Investing For College Students: A Beginner's Guide To Smart Finances

College is a great time to start investing. While many college students are perceived as being broke, there is no age limit or minimum amount required to start investing—you can begin with as little as $5. The earlier you start investing, the more time your assets will have to grow, and the more financial freedom you will have after graduating.

Budgeting and saving

Identify how much you can invest

The first step is to prepare a budget to determine your income and expenses. This will help you understand how much money you have left after covering your necessities. You can use budgeting rules such as the 80-20 or 70-20-10 rule as a guideline, where a certain percentage of your income is allocated to needs, savings, and discretionary spending. For example, with the 70-20-10 rule, 70% of your after-tax income goes to personal living expenses, while 20% goes to savings and 10% to fun or discretionary spending.

Set clear financial goals

Once you have an idea of your income and expenses, you can set clear financial goals. These goals will help you stay motivated and on track with your investment journey. Your goals can include both short-term and long-term objectives, such as saving for an emergency fund or investing for retirement.

Choose the right investment types

When choosing an investment type, it's important to consider your risk appetite and financial goals. If you're risk-averse, you might prefer safer options like certificates of deposit, which offer lower yields but less risk. If you're willing to take on more risk, stocks or equities might be a better option, as they offer higher potential returns but also come with greater risk. You can also mix and match different investment types to diversify your portfolio.

Start with a small amount

You don't need a large sum of money to start investing. Even a small amount, such as $20 or $30, can be a great way to get started and learn about the market. Many brokers now allow investors to buy fractions of shares, making it even easier to get started with a small amount.

Be consistent

Consistency is key when it comes to investing. Try to invest a small amount each month, even if it's just a few dollars. This will help you stay disciplined and take advantage of dollar-cost averaging, where you buy more when prices are low and less when prices are high.

Take advantage of compound interest

Consider investing in accounts that offer compound interest, such as high-yield savings accounts or certificates of deposit (CDs). Compound interest allows you to earn interest on your initial deposit as well as the interest accumulated over time, helping your money grow faster.

Remember, investing as a college student can be a great way to build wealth and gain financial freedom. By budgeting and saving wisely, you can set yourself up for success in your investment journey.

Investment types

There are many investment types available to college students, and it can be overwhelming to choose from them. Here are some of the most popular investment types:

• Mutual Funds: These are investment vehicles that pool money from multiple shareholders and invest in various assets like bonds, REITs, stocks, and money market instruments. The fund is managed by investment advisors or mutual fund managers, who allocate the funds to different assets to generate income or capital gains. Mutual funds offer an advantage in that they are professionally managed, and investors can easily enter and exit the market by buying or selling their shares. However, they also come with fees and commissions and do not have FDIC coverage.
• Bonds: Bonds are fixed-income instruments, essentially loans made by investors to corporate or governmental borrowers. They are considered low-risk investments, often favoured by risk-averse investors, and are typically paid with a fixed interest rate. Government-backed bonds, such as T-bills or municipal bonds, are more adaptable to inflation and provide better protection against valuation losses during interest rate hikes.
• Stocks or Equities: Investing in the stock market means buying shares or fractions of a company, giving investors access to the company's assets and income proportional to their ownership. Stocks are more volatile than other investment types, carrying greater risk but also offering the potential for higher returns. Investors can earn through dividends, though not all stocks pay dividends. It's important to research and analyse the fundamentals of the company before investing.
• Real Estate Investment Trusts (REITs): For dividend investors, REITs can be an excellent choice. Despite the volatility in the real estate industry, REITs have shown promise, appreciating due to high property demand. They offer high dividends, value appreciation, and a low correlation with stock market changes, making them a more stable investment option.
• Certificate of Deposits (CDs) and High-Yield Bank Accounts: CDs and high-yield bank accounts are optimal choices in challenging macroeconomic environments, as they can generate higher yields with lower risk compared to other bank accounts. With CDs, investors commit to leaving their money in the bank for a specified period without withdrawing it, and they receive their savings plus interest at the end of the term.
• Robo-Advisors: Robo-advisors are automated services that create and manage investment portfolios based on an investor's goals, time horizon, and risk tolerance. They usually charge a percentage of the assets under management, and they can be a hands-off way for beginners to start investing with a small amount of money.
• Individual Retirement Accounts (IRAs): Opening an IRA while in college may seem premature, but it can be an excellent opportunity to start building retirement savings. An IRA allows you to defer taxes on profits and deduct contributions from taxable income. The earlier you start, the more you can take advantage of compound interest to maximise your account.

