the uncertainty associated with stocks, bonds payments from bonds are almost always guaranteed.  That’s why bonds are also classified as “fixed income.”  Bonds held to maturity can serve as a stabilizing factor to the volatility associated with stocks in an investment portfolio.  Furthermore, the interest received on state and local bonds is tax-free.
Cons: Selling a bond before the maturity date may result in a loss, and if the entity you purchased a bond from declares bankruptcy, you may lose money.
Perfect for: People with a lower risk tolerance. Â With government bonds, return of initial investment is practically guaranteed. Â That being said, government bonds have a lower interest rate than their more-risky corporate counterparts.
How to get started:Research bonds at http://www.bondsonline.com/, then buy them through an online brokerage firm, just as you would buy stocks.
In addition to stocks and bonds, there are many additional types of investment vehicles, including real estate, hedge funds, and commodities.  These are more complex and harder to invest in when you’re just starting out, but are important options to consider as you become a more sophisticated investor.
3. Diversify
Rather than choosing to invest in the above vehicles individually, an option that requires you to be a highly proactive investor, you can choose to invest in mutual funds. A mutual fund is a pool of different investments vehicles that may include stocks, bonds, and/or cash.  When you invest in a mutual fund, you own a piece of the investment pool and will receive a portion of the returns from the mutual fund’s portfolio.
Pros: Because owning a single mutual fund can expose you to a wide range of asset classes (stocks, bonds, etc.) or even a wide variety of investments in one particular asset class, it is one of the easiest ways to diversify your portfolio.  No one asset class outperforms every year, so diversification is a great way to make sure you don’t have all of your eggs in one basket.
Cons: Mutual funds that are actively managed by professionals (i.e. not index funds) often charge investors fees regardless of performance.
Perfect for: Anyone.  Owning a well-diversified mutual fund will ensure that losses in one asset class are counteracted by gains in another asset class.  With a professional manager overseeing the fund, you also don’t have to be as proactive about monitoring individual investment performance.
How to get started: Browse and read up on all of the different mutual funds that are out there at Morningstar.com. Â Mutual Funds can be purchased through brokerage firms such as Fidelity, Vanguard, and Charles Schwab.
4. Set up a retirement savings account
An easy way to start investing is to open up a retirement savings account.  Before you do, it’s important to understand the nuances and implications associated with each type of account.
Roth IRA: A retirement account that you can open if you make less than $105,600 a year. Â Contributions to the account will be taxed now, but when you take money out in the future, it will be tax free!
Pros: Because the money you put into a Roth IRA account is taxed now, the money will not be taxed when you take it out in the future, meaning the interest that you earn on the money you put in is tax free.
Cons: Because it is a retirement account, you are only allowed to withdraw the money before you retire under very special circumstances (to buy your first home or if you are disabled). Â In most cases, you will not be able to use the money until you retire.
Perfect for: Anyone who is making less than $105,600 a year.  In some cases, there is a very small or even no minimum deposit amount required to open a Roth IRA. Additionally, the tax rate you pay now will very likely be less than the tax rate you pay in the future, so take advantage of it!
How to get started: Head to a bank or contact a brokerage firm. Â They will help you set one up!
401(k): A 401K is an employer-sponsored retirement account that’s funded by contributions from your paycheck.  Typically only full-time jobs offer 401Ks, so these will be more relevant to you after you graduate.
Pros: Your contributions to your 401(k) account are tax-deductible now. Â Also, many employers will match your 401(k) contributions, which means free money!
Cons: The money you take withdraw from your 401(k) at retirement will be taxed as income.  Aside from that, there are no major disadvantages to 401(k)s.  It’s a nice employee benefit and a great way to save for retirement.
Perfect for: When you’ve acquired a full-time job, take full advantage of your company-sponsored 401(k) plan!
How to get started: You will be able to set up your 401(k) and control your contributions through your company when you start working full-time.
To read more about retirement savings accounts, visit Learnvest’s Retirement Basics Page.
Overall, when you’re looking to start investing, it’s important to take the time to research all of your options and really understand what you’re investing in.  The amount of your savings you choose to invest will depend on the time horizon of your financial goals, as well as what other expenses you are saving up for (i.e. student loans, a first apartment).  As college students, we typically don’t have a significant amount of cash laying around to start investing right away, but that just means it’s the ideal time to begin developing an investment plan for when we do!
In our next blog installment, we’ll discuss credit and the factors that influence your credit score.  In light of the recent recession, you can bet your credit score will be one of the main factors banks and lending agencies will use to determine whether or not they should lend money to you.  Working to establish good credit early on will make it much easier for you to secure loans or open lines of credit in the future.
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