I was talking to a friend recently and she started asking me about what to do with her savings. She just recently finished graduate school and mentioned to me that she keeps all her money in her checking account. She also borrowed more in student loans than she needed, but the loan was subsidized by the government so it was basically an interest free loan. Unfortunately, she did not do anything with this money. I proceeded to scold her for managing her money poorly.

Given that my friend is not very financially savvy (rather she doesn’t know the first thing about personal finance) I thought it would be good to write about the advice I gave her in case there is anyone else out there who is in a similar situation.

The first piece of advice that I had for her was to move her money out of her checking account and into a savings account. I told her to open a high yield online savings account with a bank like ING Direct or HSBC (there are a number of other online banks that offer slightly higher interest rates than traditional banks). At least her money would be making some return in that account instead of just sitting in her checking account.

Next, I told her to put half her money in a certificate of deposit (CD) and the rest in the savings account. A CD pays a higher rate than a savings account and has very low risk. You essentially lock your money into a CD for a certain amount of time. Rates for different CDs can be looked up at bankrate.com. I told her to put in half her money because: 1. she doesn’t have much and 2. she is looking for a job and might need her savings in the near future. I instructed her to open a CD since it is an easy and safer investment option for beginners who do not know much about managing their money.

I also discussed my saving mentality with her. This might help some people who struggle with saving. I made a rule for my savings account – it is a one way street. Money can only go in, but cannot come out. This has worked well for me since I have yet to tap into it.

Another issue was my friend’s interest free loan that she just allowed to sit in an account. At the very least, she should have put that money in a CD for a year so that it could collect interest. If she had done that, she would probably be better off by a couple hundred dollars.

Does anyone else have any suggestions for beginners who are learning to manage their money?