Trading platforms

There are many trading platforms available for college students to start investing. These platforms offer various features, including the ability to trade in different investment types, determine risk tolerance, and provide suggestions for diversification. It is important to research and find low-cost but reliable trading platforms to avoid fraudulent activities. Some popular trading platforms include:

• Robinhood: This platform offers commission-free trading and has a mobile app, making it easily accessible for college students. Robinhood Gold provides Morningstar research for a relatively cheap $5 per month.
• Webull: Webull is similar to Robinhood, offering commission-free trading with more customer support options.
• Stash: Stash is a mobile app that allows users to buy individual stocks or ETFs. It has a low starting cost of $5, and the entry-level account costs $3 per month.
• Acorns: Acorns is another popular investing app that rounds up purchases to the nearest dollar and invests the difference into ETF portfolios. The core membership is $3 per month, and there is also a family version for $5 per month.
• Betterment: Betterment is a robo-advisor that creates a portfolio for you based on your time horizon and investment goals. It charges a low fee of 0.25% annually.

When choosing a trading platform, it is essential to consider your investment goals, risk tolerance, and the features offered by the platform. It is also crucial to understand the risks associated with investing and to make informed decisions based on research and analysis.

Risk tolerance

Your risk tolerance will help determine your investment strategy. If the idea of any loss makes you uncomfortable, you may want to take a more conservative approach, which will likely result in smaller gains and losses. Conversely, if you are comfortable with higher risk, you may opt for investments with greater potential gains but also greater potential losses.

It's also worth noting that certain investment types are more suitable for different levels of risk tolerance. For example, a risk-averse investor may prefer low-risk assets like bonds or bond funds, while a risk-tolerant investor might opt for equities like stock funds and index funds.

Additionally, it's crucial to understand the risks associated with different investment strategies. For instance, investing in a single stock or sector can be riskier than diversifying your portfolio across various assets and industries.

Before investing, it's essential to assess your financial situation and ensure that the money you plan to invest is non-essential, meaning your necessary expenses and bills are covered. It's also recommended to establish clear investment goals and create a reasonable budget that accounts for all your expenditures.

Remember, investing as a college student can provide valuable real-world financial experience and help you build wealth over time.

Long-term investing

Start Early

The earlier you start investing, the more time your money has to grow. College students have time on their side, allowing them to ride out market fluctuations and recover from short-term losses. Starting early also helps develop essential financial habits and a mindset of disciplined saving and decision-making.

Understand the Power of Compound Interest

Compound interest occurs when your investment gains generate additional returns, creating a snowball effect that multiplies your initial investment. The earlier you begin investing, the longer your investments have to grow and benefit from the compounding effect. Even small amounts invested during college can accumulate substantially over time.

Choose the Right Investment Options

As a college student, you have a range of investment options, each with its own benefits and risks. Here are some options particularly suitable for long-term investing:

• Stocks and Exchange-Traded Funds (ETFs): ETFs offer diversified exposure to a basket of stocks, reducing the risk associated with individual company performance. When investing in individual stocks, look for well-established companies with solid financials and a history of consistent growth.
• Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They offer instant diversification and are managed by professional fund managers. Look for mutual funds with a good track record, low expense ratios, and a focus on long-term growth.
• Robo-Advisors: Robo-advisors are online platforms that provide automated investment advice and portfolio management based on your risk tolerance, investment goals, and time horizon. They offer convenience, low fees, and personalized investment strategies.
• Index Funds: Index funds are a type of mutual fund that tracks a specific market index, such as the S&P 500. They provide broad and diversified exposure to a range of stocks and bonds at an affordable cost, making them a good option for students with limited funds.
• Retirement Plans: Investing in a retirement plan, such as a 401(k), allows you to develop consistent saving habits and ensure your long-term financial well-being.

Assess Your Risk Tolerance

As a college student, it's crucial to assess your risk tolerance before investing. Younger investors typically have a longer investment horizon, often allowing for a higher-risk tolerance. If you're comfortable with risk, consider aggressive or growth-oriented investments like equities and ETFs, which offer higher returns but come with greater market volatility. On the other hand, if you prefer a more cautious approach, opt for lower-risk options such as bonds or mutual funds, which provide more stability to your portfolio.

Diversify Your Portfolio

Diversification is a crucial aspect of long-term investing. Asset allocation and diversification techniques can help reduce risk and volatility in your portfolio. Spread your investments across different asset categories, such as stocks, bonds, and cash. Within each category, consider investing in a range of industries and companies to minimize the impact of any single investment on your portfolio.

Make it a Habit

Consistency is key when it comes to long-term investing. Make investing a habit by setting aside a small amount of money regularly, even if it's just $20 or $30 per month. Many brokers now offer the ability to buy fractions of a share, making it easier to invest with modest amounts.

Educate Yourself

Take the time to educate yourself about investing. Learn about stocks, bonds, mutual funds, and other investment options. Stay informed about market news, trends, and economic indicators. This knowledge will help you make more informed investment decisions and spot potential opportunities and risks.

Frequently asked questions