Invest as a college student?
I’ll admit that on the surface that may seem like a tough balancing act, or even a cruel joke. After all, you have school to worry about, more than enough homework, and you may even be juggling a part-time job. Then there’s the student loan issue. Most students have these floating out there, somewhere just over the horizon.
I’m going to ask you to do your best to forget about those issues while you’re reading this article, and just imagine the possibilities.
Investing as a college student isn’t as much of a stretch as you might think, and it is a possibility for many students. After all, college is all about getting your education in order to build your future—you may as well begin building your financial future at the same time. The benefits from investing early are big enough that you should at least contemplate the possibility, and do what you can to make it happen.
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There are multiple reasons to invest as a college student. First and foremost, it’s standard news that millions of college students graduate with tens of thousands of dollars in student loan debt. At the same time, most also graduate with no money saved or invested at all. You have at least a small leg up if you’ve already begun saving and investing before graduation.
Second, while you will probably only begin investing with a small amount of money, you’ll be gaining valuable investment experience early in life. That experience will serve you well after graduation when you begin investing with larger amounts of money. You’ll lower the risk of losing money later by learning the ins and outs of investing now.
But, I think the single most important reason to invest as a college student is to build momentum. If you’ve already begun investing, and you have even a small investment stake by the time you graduate, you’ll have cleared the first investment hurdle, which is getting started.
From there, you’ll be able to build on the investments you’ve already made. That will completely eliminate the need to begin investing after graduation from a cold start.
And, don’t underestimate the importance of getting started. Lots of people live their entire lives, never building savings and investments because they never got started. You’re 50% of the way toward financial independence just by choosing to start.
Next to establishing the desire to begin investing, finding the money to do it is the biggest hurdle for most college students.
The first task is to establish a workable savings target. Even if that’s only $10 per week, which will accumulate over $500 per year, if you’re an incoming freshman, that’ll total over $2000 by the time you graduate. If you can manage $20 per week, you can double those numbers.
Saving $500 or $1,000 per year may not seem like a lot of money, but it’s plenty when you’re a college student, and more than enough to begin your life as an investor.
No doubt, it will be difficult to save even that much money on a very limited budget. But, if you have a part-time job, or you receive a monthly allowance from your parents, do your best to put away the first $10, $20, or whatever amount you choose as soon as the money comes in.
Still another option is to fast-forward the process by working during your summer vacation. If you can make $3,000 over the summer, plan to allocate at least $500, or even $1,000, to investing. If you can, that will eliminate the need to save additional funds during the school year.
Your next job will be to choose the type of account you want to invest through. The two basic choices are taxable investment accounts and retirement accounts. And, there is a third choice that works as a halfway between the two.
These are accounts you can open for general investing. You can open an account in your own name individually, or jointly with another person. In the account, you can trade any investments you like—stocks, bonds, mutual funds, ETFs, and even options (but these are not recommended for college students!).
As the name implies, you’ll need to be concerned with taxes on investment earnings in a taxable investment account. This can include dividends as well as capital gains.
But the tax consequences of investing may not be significant. First, as a college student, you’re likely on the lower income side, and your marginal tax bracket will be very low—almost certainly 12% or less.
Second, both qualified dividends (and most are) and long-term capital gains (investments held more than one year), get the benefit of more favorable long-term capital gains tax rates. It’s likely you’ll pay no tax on either, or be limited to not more than a 15% tax rate.
The advantage of a taxable investment account is that you can take money out of the account anytime you like without any tax consequences. And, you can also fund the account with no limits on how much you can contribute.
A retirement account for a college student? Sounds crazy, doesn’t it? Actually, it’s anything but.
The best time to start a retirement account is as soon as possible! While you’re still in college is not too early.
Here’s the thing about retirement accounts: the longer you invest, the more money you have by the time you retire. And, if you’re particularly aggressive about retirement savings early in life, you may be able to seriously consider early retirement.
The simplest way to invest for retirement is through a traditional IRA. You can contribute up to $6,000 per year into an IRA account. Since it will be a self-directed account, you can choose the broker that will hold the account, as well as choose the investments you make.
And, not that it matters much to a college student—at least if you’re low income—but your contributions to a traditional IRA are fully deductible against earned income. In addition, any investment earnings in the account will accumulate on a tax-deferred basis. You won’t begin paying taxes on the IRA until you begin taking retirement withdrawals, which you can begin taking at age 59 ½. (Withdrawals taken before that age will be subject to ordinary income tax, plus a 10% early withdrawal penalty imposed by the IRS.)
Even if you can’t make the full $6,000 contribution, contribute as much as you can. If that’s $2000, fine, if it’s $1000, that’s fine, too. Once again, the most important step with an IRA is to get started as early as possible.
As a college student, there’s a bit of a dilemma between taxable investment accounts and traditional IRAs. The IRA will allow you to put money away for retirement, as well as get a tax deduction for your contributions and tax deferral on your investment earnings. But, it also means you won’t be able to withdraw funds if they’re needed for some other purpose.
Taxable accounts will enable you to withdraw funds at any time without tax consequence. But the investment earnings in the account will be taxable.
But, there’s a happy medium between taxable investment accounts and traditional IRAs—Roth IRAs.
These are similar to traditional IRAs, in that you can contribute up to $6000 per year, and your investment earnings accumulate on a tax-deferred basis. However, your contributions are not tax-deductible; but, once you reach age 59 ½ you can begin taking distributions from the plan completely tax-free.
Roth IRAs can be particularly valuable for college students. First, you probably don’t really need the tax deduction. Or, at least you won’t get a big benefit from it. Second, since Roth IRA contributions are not tax-deductible, they can be withdrawn from the plan at any time, without incurring taxes or an early withdrawal penalty.
