Chances are, if you’re a college student, or you’re about to become one, the last thing on your mind is figuring out how to invest your money.
This is completely logical. Managing your finances in college is tough.
Between the demands of school and need to save money whenever possible, thinking about how to invest in college isn’t at the top of the list.
Studies show that, in fact, the average college student is grossly under-educated on personal finance topics such as investing and general financial literacy. