Do you know that there are best investments for students? Do visions of packaged mac and cheese and stealing condiments from the student commons come to mind when you think about college on a budget?
Investing can seem daunting for students, but there are ways to make money while in school.
It’s possible that you can get started with quite a little cash, depending on the nature of the venture.
If you start investing while you’re still in school, you can graduate with a nest egg and get a head start on retirement savings.
Let’s consider the best investments for students and pitfalls to avoid before investing. Previously we have covered:
Why College Is a Great Time to Start Investing
Students are often stereotyped as cash-strapped, but they actually present an excellent opportunity to begin saving and building wealth.
You can learn valuable lessons about managing money in the real world by dabbling with investing while still in school. Investing earlier may also position you to receive higher returns later on.
It may come as a surprise, but you don’t need a large sum of money to get started in the world of investing.
There is often no minimum investment at discount brokers. Actually, even $5 is a viable investment amount.
If you only put a little money away at the start of college, you might not have much when you graduate.
Ways to Start Investment as Students
Students’ investment capital is likely to be small because of their status. Worry not; very little is required to get going.
What is required, however, is a serious commitment to the concept of wealth creation. Maintaining hope and confidence that the markets will recover from occasional dips requires perseverance, patience, and faith.
1. Get a Head Start on Your Peers With a High Savings Rate
The average American is awful at budgeting and saving money. MarketWatch reports that only about 3% of earners in the United States actually put away any of their money.
A low savings rate will make it difficult, if not impossible, to amass significant wealth.
As an alternative, you should begin by making a budget (we recommend using Tiller). No need to overcomplicate things at first; keep it basic.
Make a schedule of your regular and ad hoc outlays of cash. If you’re a student, your income can be erratic as well, with the majority of your earnings coming in during the summer.
Put a little bit of money into an emergency fund, and then spend the rest on necessary things and investments.
Don’t overcomplicate your personal finances at this time in your life; instead, try out these strategies designed with students in mind.
Reduce your outgoings and increase your savings, and don’t buy expensive drinks or flashy cars just to impress your friends.
2. Automate Your Savings
I am a firm believer that beneficial activities, such as conserving money and working exercise, should be built into one’s routine.
You shouldn’t put all your faith in your own self-control and will to do the right thing, since eventually, they will let you down.
With consistent earnings, it is possible to arrange for automatic deposits to savings or investment accounts. You might also discuss with your employer the possibility of having your paycheck deposited into multiple financial institutions, such as a checking account, savings account, and investment account.
But that’s not all you can do. The number of apps that can automatically help you save money is rising.
To illustrate, Acorns will automatically add the spare change from your credit and debit card purchases to your brokerage account whenever possible.
Automatic contributions to an Individual Retirement Account (IRA) or Roth IRA can be set up quickly and easily using a broker like SoFi. Chime, another web-based bank, has a similar set of automated savings features.
Finding a way to automate your savings and investments can free up your time each month and help you focus on what really matters: enjoying life.
3. Start Simple With Stocks
If you are a young investor, you should get started with stocks. They do, in fact, come with significant volatility, which is a form of risk.
However, if you are not planning to retire for quite some time yet, you can park your money and ride out the odd stock market correction while still reaping the benefits of the market’s long-term growth.
The stock market can appear daunting to someone who has never invested before. There is a good chance that the terms price-to-earnings ratio (PE ratio) and dividend yield (dividend yield) used by analysts are unfamiliar to you.
Someone is always “proving” that the market is likely to crash by referring to some arcane technical indication. Put the stuff in the trash. Instead, consider the advice below.
A. Don’t Try to Beat the Market
Don’t try to pick stocks. That’s the first rule of stock investing for novices. Numerous inexperienced and even seasoned investors make the mistake of trying to “beat the market” by selecting superior stocks. This is a surefire way to lose money for all but the most experienced stockholders.
Instead, invest in an index fund. Index funds are a type of passive investment that seek to replicate the performance of a market index without the need for active management or stock selection.
