Content of the material
- A Quick Disclaimer
- Waiting Too Long to Get Started
- Should College Students Invest through a Traditional IRA?
- Frequently Asked Questions About Investing While in College
- Final Word
- I Did It! Now What?
- The learning doesn’t need to stop here
- 6. Turn to an investing app
- 1. Consider starting with a high-yield savings account or CDs
- What Type Of Account To Open
- 4. The key is to diversify
- Investment Apps
- Robo Advisors
- Fractional Stocks
- Rewards & Benefits
- Establishing Your Online Investment Portfolio
- Learn What Type Of Investments Fit You
- 6) I already have a retirement fund, why should I invest more money?
A Quick Disclaimer
We’re not financial advisors. And everything you read here is just to help you learn about the basics of how to invest and share some personal opinions.
To make smart financial decisions, it’s important you continue to conduct your own research. And, if necessary, seek the advice of a licensed financial advisor who can help you make decisions based on your current financial situation.
You also need to know that all investments involve some form of risk. And, unfortunately, there’s no guarantee you’ll be successful or avoid losing money when investing.
In short, when you’ve finished learning the basics here, keep on researching before you get started so you can make smart decisions!
Sound good? Perfect! Let’s get started by talking about why learning how to start investing is worth your time!
If you’re new to investing, it probably makes you feel one of two ways.
First, it can feel like a level of long-term financial planning that’s too far off for you to be thinking about yet. Most people invest for retirement, right? Yes, but, there are more reasons to invest than that!
And, second, it can feel like a significant risk to put your hard-earned money towards something and not know exactly how much money — if any — you’ll be able to withdraw later. Nerve-wracking? Perhaps…
But, is learning how to invest still worth it? Absolutely! Why?
Investing gives you the power to let your money earn more money for you. Yep, you read that right! When you invest, your money can make you money thanks to compound interest. In addition, when you invest you generally protect yourself from your money losing value over time due to inflation.
And, it’s for that reason that investing is said to be the #1 way to build sustainable wealth over time. It also makes it a lot easier for you to pay for major milestones in your life like buying your first home, having the wedding of your dreams, knocking every travel destination off your bucket list, eventually retiring with ease, and so much more.
Wanna know the best part for you? The earlier you start investing, the better! And luckily, these days, you don’t even need that much money to get started. Seriously, the starting amount is likely lower than you think!
How much money do you think you need to start investing? $10,000? $1,000? $500? Sure, those amounts all work. But you can get started with a lot less — a whole lot less. How much exactly?
$5-10 a month. Seriously. That’s all you need to get started!
Sure, if you want to be the next Warren Buffet, you’ll need more. But you can get started with very little thanks to a few no-fee online brokers, robo-advisors, and micro-investing apps. We’ll explain what those are soon. The key thing to know now is that it’s never been easier to invest on a budget!
With that said, there are some financial goals you should be sure to achieve first. Financial experts recommend that you hold off on investing until you:
- Save up enough money to cover your living expenses for 3-6 months in case of an emergency in which you need to quickly access your money
- Pay off any debt that has high-interest rates (e.g. credit cards) because the interest can eat away at your money more than you’d make from your investments
But, again, once you have those things settled, you won’t need a ton of money to get started investing as a college student!
As a beginner to investing, one of your biggest hurdles to making smart investment decisions is learning all the financial jargon. Sure, you may have heard about things like stocks and bonds. But do you know what they mean?
If you’re not confidently shaking your head yes right now, then read on. Here’s a beginner list of a few of the most important investment terms beginners should know.
Waiting Too Long to Get Started
It’s never too late to start investing. But the sooner you start, the more time you’ll give your investments to grow. In other words, you increase your potential for earning a lot more if you start now rather than later.
Just take a look at the difference 10 years can make in the chart below.
The investment portfolio of the person who started investing at 25 is more than 2x the portfolio value of the person who started at 35! And it’s more than 5x the portfolio value of the person who started at 45!
The key takeaway: take your time to research what you want to invest in and then get started ASAP.
Should College Students Invest through a Traditional IRA?
A benefit of traditional IRAs is that contributions are tax-deductible. However, most college students don’t have very high tax rates.
It’s almost always wiser for college students to invest in a Roth IRA rather than a traditional IRA.
It’s possible to contribute to both a traditional and a Roth IRA. Still, the maximum yearly contribution you can make applies to both IRAs combined. Rather than put some in each account, college students should max out their Roth IRA with the best investments, if possible.
