Reaching Big Goals Like Saving for College

Investment accounts support your long-term goals

In addition to all the saving and investment tools we introduced in the last topic, there are also long-term investment accounts that you can use for specific purposes.

• Accounts such as a 401(k) plan through your employer or an Individual Retirement Account (IRA) help you save for retirement.
• Accounts like a 529 savings plan or Coverdell education savings account (ESA) helps you save money for school and education expenses.

These a big life goals that require years or even decades of savings. But they’re important. Investing in education means you can avoid student loans. Investing earlier in your retirement means you can retire sooner.

How investment accounts work

1. You make deposits into the investment account.
2. The money in the account is invested through an investment tool called a mutual fund.
3. Mutual funds let you invest in a variety of different stocks and other investment tools all at once.
4. This helps minimize the risk that you’d lose money instead of earning it.
5. The money grows over time and the interest compounds.
6. You can withdraw money out of the account at any time, although you have to follow certain rules or you could face penalties on the withdrawals.

For example, if you invest in a 529 college savings plan, you only want to take money out for qualified education expenses. That includes tuition, books, covering the cost of your dorm room, and purchasing a computer for school.

Matching means free money

Some investment accounts offer an advantage known as matching.

This happens with 401(k) plans through your employer. If you work for a company that offers a 401(k) plan, they will often offer to “match” your contributions. For example, many companies match every dollar you contribute to the plan with 50 cents from them, up to 6% of your annual salary.

Let’s say you make $30,000 per year (annually) at your first job out of college. If you save 6% of your salary, you would contribute $1,800 per year to your 401(k). Your boss would give the plan an extra $900 per year.

So, instead of adding $1,800 per year to your 401(k), you add $2,700.

Matching is basically one of the few opportunities you will have in life to get free money. So, take advantage of it! If someone offers to match contributions on an investment account, take advantage of it!

Smart Money Tip: Talk to your parents about saving for college

Now that you know how these long-term investment accounts work, you should see if there’s already one working for you!

Ask your parent or guardian if they set up a college savings fund for you. If so, you may already have money saved for college and not even know it!

If not, talk to them about setting this account up now. That way, you have some money saved for college.

And let them know you want to take an active role in saving for college. That means that you’ll start contributing some of the money you get from allowance, working part-time, or even gift money you receive to the fund.

You may even want to ask them about matching. So, for every dollar you contribute, they would contribute too!