The S&P 500 index fund records the performance of the 500 largest publicly traded companies in the United States, while the Russell 2000 index fund follows the performance of the 2,000 smallest publicly traded companies in the United States.
Most new investors underestimate the importance of index funds’ modest maintenance fees. To top it all off, they consistently outperform actively managed funds according to the data.
After evaluating the statistics, U.S. News & World Report reported that your odds of picking an actively managed fund that outperforms a passive index fund are around 1 in 20.
B. Practical Steps to Get Started
An investment account must be opened as a first step. For its user-friendliness, cheap commission ($4.95 each trade), and availability of commission-free funds, I choose Charles Schwab. M1 Finance is another excellent choice.
Any type of brokerage account, including traditional IRAs and Roth IRAs, can be opened in under five minutes. You can then deposit monies into the account and begin purchasing index funds of your choosing.
About half of my portfolio is in domestic funds and the other half is in foreign funds. I invest in a mix of small, medium, and large-cap funds across all of these broad investment buckets.
Still, you shouldn’t let a lack of action stem from overthinking. If you’re not sure where to begin, an index fund that follows the S&P 500 is a good bet. You can start diversifying your portfolio by looking for a new fund next month.
4. House Hack
House hacking is a viable option for a first real estate purchase and a cost-free means of settling down.
Buying a tiny multifamily building, living in one of the apartments and renting out the rest is the classic example of house hacking. The rent from your tenants pays the mortgage, so you can essentially live rent-free while increasing your investment’s equity.
Most people’s biggest monthly expense is their home’s mortgage or rent, so being able to get by without paying that at all is a huge financial boon.
The challenge, of course, is to refrain from spending and instead put the money into savings and investments. (For more on how to make savings automatic rather than relying on willpower, see Tip No. 2)
Having your parents co-sign for a mortgage is one way to get the down payment you need when buying a home. With their support, you may be able to get a mortgage on your first investment property if you ask them to co-sign for it.
You could even get a hand with the down payment from them. You should take it upon yourself to act as the property manager and take care of everything from tenant screening to rent collection to fixing things that break.
Finally, keep in mind that there are always going to be some unexpected expenses associated with owning property. You should set aside money every month to cover unexpected costs like vacancies, repairs, and evictions.
5. Invest in Crowdfunding
Crowdfunding platforms are one alternative for people who aren’t quite ready to buy a property of their own but are interested in real estate investing. It is one of the best investments for students where be supporting their lending products for other real estate investors.
Bear in mind that most crowdfunding platforms will only accept investment from “accredited investors,” defined as those with a $1 million net worth or $250,000 in annual income. You are not one of them since you are a poor student.
However, the general public can access a select few real estate crowdfunding platforms.
As a student just starting off, you can choose from the following options:
Fundrise has offered returns to investors between 8.7 and 12.4 percent since the company’s establishment.
Anyone with at least $500 to invest can do so in their choice of income- or growth-focused investments.
RealtyMogul welcomes investments with a minimum of $1,000, and there are a number of different investment fund options available.
For instance, from its start, their MogulREIT 1 fund has returned 8% annually, distributed monthly.
Groundfloor allows you to test the waters of crowdfunding with a $10 minimum commitment, so you can see if you like it before committing more.
Investment returns can be anywhere from 5% to 25%, depending on the quality of the property and the duration of the investment lock-in.
Property investments allow individuals to tailor their exposure to risk and return.
6. Invest in Peer-to-Peer Lending
Websites that provide peer-to-peer lending are an alternative to crowdfunding platforms that focus on real estate.
The principle is the same, except in this case the loans are typically unsecured personal loans rather than mortgages.
Similar to Groundfloor in the example above, many lending platforms now allow investors to select the level of risk they are willing to take on with the loan, with greater risk loans typically offering higher returns.
7. Start a Side Hustle
There’s no rule that says you have to back other people’s endeavors. A personal investment portfolio is another option.
I’ve taken to investing in rental homes. Zack gives tours to restaurants and bars. Caitriona, a second acquaintance, is a VIPKid tutor.
You can test out any number of potential side investments, but a good place to start is with these options specifically tailored to college students.