While the Roth IRA contributions aren’t tax-deductible, they are only taxed at your current tax rate (typically low in college). You can take tax-free withdrawals later and don’t pay taxes on investment income either.
If you have money you could contribute to a traditional IRA, usually it would be best to invest it in a Roth IRA instead. Remember, you can’t contribute more than you earned that year.
Frequently Asked Questions About Investing While in College
Cryptocurrency is digitized currency that is not tied to a bank. Because the currency is protected by cryptography, cryptocurrency is almost impossible to counterfeit. College students can invest in cryptocurrency, such as Bitcoin, and your coin can accrue profits.
Buying cryptocurrency is easy, and depending on who you purchase through, you can contribute small amounts. However, cryptocurrency can be a risky investment because it’s unregulated or decentralized.
The terms “bull market” and “bear market” are used to describe financial markets. Most often, the phrases may be used in relation to the stock market, but both a bull market and a bear market can describe other traded items like bonds, currencies, and real estate.
The term bull market is used to describe a financial market that’s experiencing a continual rise or that’s expected to rise. Typically, this rise is at 20% or higher. A bull market is the opposite: a market experiencing a fall of 20% or more.
Investing in real estate while in college may seem impossible, but there are several avenues you can explore. The most financially challenging option would be to buy a house while in college. However, if you’re able to swing the purchase, you could rent out part or all of the property.
Another option is to explore partial real estate ownership. For example, you could invest in a real estate investment trust, which allows a real estate investor to use funds from several contributors to invest in real estate, like a shopping mall. Investors then receive portions of any profits.
DISCLAIMER: The information provided on this website does not, and is not intended to, constitute professional financial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact a professional advisor before making decisions about financial issues.
Feature Image: Prasit photo / Moment / Getty Images
As a young person, you’re in a particularly strong position to get a head start on wealth building. While your friends are pumping every penny into things like flashy cars and going out every night, you can start creating stealth wealth for yourself.
Take advantage of compounding and time and let them do the heavy lifting for you. To leave you with one final demonstration of its power, consider this example: If you invest $550 per month for the next 10 years at an 8% return, then stopped investing entirely and just let the money grow over the next 30 years, you would end that 40-year span with roughly $1 million.
In other words, it only takes $66,000 of your own cash, invested over 10 years, to reach $1 million; simple compounding does the rest of the work for you if you can let the money sit for the next 30 years. When it comes to compounding, time really is money. So start young, and live long and prosper!
If you’re a young adult, have you started investing? If not, what’s stopping you?
I Did It! Now What?
So, now you have invested your $1,000 in a good index fund. Congratulations. Now, just wait it out and add more money every month or year. Setup an automated deposit and investing option so that you can keep growing your portfolio.
The stock market will go up and down. The worst possible thing you can do is panic if the market drops, and sell your investments. The market will recover, and if you are invested for the long term, you will reap the gains.
Always remember, it’s important to start investing early. If you can start investing in college, you’ll have a huge leg up on everyone you know!
Does anyone else have any tips or advice on getting started? Any great fund ideas for beginners?
The learning doesn’t need to stop here
Explore the rest of our collection of financial education resources to continue your journey to a healthy financial future.
6. Turn to an investing app
One way to simplify the investing process even further is with an investing app. One popular mobile app that may help here is called Stash, and it allows you to buy some individual stocks or a selection of ETFs. It takes only $5 to get started, and the basic account costs $1 per month. If you don’t know how to start investing but want to learn and do it yourself, Stash will help you out.
Another popular investing app is Acorns, and it made Bankrate’s list of top investment apps because of how easy it is to use. With Acorns, you link a debit or credit card, and then the app rounds purchases up to the next dollar and invests that difference into one of a few ETF portfolios. Acorns offers a core all-in-one membership for $3 a month and a family version at $5 a month.
1. Consider starting with a high-yield savings account or CDs
One of the simplest ways to give your savings a boost is to open a high-yield savings account. These accounts pay interest on your deposits at rates far above what is available through traditional savings or checking accounts, while still offering you the ability to make withdrawals at any time.
Savers don’t often think of bank products (such as high-yield savings accounts, or a certificate of deposit, or CD) as investments, but they are. And they’re some of the safest alternatives around. CDs will pay you a fixed rate of interest in exchange for you 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, you probably want that in a super-safe account that won’t fluctuate with the stock market. A CD fits the bill for exactly this kind of requirement.