With a Roth IRA, you can get the benefit of tax-deferred investment earnings, but still have access to your contributions if you need them for another purpose. That means a Roth IRA account may be the perfect investment account choice for a college student.
There are a lot of options when it comes to what to invest in, and it can be confusing for first-time investors. Let’s consider the possibilities, and then you can choose which you believe will work best for you.
Not all college students need to have an emergency fund, but it should be the first priority. If you’re working your way through school, having one can help you even out your cash flow from what might be an unpredictable part-time job income.
There are two basic reasons for having an emergency fund. The first is to cover emergencies, as the name implies. The second is to keep you from having to liquidate investments to cover emergency situations. In that way, an emergency fund works in cooperation with actual investment accounts.
A local bank or credit union is better than nothing, but they also pay interest that’s close to nothing. The better choice will be to consider high-yield online banks, and interest-bearing cash investment accounts like the Betterment Cash Reserve.
As a college student, investing in stocks needs to be a priority. You’re young and looking to turn a small nest egg into a bigger one. Stocks are probably the single best way to accomplish that. That’s because stocks are investments in companies that grow in both revenues and profits over the long term, causing stock values to rise.
Many stocks also pay dividends, which gives you two sources of income and growth from the same security. Stocks are providing an average annual return of about 10% going all the way back to the 1920s. That’s the kind of growth you need working in your favor.
For most college students, stocks should be the largest investment share in their portfolio.
Bonds are a type of security that come in a wide variety of shapes, sizes, and flavors. But, they all have one thing in common, and that’s that they are debt securities. They can be issued by corporations, governments, and even foreign entities, and typically have terms of between 15 and 20 years.
Though it’s worth knowing about bonds as a new investor, they’re not highly recommended for college students. That’s because they’re primarily income generating securities, rather than growth investments. And, unfortunately, interest rates being paid on bonds in today’s very low interest rate environment are hardly worth adding to your portfolio.
Because of your age, probably not more than 10% of your portfolio should be invested in bonds. The rest should be invested in stocks and other growth type assets that will give you the most bang for your investment buck.
Whether it’s a mutual fund or an ETF, the fund is basically a collection of securities wrapped up in a single investment.
Mutual funds generally are actively managed funds, which means the manager will buy and sell securities on a frequent basis in hopes of outperforming the general market. (Reality check: it doesn’t work with the majority of mutual funds.)
ETFs are primarily what’s known as index funds. They are called index funds because they invest to match an underlying index, like the S&P 500.
ETFs are therefore designed to match the performance of the market, and not to either outperform it or underperform it. They also have very low fees. If you’re going to invest in funds, it should be through ETFs, not mutual funds.
Short of buying a property for investment, there are ways to invest in real estate through a small portfolio.
One way is to do it through what are known as real estate investment trusts (REITs). These are basically mutual funds that hold commercial real estate, like office buildings, retail space, and large apartment complexes. They trade on major stock exchanges and can be bought and sold like stocks. They also pay dividends, and will give you an opportunity to participate in both the rental profits on the underlying properties, as well as in any capital gains from the disposition of any properties held in the trust.
Another way is to take advantage of real estate crowdfunding platforms. This is more specialized investing, and does not involve publicly traded shares.
A good example, and one that may be suitable for college students is Fundrise. You can invest through the platform with as little as $500, and reap returns of between 8.7% and 12.4%.
A small position in real estate may be an excellent diversification for the growth portion of your portfolio, alongside your stock holdings.
There are different ways to invest, and even specific investing platforms to accommodate each method.
Self-directed investing, as the name implies, is where you choose and manage your investments. You can do this with stocks, bonds, mutual funds, ETFs and REITs.
If you feel comfortable handling your own investments, look into Robinhood. It’s an investment app designed specifically for young, tech savvy investors. You can open an account with no money at all, and trade stocks, options, and ETFs all commission free. And if you refer your friends to Robinhood, both you and your friend can get free stock.
If you’re not comfortable choosing and managing your own investments, a robo-advisor is the better choice. They are online, automated investment management services that will create your portfolio and manage all the details for you, and all at a very low fee.
Probably the best robo-advisor available is Betterment. They’ll create and manage a portfolio of stocks and bonds based on your investment goals, risk tolerance, and other factors.
You can open an account with Betterment with no money at all, then begin investing as you fund your account. They charge an annual advisory fee of 0.25%, which means a $1,000 account can be managed for just $2.50 per year.
If you like the idea of choosing your own investments, but you have no time or interest in managing them, check out M1 Finance. Like Betterment, M1 Finance is a robo-advisor, but one with a unique twist.
M1 Finance provides complete portfolio management after you have chosen the stocks that will be held in your portfolio. In fact, you can have multiple portfolios in the account, referred to as “pies.” Each pie can be filled with as many as 100 individual stocks and/or ETFs. You can choose from a selection of prebuilt pies, or create your own.
And best of all, there is no management fee or commission charges with M1 Finance.
Now you have plenty of information to get you started investing as a college student. All you need to do is make the decision to get started, and begin accumulating the funds you need.
Don’t be hung up on how much to invest. As you can see from the recommendations above, you can get started with very little money or even no money at all. But, the best advice is to get started now, and keep going while you are in school.
Then, by the time you graduate, you’ll already have the investment habit and experience under your belt, and you just need to continue doing what you’ve already been doing. Only once you start working full-time, you’ll have a lot more money to invest. And because you began when you are in college, you’ll be ahead of most of your friends and coworkers.