Too much money in the bank, not enough to invest...

[Sunflower]

This will probably end up being a pretty basic question but I keep going in circles in my head. I'm hoping this community can help me sort it all out!

I'm currently a student, making a rather small salary and managing to save ~$250/month. I didn't open a Roth until very recently but with the money I saved, I maxed it out for 2011 and will definitely max it out in 2012. At this rate of saving, I would have $5000 saved up by the end of the 2013 contribution window as well but depending on everyone's advice below, I might need to use at least part of it towards debt instead. Also, it's safe to assume I'll have my degree by the end of 2013 and will have a different money situation.

My basic question is: If I have more money (not so much more, ~$4000) that's sitting in a savings account right now, what should I do with it?

The caveat: I'm very very debt averse and I have $12,000 in student loans from college that will become active (at 6%) 6 months after I graduate. Although there is a chance that I will make a significant amount of money by taking a real job after I graduate, there's a greater likelyhood that I'll stay on the academic train and see only a modest salary increase so I'd like to have the money available from my current saving efforts.

I'm prepared to pull money out of my Roth if I need to cover the loans but I'd obviously rather not have to. I know some people will argue with even considering that as a back up plan but for me the emotional pull of no debt beats the logic. Is it even worth opening a taxable account for such a short time frame (1-3 years)? Part of me hates the thought of it sitting in a bank account making 0.8% but the thought of it not being there when I need it is equally scary. If I were to open an account, I'd probably be looking at VFSTX for the taxable 'short-term' money while maintaining a reasonable long-term allocation in my Roth. I'm just begining to learn about investing but from what I understand, dividend paying accounts like VFSTX are going to cost me tax-wise whereas a stock-based index fund would be spared from taxes until I pull out any money, is this even something to worry about?

So, should I keep hording money in my nice little bank account, or is there a better option?

[sol]

Are we assuming this 4k is above and beyond your comfortably full emergency fund?

If your'e going to stay in academia and the loans get deferred, then you won't need to worry about paying them until many years in the future.  Hope for a high inflation rate to devalue your debt.

If you graduate and get a good job, you can pay the student debt off pretty quick and be free of it.

So really the only situation in which you would need to keep that money on hand would be if you plan to graduate and be a loafer.  In that case a taxable account isn't a bad idea, and I'd opt for something like VIPSX or VFIIX that can match inflation with minimal risk to principle.

If you're pretty sure you're not going to be a loafer, then I'd go ahead and tie that money up for retirement right now.  If you don't have access to a university 401k style plan (some students do, depends on your union rules) then you might consider a 529, HSA, or other tax deferred option.  You're likely paying so little tax as a student right now that putting this money to work in a tax-sheltered account for use later on is pretty much the best deal you can get.

[Sunflower]

Sorry, I guess I should clarify - I'm already working on my Ph.D. which is why everything from college is deffered. The career choice I'll have to make is whether to take a post-doc position or look for a cushy industry job. I'm leaning towards a postdoc at which point I won't be a student but still won't be making any outrageous amounts of money.

And yes, I would still have some cash in the bank for emergencies. :-)

[Joementum]

Use any extra money you have to pay off the student loan. If it were me, I wouldn't even be worrying about a ROTH IRA or any other IRA. The interest you're paying on the student loans are probably going to be a lot greater than the money you would be making in this unstable market.

[Chris]

I wouldn't let it burn a hole in your pocket. Given the amount, the short duration, and volatility, I don't think you'll see much benefit investing in stocks right now. You could consider keeping it in a risk-free investment such as CDs or Series I bonds in the interim.

[Sunflower]

You could consider keeping it in a risk-free investment such as CDs or Series I bonds in the interim.

I thought about that but the best 1-2 year CDs that can find (Ally) are 0.93-1.15% and I'm getting 0.8% in my high interest savings account so its only a difference of a few dollars. I haven't really looked into I bonds though, thanks!


Joementum - I'm currently registered as a student and they're gov. subsidized loans so they won't start accruing interest until six months afte a graduate. That's why I was thinking I should find something for the money to do in the mean time.

[BryanR]

Series I-Bond risk free paying 3.06 % right now.

[nondualie]

Series I-Bond risk free paying 3.06 % right now.

Can you drill down on this a bit for us?  How?  Where?

[Chris]

Can you drill down on this a bit for us?  How?  Where?

I Bonds are only available from the federal government. You can buy them electronically and have them deposited into a TreasuryDirect account. More info on the savings bond site.

[lr]

Chemistay,  the decision to go into industry or academia is often several orders of magnitude greater than anything in the $4,000 to $16,000 range, and you don't seem to be finished wrestling with it. 

As such, the best investment you could make--far, far more important than anything as comparatively piddly as interest rates or dividends or taxes or treasuries or student loan repayment plans or whether you're risk averse--is to spend some serious time investigating, interviewing, gut wrenching, lit-reviewing, cold calling, interning summer after summer, praying, planning, and generally sleuthing to know whether industry, academia, or a hybrid is the right fit for you.

I cannot overstate that this is the most important decision most sci-tech PhD students make, and many professors do a piss-poor job helping their students through it.

[Sunflower]

Chemistay,  the decision to go into industry or academia is often several orders of magnitude greater than anything in the $4,000 to $16,000 range, and you don't seem to be finished wrestling with it. 

As such, the best investment you could make--far, far more important than anything as comparatively piddly as interest rates or dividends or taxes or treasuries or student loan repayment plans or whether you're risk averse--is to spend some serious time investigating, interviewing, gut wrenching, lit-reviewing, cold calling, interning summer after summer, praying, planning, and generally sleuthing to know whether industry, academia, or a hybrid is the right fit for you.

I cannot overstate that this is the most important decision most sci-tech PhD students make, and many professors do a piss-poor job helping their students through it.

Very true words. You're right, I'm not done struggling with this decision although I'm leaning towards a short post-doc in a slightly different field of chemistry which will hopefully lead into an industry job that I'm happy with. I'm not thrilled with my industry options coming out of the lab that I work in now but think that overall industry is a better fit for me than academia.....but yes, definitely still wrestling with it. Overall, I know that I'll be able to live off of whatever income I have (I've been doing fine with a graduate salary in a high-priced city) but I want to make sure that my debt is compltetly knocked out by the time I graduate so that money doesn't become too much of a factor in this decision.