What Type Of Account To Open
If you are new to investing, the first thing that you need is a brokerage account. Investing cannot be done at a bank, but must be done at a separate entity (even though some banks do have brokerages within them). We recommend M1 Finance or Fidelity to get started.
When you sign up on the platform you want, you have several options:
Cash Account: This is the most basic account. It allows you to purchase any type of security you want with your cash on hand. This option is suitable for most investors, especially ones starting out, and ones who don’t want their money locked up until retirement.
Margin Account: This account is similar to the cash account, except that you can borrow money to invest. This account enables some features a cash account doesn’t, such as shorting investments, and selling uncovered options.
Traditional IRA: This is the traditional retirement account vehicle. It is similar to the cash account in that you can purchase securities with the cash you have available. However, this account places a limitation that you cannot withdraw that money inside it until you are at least 59 1/2. However, you get a tax benefit for all money invested up to the limit (which is $5,000, or $6,000 if over 50). You will have to pay taxes on any money you withdrawal once you do retire.
Roth IRA: This is similar to the Traditional IRA, except that you do not receive a tax benefit in the year you invest, but, at retirement, all of your withdrawals are tax-free.
So, what is the best option? If you want to save for retirement now, and you earned your income (meaning it came from work and not Mom and Dad), a Roth IRA is the way to go. The reason is the tax you pay on your income now is so low, that you get huge savings in taxes when you retire. However, if you don’t want to tie up your money for 40 years, a cash account is a great way to start. If you want a more detailed guide, check out What Type of Investment Account Do I Open?
4. The key is to diversify
The key, experts say, is to diversify, which means have a variety of investments in different things. Don't put all of your eggs in one basket. That keeps balance, and if one investment is going down, another might be holding steady or going up.
For example, if your investments are all in tech and all of a sudden the tech sector starts sliding, so is your portfolio, Sun explained. "If you have some in tech, maybe some in health care and those more traditional companies that pay dividends," Sun said, "then your overall portfolio is a little bit better balanced."
So, try to make sure you have investments across a wide variety of sectors (such as technology, health care, retail, financial, etc.) as well as risk levels. Growth stocks, for example, can gain a lot but also lose a lot. Value stocks are more steady growth. You can also invest in currencies, commodities and riskier investments such as cryptocurrencies and NFTs. Those tend to be more volatile and complex, so you really want to do your homework — and make sure you are only investing what you can afford to lose.
It's OK to get advice from friends when investing, but you need to do your own research and you need to be diversified. If your friend says buy XYZ stock because it went up for them, don't just buy that and leave it at that. It could go down for you. So, if you're diversified, you have a cushion for that.
Investment apps make engaging in the stock market more accessible to those with little investable surplus, or money saved for investing.
This can be an ideal investment opportunity for college students with strict financial limitations.
In addition to offering commission-free ETFs and stocks, investment apps also act as or include robo advisors, sell fractional stocks, and allow users to earn financial products for free.
College students who are new to investing may find that the most efficient way to build and monitor a financial portfolio containing a good mix of investments is through a robo advisor.
Robo advisors are automated financial counselors that can design a diverse portfolio customized to the user’s current financial needs.
Nearly all investment apps are or include robo advisors.
And although some apps charge annual or monthly subscription fees, it’s usually no more than $10 or $12 per month, a minimal amount compared to the quality assistive services these apps provide.
Investment app subscriptions are even more economical when compared to the price of an in-person wealth manager, which can cost about $200 to $400 per session.
Robo advisors are a much more affordable alternative for those with limited funds or who would like to dip their toes into investing before taking a giant leap.
Using robo advisors allows college students to curate a customized financial portfolio at a low cost.
Stocks, especially blue-chips or stocks from internationally renowned companies like Disney, can be very expensive.
Undergraduates on a tight budget typically can’t afford a stock if it’s priced at $1,000 per share.
But most investment apps allow investors to buy fractions of a stock rather than an entire unit or share — which reduces the price significantly.
Charles Schwab and Fidelity Investments both sell slices of stocks from major companies like Amazon and Apple for a minimal price — sometimes around $5.
By offering stocks in digestible fractions at affordable prices, these apps can generate great investment opportunities for college students.
Rewards & Benefits
Some apps, like Webull, are not only free, but also give rewards to first-time subscribers. For Webull, first-time subscribers get two free stocks with a total market value of $2,300.
Moomoo offers a similar gift to its first-time subscribers. New Moomoo subscribers are each awarded a single free stock valued at $350.
And users can even earn shares of stock for every direct deposit made into their investment account.
