Investing early can help college students build healthy financial habits and prepare for the future. Even a small amount of money saved from summer jobs, family gifts, or scholarships can mean a head start in the market and the first step toward financial independence.
Still, investing can be a complex and nuanced process. That’s why it’s important to seek out good investment tips for college students and research the best resources to help make well-informed decisions when building a portfolio.
The Benefits of Investing as a College Student
By starting early and slowly, students can start generating wealth with minimal risk. Here are some of the biggest advantages of investing while still in college.
Students can turn minor savings into major investments by accruing compound interest at a young age. They can also give themselves more room to make mistakes and take risks as they learn about the investing process.
According to The College Investor, college students would have to start investing $175 per month at age 18 to reach $1 million by age 82. That’s only about $6 a day. If they wait until they’re 21, however, that number jumps to $231 per month; if they wait until they’re 30, it more than triples to $575 per month.
Building Healthy Financial Habits
Before they graduate and build careers, college students can develop valuable financial skills such as learning how to make smart investments, monitor the stock market, and save money. This way, once they begin earning a regular salary, they’ll already have the experience they need to make the most of their earnings and continue saving for the future.
Preparing to Pay Off Student Loan Debt
U.S. student loan debt is now at a record $1.6 trillion, with more than 45 million borrowers across the nation, according to Forbes. The majority of young adults who attend college take on some form of debt, such as student loans, as the Federal Reserve reports. Their latest survey in 2018 found that 20% of students who still owed money were behind on the payments. Students can prepare to pay off this debt by investing during college and growing their wealth.
Common Types of Investments for College Students
College students can start investing by exploring manageable and low-risk investment accounts. Consider these popular options for young and beginning investors.
Index funds are based on the Standard & Poor’s 500 index of major U.S. companies, also known as the S&P 500. This option allows students to invest in a ready-made portfolio of low-risk stocks. They don’t have to choose individual stocks themselves and can instead get an easy introduction to how the market works.
If students have a job, they can consider setting up an individual retirement account (IRA), which is a type of retirement savings account where investments grow tax-free. Students can set up an IRA through their bank or brokerage.
IRA accounts are divided into two main types:
- Traditional IRA. These accounts include tax benefits for contributions (with some deduction restrictions). That means students don’t have to pay taxes on the money they put in, and they can accumulate money more quickly. The downside is that they can’t withdraw the money until they’re 59.5 years old, and will have to pay taxes on those funds once they do withdraw them.
- Roth IRA. These accounts don’t include a tax benefit for contributions, but the taxation is usually minimal, and contributors can make tax-free withdrawals from these accounts at any time.
Certificates of Deposit
Certificates of deposit (CDs) are safe, low-risk products sold by banks and credit unions. Like savings accounts, CDs can be used to store money in a safe place. Unlike savings accounts, CDs grow at a fixed interest rate, as long as the deposit is left in the account for a predetermined period of time. That’s why, even though CDs aren’t stocks or bonds, they can be an important form of investment for college students.
7 Good Investment Tips for College Students
Young investors can use these seven tips for college students to make more efficient and financially savvy decisions for their futures.
1. Save Money Now
Students don’t need thousands or even hundreds of dollars to start investing. Setting aside just $10 or $20 each week can be enough to begin. Automating savings can also help students stick to a budget and retain money for consistent investments. Skipping that daily coffee trip or weekly food delivery might seem worth it when students know that, years from now, that small amount of money can turn into big savings.
2. Research Brokerages
Brokerages make investments on investors’ behalf, helping them make informed decisions and track their investments’ value. That’s why finding brokers who best fit their financial needs is important for students. Some low-cost brokerages that are great for beginners include Fidelity, Ally, and TD Ameritrade. Investment apps like Robinhood let investors start trading without fees, making it a valuable option for college students.
3. Open a Brokerage Account
After choosing a broker to work with, investors decide which type of investment account to open.
Brokerage accounts are available in two main types:
- Cash account. This basic type of account uses cash on hand to purchase securities. Cash accounts are low risk and easy to set up for new investors.
- Margin account. This type of account allows holders to borrow money from the broker to make investments. Brokers can use available cash and purchased securities as collateral for the loan. These accounts are riskier and come with interest rates, but they can yield higher returns since they allow for bigger investments.
4. Decide on Managed vs. Self-Directed Investing
Students can choose from two different approaches to investing: managed or self-directed. Managed investing is supervised by an account manager who can help create and balance a portfolio, make decisions on investors’ behalf, and keep track of investments.
Self-directed investing, on the other hand, gives investors more autonomy, but it comes with greater risk, since investors are making all investment decisions on their own, including which stocks to invest in, and when to buy and sell shares.
5. Understand Risks
It’s important for new investors to understand the risks that come along with this process. The stock market fluctuates, for example, and investments may not always increase in value quickly or consistently. But young investors should still maintain their portfolios as stocks rise and fall. This way, they can gain experience tracking and managing their investments, while getting a firsthand look at how the market recovers even after major declines.
6. Use a Robo-Adviser
Robo-advisers are helpful tools that automatically create portfolios, make investments, and analyze returns. This is beneficial for college students who want to get started investing small amounts of money and still remain focused on their educational and career goals. Popular and affordable robo-advisers include Wealthfront, Betterment, and SoFi.
7. Don’t Stop Investing
One of the biggest mistakes new investors can make is stopping too early. Investing can be a bit scary, and it does come with risk, but if they continue developing their knowledge and building healthy investing habits, students can reap the rewards for years to come.
Resources for Beginning Investors
College students still worried about making their first investments should know that they’re not in this alone. Plenty of helpful apps and resources have been built just for guiding young investors and college students through this financial process.
Consider these popular tools for beginner investors.
The M1 Finance app automates the investing and money management process for free. The program uses intelligent automation to invest money in chosen stocks according to target amounts, so investors don’t have to do it manually. Users can also open an M1 checking account and debit card to spend their earnings directly from the M1 platform.
Streitwise is a real estate investing platform that helps users build a professionally managed portfolio of private real estate properties. As those properties appreciate in value, investors can share in the earnings and generate passive income.
The Stash app helps beginners invest in stocks with $1 or less, meaning students can essentially turn pocket change or minimal daily savings into investments. Stash also keeps users updated with helpful resources and advice for budgeting, saving for retirement, and staying on track with financial goals.
The Public app combines social networking with the stock market, inviting users to follow other investors, discover new opportunities, and share insights about their experiences. They can even start group chats to dive further into stock tickers, charts, and trends. On top of this, people can use the app to make investments and build their portfolios with no required minimums or commission fees.
Invest in Your Future
The best time to start learning about investing is now — whether you’re ready to open your first account, download a robo-adviser app, or research the fluctuations of the stock market. The sooner you begin investing, the sooner you’ll start saving for your post-college future. With the right investments in place, you can graduate knowing that you’ve already built the foundation and skills you need to continue growing your wealth and planning for financial success.