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The Best Ways to Handle Earnings From Your Summer Job

Jeff Brown

NEW YORK (TheStreet) -- Whether it's lifeguarding on an idyllic lake, flipping burgers or sprucing up the landscape, a summer job can give a teenager or early 20-something a first exposure to working life -- and a chance to learn the ins and outs of handling money.

Ideally, the summer job provides pocket money to carry a young person through the year. But it can also be much more important, helping to pay for college or to build savings for a major purchase such as a car. What are the options for handling this "serious" money?

For short-term needs, choices are pretty simple given the rock-bottom earnings offered by interest-bearing accounts. Though you might earn twice as much with a bank money market account instead of a checking account, the earnings are so pitiful it hardly matters: 0.095% in a money market, 0.045% in checking.

You could earn nearly 1% by tying your money up in a 12-month certificate of deposit, but that's still so little -- $30 a year on $3000 in savings -- that it would hardly offset the inconvenience of keeping your cash off-limits for a year.

In recent years, the big earnings have been made in the stock market, but that's too risky for money you may need quickly.

Young people attending college, or planning to, could put summer earnings into a Section 529 plan, which offers tax-free treatment of investment gains. But, again, if the money will be needed in just a few years, the best 529 options, such as target-date funds, would invest your cash so conservatively they probably would not grow very much. A 529 is best started when the beneficiary is very young, providing time to benefit from stocks and ride out the downturns.

So an 18-year-old headed to college in the fall might as well keep the tuition money in a cash account, even if it won't be needed until junior or senior year. Or if you are certain the money can be tied up for awhile, you could put it into a 24- or 36-month CD to earn a bit more -- and to keep it separate from the day-to-day checking account, where it could be subject to temptation.

What to look for in bank savings?

Any bank will provide FDIC insurance to protect your money from loss, even if the bank goes out of business.

With interest earnings so low as to be almost meaningless, there's not much need to shop around for the best rate. Convenience is much more important. Look for a bank that offers a debit card that will draw from your checking account, and pick one with plenty of cash machines where you live or will go to school. If you use another bank's ATM, you'll pay fees that could chew into your savings if you make frequent withdrawals.

Keep in mind that you can avoid fees by getting cash back when you use your bank debit card to make purchases.

It's also useful to choose a bank that has a good online operation, so you can keep track of your money on a website or phone app. Many banks have services to alert you by email or text message if your balance falls below a set level or if your debit card is used for an unusually large purchase.

What if you do have cash that can be tied up for the long term? In that case, there are lots of options, including mutual funds and IRAs -- a topic for next time.

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