One benefit of starting a side business while still in school is that it has the potential to become a full-time occupation after graduation.
8. Turn to a free or low-cost broker
This is also one of the best investments for students. You can get started investing for next to nothing. Free stock and ETF trades, in addition to excellent research and instructional resources, may be found through a number of reputable low-cost online brokers like Fidelity Investments and Charles Schwab.
Examples of brokerages that excel in these regards include Fidelity and Schwab, which have a strong reputation for their dedication to customers and their ease of use by investors.
But if you want to avoid paying anything at all, Robinhood is a terrific option, especially for students.
The key selling feature of Robinhood is that it is free to use for all types of trading, including options and cryptocurrency.
For only $5 per month, Robinhood Gold users have access to Morningstar research. Robinhood is a fantastic option for individuals on a budget because of its convenient mobile app that allows trading from any location.
If you’re an investor who cares a lot about keeping your costs low, you might want to consider Webull.
Webull is an alternative to Robinhood that also allows for commission-free trading, but it provides a broader range of customer service choices and access to retirement funds.
9. Buy an S&P 500 index fund
Purchasing an index fund is a simple way to start investing, and many of the best-known index funds track the performance of the Standard & Poor’s 500 Index of significant U.S. firms.
The equities in an index fund, such as the S&P 500 Index Fund, could number in the hundreds.
The fund’s high degree of diversification allows investors to benefit from lower volatility in returns than they would experience by purchasing a collection of individual equities, as the fund’s holdings span many different sectors.
The low entry barrier of an index fund is another perk.
Investing in an S&P 500 index fund is equivalent to investing in the market at large, with the corresponding return.
Warren Buffett, the famed investor, and millionaire, recommends this approach to most investors since it is an excellent way to learn the ropes. Therefore it is one of the best investments for students.
10. Sign up for a Robo-advisor
There is the option of using a Robo-advisor if you don’t feel confident selecting equities or even an index fund.
Depending on your investment horizon and risk tolerance, a Robo-advisor will automatically purchase a diversified portfolio of funds on your behalf.
An initial investment of as low as $20 is all that’s needed to get started, and subsequent deposits incur no additional fees.
Robo-advisors typically charge 0.25 percent of assets per year for their services, though some providers may be willing to forgo this price for particularly small accounts.
Among the biggest Robo-advisors, Wealthfront and Betterment are two of the more affordable options.
Even while you won’t have to pay the advisor anything extra, the funds in which you invest will likely charge you a percentage of your assets every year.
The advisor will often offer you enticing interest rates on cash accounts and will rarely require you to commit your funds to a specific investment.
11. Turn to an Investing App
Investing in apps can help streamline the process even further. Stash is a well-known smartphone app that can come in handy, as it lets you invest in both individual stocks and exchange-traded funds (ETFs).
In addition to the low initiation fee (five dollars), the monthly maintenance fee for the most basic account is merely one dollar. Stash is here to help you learn and do your own investment if you have no idea where to begin.
Acorns is another well-liked investing app, and it was included on Bankrate’s list of the best investment apps because of how simple it is to use.
After linking a debit or credit card, Acorns automatically invests the spare change from each purchase into one of many exchange-traded fund (ETF) portfolios.
One can join Acorns for $3 per month for the basic all-access plan, or $5 per month for the family plan.
12. Open an IRA
Starting to consider an Individual Retirement Account (IRA) while still in school may seem premature.
However, if you are working as a student, an IRA might be a fantastic way to save for the future. You can reduce your taxable income by the amount you contribute to your IRA and delay paying taxes on interest and dividends you earn.
Also, the longer you have to take advantage of compound interest to fill up a tax-deferred account, the more money you’ll have saved.
The Roth Individual Retirement Account (IRA) is an alternative approach to begin saving for retirement. Since Roth IRA contributions are made with after-tax monies, there is no immediate tax benefit; nevertheless, withdrawals taken in retirement are free of taxation.
