Josephine Norton
College is a time of new experiences and challenges, and while it can be a financially demanding period, it also presents opportunities for students to start investing and building their financial future. Investing as a student can be an excellent way to gain real-world money management experience and set oneself up for long-term financial success. With the right strategies and a measured approach, students can make the most of their time at college and lay the foundation for their future investment journey.
| Characteristics | Values |
|---|---|
| Time to start investing | The earlier, the better |
| Investment types | High-yield savings accounts, CDs, stocks, bonds, mutual funds, REITs, cash accounts, margin accounts, robo-advisors, index funds, IRAs, Roth IRAs |
| Investor psychology | Avoid FOMO, buying high and selling low |
| Investment strategy | Realistic, time-efficient, long-term, well-diversified |
| Risk tolerance | Depends on age, financial independence, income, expenses, and goals |
| Budgeting | 80-20 rule, 70-20-10 rule, 50-30-20 rule, 60% solution |
| Trading platforms and brokers | Low-cost, reliable, user-friendly, offer risk tolerance suggestions |
| Amount to invest | Start with a small amount, e.g., $5, $20, $30 |
What You'll Learn
High-yield savings accounts or certificates of deposit (CDs)
With CDs, investors can leave money in the bank for a specific period without touching it. After the period, the saved money and the interest yielded are returned to the customer. CDs are considered one of the safest investment alternatives. They pay a fixed rate of interest in exchange for the investor committing money to the bank for a specified timeframe. These investments can be a good place to park money that you don't need until a specific time in the future. For example, if you have money for next year's tuition fees, you'll want that in a super-safe account that won't fluctuate with the stock market.
Savers don't often think of bank products as investments, but they are. High-yield savings accounts pay interest on deposits at far higher rates than traditional savings or checking accounts, while still offering the ability to make withdrawals at any time. The rates available on these accounts are the highest they've been in years, making them one of the best short-term investments.
College students may be overwhelmed with various investment types as they enter the financial market. However, it's important to remember that investing does not impose an age limit, nor does it set a minimum amount—you can start investing with as little as $5. Building assets will take time, so the earlier you start, the better.
Investing as a college student will give you real-world money experience to sharpen your skills and allow you to become an expert by the time you graduate. Losing money will also be less risky since the amount invested will be much smaller. But most importantly, investing early can help generate higher payouts in the future.
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Low-cost brokers
Low-cost online brokers such as Fidelity Investments and Charles Schwab offer free stock and ETF trades, along with excellent research and educational tools to help you get started on your investment journey. Both Fidelity and Schwab are known for their overall client service and investor-friendliness. These platforms allow you to invest modest amounts each month without having your capital eaten up by fees, so more of your money actually goes into your stocks or funds.
If you want to go completely free, Robinhood is a great option. Its main selling point is that trading on the platform is free, including options and crypto. Robinhood Gold also provides Morningstar research for a relatively cheap $5 per month. With a slick trade-anywhere mobile app, Robinhood is an excellent choice for those looking to cut costs to a minimum.
Webull is another option for the cost-conscious investor. While it also features commission-free trading, it has more customer support options than Robinhood.
When choosing a low-cost broker, it is important to be cautious and do your research to avoid fraudulent activities.
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Regular monthly investments
Start with a small amount
Even a small amount like $20 or $30 a month can be a good starting point for college students to begin investing regularly. This allows students to get a feel for the stock market and make more informed decisions without risking a large sum of money. With many brokers now offering the ability to buy fractions of a share, it's easier than ever to invest with small amounts.
Choose the right investment vehicle
College students should consider investing in diversified investment funds such as index funds, mutual funds, or exchange-traded funds (ETFs). These funds provide exposure to a wide range of stocks or other assets, reducing the risk of losing money. Index funds, in particular, are a good option as they offer less volatile returns than individual stocks and are recommended by legendary investor Warren Buffett.
Take advantage of compound interest
By investing regularly each month, college students can take advantage of compound interest, which allows their investments to grow faster over time. The power of compound interest is most noticeable over long periods, so starting early is key.
Automate your investments
To make regular monthly investments easier, consider automating your investments. Many investment platforms and brokers offer the ability to set up automatic monthly contributions. This helps ensure that you stick to your investment plan and removes the temptation to spend the money on something else.
Choose the right platform
When choosing an investment platform or broker, college students should look for low fees and the ability to invest in a variety of assets. Some popular options include Fidelity Investments and Charles Schwab, which offer free or low-cost trades and educational tools.
Be consistent
Consistency is key when it comes to regular monthly investments. By investing the same amount each month, college students can take advantage of dollar-cost averaging, which helps to smooth out the highs and lows of the market. This strategy also helps to remove emotion from investing decisions, which can lead to better outcomes over time.
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Index funds
Diversification
Ease of Use
Long-Term Investment
Low Fees
Accessibility
Performance
Historically, index funds have performed well. Since the Global Financial Crisis, the average annual return of the S&P 500 has been 7.42%. This shows that index funds can be a durable investment, even during macroeconomic disturbances.
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Robo-advisors
- Low Minimum Investment: You can get started with a small amount of money, often as little as $20, which makes it accessible for students with limited funds.
- Incremental Investments: You can add money to your account incrementally without transaction costs, making it easy to invest small amounts regularly.
- Affordable Fees: Robo-advisors typically charge a percentage of your assets under management, often around 0.25% annually, and some waive fees for small accounts.
- Attractive Interest Rates: They often offer competitive interest rates on cash accounts, providing a good return on your money.
- Flexibility: You are not locked into your investments, and you can usually withdraw your money at any time without penalty.
- Diversification: Robo-advisors build diversified portfolios across various asset classes, reducing risk and providing exposure to different types of investments.
When choosing a robo-advisor, it is important to consider the fees, the minimum investment required, the level of personalisation offered, and the types of investments included in the portfolio. Additionally, you should review the performance track record of the robo-advisor to assess their historical returns and how they have navigated different market conditions.
Some popular robo-advisor platforms include Wealthfront and Betterment, which are known for their low fees and user-friendly interfaces. These platforms use algorithms to analyse your financial situation and goals, and then provide tailored investment recommendations. They also offer features like tax-loss harvesting and automatic portfolio rebalancing to optimise your investments.
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Frequently asked questions
Some investment options for college students include mutual funds, bonds, stocks, and certificate of deposits (CDs).
First, identify the amount of money you want to invest by preparing a budget. Next, choose your preferred investment type and look for low-cost but reliable trading platforms and brokers. Finally, begin by investing a small amount every month to test the waters.
Before investing, establish clear goals and create a reasonable budget. Assess your risk tolerance and be cautious of investor psychology, such as the temptation to buy high and sell low. Additionally, consider diversifying your portfolio and staying informed about the companies you invest in.
Avoid putting all your eggs in one basket by diversifying your investments across different assets and industries. Be wary of investment fraud and do your own research before investing. Don't invest based solely on social media advice or follow the herd mentality.
The amount a college student should invest depends on their financial situation and risk tolerance. A common formula is the 50-30-20 rule, where 50% of income goes to needs, 30% to wants, and 20% to savings. Another rule is the 60% solution, allocating 60% to committed expenses, 20% to long-term savings, 10% to short-term savings, and 10% for fun.
