Valentin BerardCollege hardly seems the time to begin an investment portfolio. After all, you’ve got your fair share of challenges. Moving away from home, meeting new people, getting to class on time, and maybe even what jobs you can work towards will be occupying your mind.
College students also aren’t exactly renowned for their vast incomes. So, where can you invest your money as a student?
Investing isn’t just for the rich and those with huge incomes. You can start with $20 or $30 a week. It’s not about where you start, but where you finish. We’re not talking about trading here. That’s gambling. We’re talking about long-term investments that build over time. It’s not hard; all that’s needed is patience and a bit of discipline.
With that said, let’s find out why, how and where you can invest your money as a student.
Why start investing your money as a student?
The hardest part of investing is starting. Beginning as a college student is a great way to develop an investment mindset that will serve you well for the rest of your life. If you can manage to invest and build a small nest egg while on a limited income, imagine what you will be able to accomplish once you’re earning a full-time wage later on.
You will graduate college with real-world investment experience. The lessons learned while actually investing will strip anything you can learn in a book or read on a website.
As a young student, you have the one element that older investors can not get back; time. Time in the market beats timing the market. Time and compound earnings are the foundations of financial security.
How to save money on a tight budget
When you have limited resources, it can be hard to find a bit extra to put away as savings. No matter your income, it’s essential to have a little to put away for the future. There are areas you can look at to find a little extra to save.
Change your TV provider
An easy way to find extra money is to cancel cable or satellite TV services. There is a wide range of alternatives in today’s market that cost a lot less. Streaming services can charge as little as $30 per month, though $50 per month is more common.
For example, Netflix ranges from $8.99 – $15.99 per month, and you can view it on devices like a laptop.
Have a look at the way you eat
Eating out all the time is a sure-fire way to put a big hole in your budget. Preparing your own food will produce cost savings and allow you to do things like cook in bulk. Having leftovers for lunch the next day is far cheaper than buying lunch.
Cut everything a little bit
You may already have your spending lean and mean. The next step may be to try to find $5.00 – $10.00 across all the areas you spend. Can you drop an item off the grocery list and save $5.00? Combine two trips into one to save fuel? Can you take public transport or walk instead?
Pay in cash
While it’s impossible to pay rent and utilities in cash, paying your day-to-day expenses in cash can make it easier to stick to a budget. It places a hard limit on how much you can spend and makes you more aware of just how much you’re spending.
Look at your big-ticket items
Have a look at the most significant spending in your budget. Is your car payment too much? Can you rent a cheaper place in an area that is still nice? Or save money by moving in with some friends as roommates?
These last areas you look at can lead to significant savings if you can reduce these bills that you pay each month.
Get out of debt
This subject deserves its own section because it is a savings killer. The interest rates on credit cards are ridiculously high. Just the interest on credit cards each month will take a big chunk of your income.
Pay a credit card off as quickly as possible. To start with, put any savings you can make into removing these debts. The interest savings alone will put you ahead.
If you have more than one card, use the domino theory. Pick one (the highest balance usually), pay it off, and then move on to the next one. After you have paid off credit cards, pay off any personal loans you may have as fast as possible.
This is the most critical first step to using your money for building a future for yourself.
Automate your savings
The less thinking you do, the better your results. If you have a regular income, set up an automatic transfer of some of your income to a savings account or brokerage account. Even better if you can get an employer to deposit some of your wages directly into these accounts for you. Make it an amount you can afford, and remember, this money is not for spending.
The above tips are some helpful techniques to prepare you to invest your money as a student.
How to invest with a small amount
So you’ve managed to scrimp and save your way to $1,000. Maybe less than this. What do you do now? Where can you invest your money as a student?
Choosing a broker
If you’re only investing a small amount, it is vital that your funds not be eaten up by fees. Ally Invest, TD Ameritrade, and E*Trade, M1, Robinhood, Fidelity, and Streitwise are some that allow you to invest small amounts and have $0.00 or low costs. Have a look at them or other options to find the right choice to invest your money as a student.
Compound interest
Albert Einstein said, “compound interest is the eighth wonder of the world; he who understands it earns and he who doesn’t pays it.” So what is it? It is earning interest on your interest and happens when you re-invest your earnings. If you have $100.00 and earn 8% for the year, you will have $108.00 at the end of the year. If you re-invest for the next year, then you will earn interest on $108.00. At 8% per annum, you will have $116.64 at the end of year 2. This concept is one of the most potent tools in investment. Over time, 8% compounding interest will double your money in 9 years.
Keep it simple
Shares are a great place for a young person to start investing. As a novice in the stock market, it is easy to get overwhelmed with jargon and terms thrown at you from all angles. Try to cut out as much of the noise as possible. Remember, you’re in this for the long term, and the latest craze will have gone years into the future when you’re still earning compound returns on your compound returns.