Investment apps that specialize in cryptocurrency, such as Coinbase, let users earn $3 to $5 in fractional shares from various digital currencies like Bitcoin — simply by engaging with the app’s resources on a regular basis.
Stock-earning engagement activities can include reading articles and taking virtual investment courses. A small price to pay for a wealth of quality investment opportunities.
Establishing Your Online Investment Portfolio
According to financial experts, college investors have a significant advantage over other types of investors. They have time – lots of it. Considering the amazing powers of compound interest (i.e. a type of interest that earns additional interest), we can say that time IS money.
Experienced investors state that even a small amount of money, if invested properly, can reap huge profits in the future. That means you really have to think about building your personal investment portfolio while you are still in college.
Here are the things you have to do to jumpstart your career as an investor:
- If you are beginning with small capital (e.g. $25 to $50), find a broker that will accept the small account. Then, you can increase your overall capital by investing more money on a regular basis.
- You should calculate the total amount of money you are willing to risk. As a college investor, you have to keep in mind that investment always involves risk. Your personality and available funds are two of the most important factors that determine your “risk tolerance.”
- If you like to take risks, the possibility of earning large profits probably outweighs your fears of losing money. If you are risk-averse, on the other hand, you have to perform serious calculations regarding the exact amount that you are willing to risk.
- There are savings vehicles that guarantee profits and offer minimal risks. Here are some examples: certificate of deposits, federal savings bonds, student savings accounts approved by the FDIC, etc. Yep, I’m talking about saving accounts, CDs and other bank saving products. In general, these financial instruments provide the best protection against risks. However, they also involve the lowest potential for getting large profits. If you will invest in these instruments, your earning potential will be severely limited.
- If you can shoulder more risk and invest your money for a longer time period, you may try investing your capital in mutual funds or exchange traded funds (ETFs). These funds are composed of various securities such as bonds, stocks and commodities. Mutual fund corporations collect and manage the money of other people for investment purposes. Since these corporations employ financial experts, lots of college investors opt to put their money in mutual funds or ETFs.
- Prior to investing your hard-earned money in these mutual funds, you have to perform your own background research. Some mutual fund companies focus on particular industries (e.g. pharmaceutical, telecommunications, banking, etc.) while others use diversified portfolios (i.e. they make investments in different industries). You should research about the past performance of the company you will be investing on and the industries they work with. Remember: The past performance can in no way guarantee future results.
Learn What Type Of Investments Fit You
Investing while you are a teenager or college student has other perks as well and that is in the optionality you have. This is where some of you may assume I’m going to hit you with the sales pitch to my pyramid scheme but not quite. What I mean is that you have more options than you may think.
I go over the different types of investment accounts in my article: How To Start Investing Today – An Investing Guide For Beginners. You should review that article after you have finished reading this but just know some of your options include:
- Traditional IRA
- Roth IRA
- Brokerage Account
- Health Savings Account
These types of accounts should be your building blocks for investing but there is another side of things I think you should consider. You see, when you are a teenager or college student you have the ability to take risks that older people can’t. You have bills, yes but comparatively your bills are small and so are your responsibilities. You may not think so but trust me they are.
Because of this, I would suggest you take some risks in investing. Before you think I’m telling you to go all-in on a penny stock or bitcoin let’s back up. What I’m suggesting is you max out one of the accounts I mentioned above then after that, and only after that, you can make a couple of smaller, riskier investments.
I did this when I invested in oil wells back in early 2014. I took a big risk and did it pay off? Well, somewhat. I was expecting a huge return and while I have re-couped my money and then some it wasn’t a huge hit. I’ll let this chart speak for itself and you can see why.
Yes, the bottom fell out of oil prices and it hurt my rate of return by a lot. Obviously, this was a risky investment and it somewhat worked just not like I fully expected. Compare this to my low-cost index funds in my Roth IRA who have been performing better than expected and you’ll see why I suggest you take some risks AFTER setting up a good base.
6) I already have a retirement fund, why should I invest more money?
Firstly, good for you for having a retirement fund! Take a look at your savings account right now, how much interest is it paying? I’d be surprised if you said more than 1%. Inflation in 2013 here in the US was 1.5% last year. That means that your money essentially lost some of its value just sitting in the bank.
Although you shouldn’t go out and invest all of your money in the market, investing more than $0 would be a good start.
By investing early, you’ll hopefully be able to enjoy years of compounding interest and will see you total net worth grow!
How did you start investing? [optin-monster-shortcode id=”x6m5mramt42z6ouxppil”]