If you’re a college student, you’re probably interested in passing your classes, finding a career and having a good time. You’re less likely to focus on things like investing for your future and personal finance.
You may not even think it’s possible to invest while you’re paying for things like student loans, housing and food. However, college is the perfect time to start even if you don’t have a lot of money to invest.
Getting started early will give you a head start on your way to financial independence. This article will show you some of the best ways to invest even a small amount of money while still in college.
Why Invest as a College Student?
By investing early, your money gets the maximum amount of time to grow and earn compounding interest. In an investment account, the principal amount of your money earns a certain percentage of interest each year. This interest adds to (compounds) and increases your principal amount. For every gainful year, the same percentage of growth will be worth more.
Let’s say you have $100 invested, and it grows by 8% in a year. The next year, you’d have $108. If that grows by 8%, the next year, you’d make $116.64. It doesn’t seem like much in the short term, but over time, it adds up greatly. After 40 years, you’d have $2,172.45, over 20 times your initial investment.
Another benefit of getting started early is that you can build investing habits that last the rest of your life. One of the hardest things about investing is actually putting the time in and getting started. If you can get your first time investing out of the way and learn how the process works while in college, you’ll have already done the hard part.
The Best Ways to Invest as a College Student
It can be hard for new investors to save even a little money in college. After hitting the books and going to classes all day, you probably want to spend your money on things like going out to eat with friends and having fun. But a little discipline can go a long way. Even the small amount you save today could be worth much more in the future.
In the next few sections, we’ll go over some of the top ways you can put together a solid investment strategy while still in school.
High-Yield Savings Account
High-yield savings accounts give you the ability to grow your money in a safe account that will still generate compound interest. These are savings accounts, so they’re not volatile like investing in the market. Be sure to get a high-yield savings account that is insured by the Federal Deposit Insurance Corporation (FDIC), though, so that you’re protected against bank failures.
Generally, you’ll put a certain amount of money into your savings account and agree to keep it there for a period of time. In return, you’ll get interest rates that can be over 20 times what you’d earn on a traditional savings account.
If your bank offers this type of account, you can start one through them. However, you might benefit from opening an account from an online bank like Axos Bank or Live Oak Bank with an annual percentage yield (APY) of over 0.5%. Your APY is the amount of interest your account will generate throughout the year.
These accounts are good for things like building an emergency fund. They’re dependable, but they don’t offer the same growth potential as other investment options. Many high-yield accounts also have requirements for how much money you need to keep in the account and will charge you fees if your principal balance dips below them.
Individual retirement accounts (IRAs) offer tax benefits for investors. Even though retirement might seem like a lifetime away when you’re in college, an IRA is one the best investment options you can choose. There are two types of IRAs you can pick from.
With a traditional IRA, you don’t pay taxes when you put money in. Your money compounds interest until you retire (or need to make a withdrawal). When you finally take your money out, you’ll pay taxes on it at the tax rate at the time of your withdrawal.
With a Roth IRA, you pay taxes when you put money in, but you don’t have to pay them when you take money out. This lets your money grow tax-free until you withdraw it. Roth IRAs are great for when you’re in college because you’re likely not making much money, which means your income is taxed at a lower rate. Tax rates also tend to generally rise over time.
Almost anyone can put money in a traditional IRA, but you need to have certain income limits to start a Roth IRA. These rates change over time, though, so be sure to check with the Internal Revenue Service (IRS) when you open an account.
The downside of having an IRA is that you’ll have to wait to get your money out. Most IRA plans will penalize you for making withdrawals before you turn 59 ½. There are also limits to how much money you can put into an IRA. The rate is currently $6,000 per year, but it can fluctuate over time.
An index fund is a collection of high-performing stocks that you can invest in for low prices. The most popular index fund is the S&P 500. Index funds have low volatility, as they mimic the general performance of the market as a whole.
In 2020, the S&P offered investors returns of over 18%. The index fund averages returns of around 10% each year. While it’s possible for an index fund to lose money in a given year, the odds are overwhelming that it will grow over time.
An Index fund is a low-risk tool to grow your money in the stock market. Anyone can invest in an index fund. However, index funds won’t give you huge gains in a short period of time. They’re designed to slowly build wealth over several years.
If you’re in college, you likely won’t have a full-time job or much money to invest, but you shouldn’t let that stop you. Online brokers can offer low cost or even commission-free options to invest small amounts. Many online brokers have online options that can help you learn about investing. Anyone can use online brokerages.
However, there are downsides to using online brokers. Like gambling, they can be extremely addictive, and they don’t let you form a relationship with your financial advisor. Online brokers also rely on technology like the internet and investing apps to make trades. Things like malfunctions on your personal computer can cause you to miss out on profitable trades or buy the wrong stocks.
Some choices of online brokers are listed below.
Robo-advisors are online programs that make and maintain an online investment portfolio for you based on your investment preferences (like risk tolerance and future objectives). Robo-advisors can have fees as low as 0.25% (or your principal balance) annually to manage your account.
Robo-investors also allow you to put more money in your account over time without paying extra transaction fees, and they can notify you of things like low interest rates on savings accounts and other financial opportunities.
Anyone can use a robo-advisor; however, they don’t give you the benefit of meeting with a financial advisor face to face. While they offer investment solutions based on data, they may not be able to understand your exact situation as well as an in-person advisor. Below is a list of some of the best robo-advisor services.
You don’t have to buy properties to invest in real estate. Real estate investment trusts (REIT) are a popular way to invest in real estate that doesn’t require a huge amount of capital. Like mutual funds, they gather money from a large number of investors. They use the funds to purchase commercial real estate.
You can buy REITs like individual stocks from a broker. They give you investment dividends when a property is rented out, sold, and any other time it generates profit. Unlike the properties themselves, REITs are liquid, which means you can buy and sell them whenever you want. REITs also make the allocation of your investment funds more diverse.
A downside of investing in REITs is that the IRS doesn’t consider investment income from them to be qualified dividends. While qualified dividends from other types of investments can be eligible for a lower tax rate, dividends from REITs are taxed like normal income.
Learn More About Managing Your Finances as a Student at CollegeFinance.com
When you’re paying for college tuition, books, dorms and food, the last thing you want to do with any spare money is hide it away in a brokerage account. But if you can exercise even a small amount of self-control, you’ll create positive investment habits and start building a solid foundation for financial independence.
Another way to gain financial independence is to focus on paying off student loan debt. CollegeFinance.com can help you make the most of your college investment with resources on paying down student loans and making other informed choices regarding college financing.