When you make contributions while you’re still in school (and so subject to a lower income tax rate), you can put off having to pay taxes on that money until you’re earning a higher salary. In a Roth IRA, your investments can grow tax-free, just like they can in a standard IRA. This is also one of the best investments for students.
13. Buy Bonds
A bond is a type of debt instrument that can be issued by a government or a corporation. The certificates issued by the British government used to have gold leaf around the margins, which is how they got their name “gilts.” Buying bonds or gilts are similar to lending money to a government or a company.
What are the benefits to you, though? There is a set redemption date and fixed interest rate for bonds and gilts. At that point, the borrower repurchases the bonds at face value (sometimes called nominal value or par value).
How safe or dangerous investors perceive the investment will be reflected in the yield on the bonds (the amount of interest you receive per year for every £100 invested). The lower the yield, the safer the loan (the less likely the borrower is to default on its obligations).
The annual return on your bond investment will decrease as the price rises during periods of low-interest rates. However, bond prices decline when interest rates rise.
Pitfalls to Avoid as a Young Investor
Right after I finished college, I became hopelessly enamored with the concept of early retirement. At the age of 30, I planned to call it quits. (Spoiler: it didn’t actually occur.)
The idea of retiring early was never the issue; I still intend to do so. My mistake was thinking too highly of my own abilities and trying to out-invest everyone else by being “smart.” What I should have done instead is follow these suggestions:
1. Forget Being Clever
Keep the basics in mind first: a sizable savings rate, a portfolio of broad index funds, and maybe some house hacking or crowdfunding for a real estate investment down the road.
2. Don’t Buy Stocks or Funds on Margin
Leave margin purchasing to the pros until you have more expertise in trading in stocks on your own.
3. Do Buy Your Index Funds in an IRA or Roth IRA
Since your income is likely to be modest as a student, you may benefit more from a Roth IRA.
4. Most of All, Avoid Debt
Avoid taking up too much debt in any one area, but credit card debt is especially perilous. That was my undoing; I took on too much debt at too young of an age, and my rental property portfolio went under during the economic downturn of 2008.
Can College Students Invest in Cryptocurrency?
Instead of being issued by a central bank, cryptocurrency exists only online. Cryptocurrency is nearly impossible to forge since it is secured by encryption.
Your coin may potentially increase in value if college students invested in cryptocurrencies like Bitcoin.
It’s simple to acquire bitcoin, and depending on the vendor, even modest sums can be invested. In spite of this, due to its unregulated or decentralized nature, cryptocurrency investments might be dangerous.
What Is a Bull Market and a Bear Market?
The ups and downs in the economy are referred to as a “bull market” and a “bear market,” respectively. While the stock market is the most common context for these terms, bonds, currencies, and even real estate can all be affected by market cycles.
Bull market refers to a financial market that is rising or is predicted to rise steadily. In most cases, this increase is 20% or more. In contrast, a bear market is characterized by a 20% or greater decline in prices.
How Can I Invest in Real Estate in College?
It may seem impossible to invest in real estate while still a student, but there are options. Buying a home while in school is the most difficult financially. But if you can’t afford the full price, renting out some or all of the property is another option.
It is also possible to investigate the prospect of sharing the real estate investment burden. Investing in a real estate investment trust, for instance, would allow you to pool your money with other people to buy a piece of property like a retail center. In return for their financial support, investors are given a cut of the company’s final earnings.
You have a great opportunity to jumpstart your financial future while you’re still young. As your peers waste their money on flashy automobiles and nightly bar hopping, you can begin to build your own hidden fortune.
Allow time and compound interest to do the hard work for you. One final illustration of its efficacy is as follows. Over a 40-year period, you would have around $1 million if you invested $550 every month for the following 10 years at an annual return of 8%, then stopped investing totally and let the money grow.
It just takes $66,000 of your own money invested over a 10-year period to attain $1 million; simple compounding performs the rest of the job for you if you can let the money sit for the next 30 years.
The old adage “time is money” couldn’t be more accurate than when it comes to compounding. Get a head start on life early on, and you will enjoy a long and fruitful existence. Do you have suggestions on these best investments for college students? Please comment below.