Invest for the long term
Another way to invest your money as a student? Invest for the long term.
Trading looking for quick profits is a bit like going to the casino. You’re going to get the occasional win, but in the end, the house will get you. When investing while in college, it is the perfect time to develop an investor’s mindset. Investing isn’t gambling. You’re looking for safe investments with a solid foundation behind them that will grow over the long term. And by long term we are talking years. Keep it simple and straightforward, and by earning around 8% (more on this figure in the next section) compound interest, you will double your money every nine years.
It sounds boring, but put a little away each month over that time and see where you end up. The result may shock you. Most people overestimate what they can do in a year and underestimate what they can do in ten years.
Index funds
The great investor Warren Buffett, when asked about investment strategy, said he would put 10% in bonds and the remaining 90% in an index fund and just leave it there. Markets will move up and down from day to day, from year to year even. But over the long term, they always grow. You don’t have to know a lot to invest in index funds as a college investor, and the fact they are so diversified means they’re relatively low risk. You can also invest in these funds with a small investment.
So what is an index fund? The fund will consist of a group of shares that mirror a specific index. The most common index funds are based on the S&P 500, which are the 500 largest companies on the stock exchange. Over the last 20 years, the S&P 500 has an annualized return of 8.12%. There were good years in there and bad years in there, but the average over time was 8.12%. Compare that to bank interest which is 2.18%
Once you own shares, you will also start to receive dividends. You can have these paid to you or re-invest the profits and receive more shares. Re-investing is a great way to boost your compound interest and increase results.
Index Funds will also usually have very low fees. New investors often undervalue this aspect of investing, but it can have a significant effect over time, with costs eating away at investment returns. Take note of these pointers when investing your money as a student.
Try a robo investor
If you’re not ready to pick an Index Fund, a Robo advisor may be for you. The advisor creates a portfolio for you based on your desired outcome. You let them know how your time horizon and how aggressive you want to be, (remember more aggressive means more risk), and they do the rest for you.
The best part about these is that you can start with a minimal amount. You can get started with spare pocket money, literally $20, and add money in as you go. Generally, the fees involved are low and based on the size of your account.
Check out investing apps
To make investing simpler still, an investment app will allow you to buy individual shares or a selection of funds for investments as little as $5.00.
The big dog in this field is Acorns, which will round up your debit and credit card purchases up to the next dollar and put the difference into various ETFs. There are a few others in this area as well, coming in at around the $1.00 per month range for fees.
That’s another way you can invest your money as a student.
Check out bonds
Bonds are what governments and companies issue when they want to borrow money. Think of them like an IOU. Bonds issued by governments are usually the safest kind, as governments don’t go broke as a rule. The British Government used to issue bonds called Gilts. Gilts got their name because the certificates they issued had gold leaf around the edges to remind people how safe they were. Bear in mind that some governments can get into trouble; Greece, for example, has recently had trouble paying its debts.
The amount of interest you earn on a bond, known as the yield, is decided upfront and is guaranteed. There will be a date they are redeemed, and the borrower will buy them back at full price. This is known as the nominal value.
With bonds, the safer they are, the lower the yield. Those perceived as higher risk will have a higher yield. You can also sell your bond at any time. But they trade at the market value, not their face value. As a rule, when interest rates are low, the price of bonds goes up. When interest rates are high, the price decreases. Bonds can be a safe way to invest. It is worth doing your research on bonds if you think they are something that will interest you.
I've started; what now?
You’ve invested your money as a student into a suitable Index Fund. What should you do now? The answer is to wait and do it all again. In short, keep adding to your investment. Putting a small amount in each month will reap big rewards down the track.
Invest and keep on investing and never stop. Investing is a habit, and investing as a student is the best time to start the practice.
Where should I invest my money as a student?
As a student, you are likely to be starting off with small amounts. Other questions will also form a part of your decision. What is the safest type of investment? What is the smartest way to invest?
With little capital, you can’t afford to lose what you have got. The best option is to look for a low-risk investment and invest over the long term. All the options listed above, such as Index Funds, will allow you to invest over a long time at a relatively low-risk level. Investing over the long term helps reduce risk. Day-to-day fluctuations are smoothed out over the years. The smart way is to keep on investing and let time do the trick.
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Conclusion
Investing your money as a student is simple. But that doesn’t mean it’s easy. The main ingredients are patience and discipline.
Once you have got a little nest egg saved up, it is time to invest. Pick a safe long-term investment, like an index fund, and begin investing. The key is that once you have started, keep going. Add more each month and let time do its work.
The advantages of investing while in college are numerous. As well as developing good habits and gaining valuable investment knowledge and experience, you have youth on your side. Youth and starting young are an investment superpower. While everyone around you is blowing money on cars that will be outdated in a couple of years and parties, they won’t remember you will be setting up your future. Invest a little each month and let time and compound interest do the heavy lifting for you.
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