If you’re even thinking about investing, you’re doing a lot better than most of your peers.
Many college students don’t take the time to understand investing.
In fact, many don’t take the time to understand the lasting impact that small decisions, such as opening a credit card or putting $50 away each month, have on their future.
While you should take the time to enjoy some of the “best years of your life,” it’s wise to start thinking about your financial future.
We've weighed the pros and cons and how you should think about investing at this point in your life.
What to Do First
Millions of America’s college students graduate with a boatload of debt. This is for many reasons including high tuition costs.
Luckily, you have a steady flow of income from a part-time job. Before you start thinking about investing this money, answer these three questions.
- How much money is in your emergency fund?
- Do you have credit card debt?
- What type of student loans do you have?
As a college student, you should do everything you can to reduce the amount of debt you have. Only then should you think about investing.
1. Build an emergency fund
The first thing to consider is whether you can afford to pay for emergency expenses that might come your way.
Everyone needs an emergency fund. Putting money aside to cover unexpected emergency costs can save you from financial ruin.
This is especially necessary in college since you most likely don’t have a large amount of money coming in each month to cover unexpected costs.
The amount of money you should keep in an emergency fund depends on your monthly expenses.
Ideal Size of an Emergency Fund
|To start...||Ideal goal...||Super safe...|
|$1,000||3-6 months of essential expenses||12 months of expenses|
To calculate how much money you should save, start by looking at how much you pay each month on necessary expenses, such as:
- Personal expenses
Financial experts advise that you should have at least three to six months of living expenses saved in an emergency fund.
Once you know how much money you want to save for emergencies, set a monthly savings goal. Whether it be $5 or $20, anything is better than nothing.
Maybe this means you work an extra hour each week or sell a few pairs of shoes you no longer wear, being prepared for emergency costs gives you financial security and peace of mind.
2. Eliminate credit card debt
Credit card companies are notorious for luring college students with freebies.
The problem is in the fine print. Once that new t-shirt has faded or you’ve spent that $20 gift card, you’re stuck with a high APR and annual fees that quickly add up.
If you have a credit card balance, work on paying that off first. You’re essentially investing in yourself now that you have this debt.
Let’s break down how much interest you would pay on a $1,000 credit card balance at 18.99% APR.
- Current balance: $1,000.00
- Interest rate: 23.99% APR
- Minimum monthly payment: $40.00
- Interest paid: $511.35
- Total paid: $1,511.35
- Time to payoff: 5 years and 11 months
Putting extra money towards your credit card bill each month will reduce the amount of interest you pay over the long term.
The “return” made by paying off this debt is likely much higher than you’ll make by investing this amount of money.
3. Pay off student loans
The two main types of student loans are federal loans and private loans.
Whether you took out federal or student loans, you’ll pay interest on the loan.
Understanding how interest accrues can help you decide if it’s a good idea to start paying them back while you are still in school.
Private student loans
The terms and conditions on private loans vary by lender.
Not all private student loans defer payments until graduation. If you have a private student loan, you should check with the lender about the details of the loan.
If you don’t have to pay off the loan until graduation, you can still make payments towards the interest.
The interest rate is most likely higher compared to any federal student loans, so it makes sense to make interest-only payments to your private student loans first.
Federal student loans
Federal loans offer more favorable terms such as lower interest rates and more flexible repayment plans. You don’t have to start paying back your federal loans until you graduate or you’re less than a part-time student.
Unsubsidized federal loans charge interest from day one. Similar to a private student loan, interest builds up over the amount of time you’re in school.
Working to pay off the interest each month while you are still in school saves you in the long run. Interest accrues each month on your total balance. This means that you are charged interest on top of interest.
The benefit of working to pay off student loans early is that you pay less interest and owe less money when you graduate.
Investments Tips for College Students
You have a distinct advantage over many other investors — your age. It takes patience to watch money grow in an account over a long period of time.
Before you decide on the type of investments, here are five rules of thumb to keep you on track for long-term gains:
1. Do your research
Before you decide how and where to invest your money, take the time to do your research. This is particularly important when it comes to fees.
Money managers and brokerage firms charge investment and advisory fees on top of any fees inside a mutual fund. That’s money out of your pocket.
In addition, you may need thousands of dollars to even open an account.
You can save money by using an online broker or robo-advisor.
They have lower fees and you don’t need a lot of money to open an account.
2. Think long-term
Short term profits can seem enticing but often are too good to be true.
Adopting a long-term mindset at a young age is one of the best things you can do.
The advantages of compound interest in your 20s far outweigh someone in their 40s.
Power of compound interest for a 20-year-old who plans to invest money for retirement:
- Initial investment: $100.00
- Monthly contribution: $25.00
- Rate of return: 8.00%
- Term: 45 Years
After 45 years, your investment will be worth $110,509.23.
3. Don’t follow “hot tips”
If it sounds too good to be true, it probably is. You’re not in a position to throw money into the hottest company, so avoid overreacting on the latest news.
Also, beware of scammers who promise to make you rich overnight.
Don’t put all your eggs in one basket.
A diversified portfolio reduces your exposure to risk. If one stock tanks, you don’t lose all of your money.
An easy way to diversify is to use a mutual fund or ETFs.
5. Put yourself first
This is one of the only times in your life where it’s okay to put yourself first.
Although it’s not an excuse to make poor financial decisions, take the time to enjoy the freedom that comes with college life.
Don’t skip out on once that once-in-a-lifetime-opportunity, such as studying abroad, just to invest a few bucks. You can’t get these years back.
Investments You Can Make as a College Student
Now that you’ve decided to invest in the market, here are a few investment choices to consider:
It’s never too early to start saving for retirement. A ws/ira-com is a type of retirement account that is ideal for young investors.
Since contributions to a Roth IRA account are pre-taxed, all earnings grow tax-free. You won’t have to pay any additional taxes when you go to withdrawal the money at retirement.
You’ll forget about the money you put in and one day take that money out, plus all the interest you earned, tax-free!
Exchange-traded funds (ETFs) or index funds
Both funds are a mix of stocks (or “basket”) in a single fund. You’ll own a small portion of tens, hundreds and even thousands of stocks or bonds in a single fund.
They offer lost cost and diversified solutions for the long-term investors. That’s you!
If you choose to invest your money in an ETF or index fund, any online broker or robo-advisor will do the heavy lifting for you.
Based on a complex and proven algorithm, they will select the stocks and bonds best for you based on questionnaire answers.
Investing in these types of funds is beneficial since the average investor can’t afford to buy every stock in a specific index.
You’ll have partial ownership (albeit very small) in a set of stock, bonds or another type of investment, that mirrors a major index, like the S&P 500.
The annual fees are low and over the long haul, and they typically perform better (i.e. make you more money), compared to actively managed funds.
The biggest investment you can make during your college years is in yourself, and your education.
If you have money saved up or coming in from your part-time job pay off debt.
Once you’ve done that, you’re a step ahead of everyone else.
Think long-term and think diversification. And don’t forget, never stop having fun. These truly are some of the best years of your life.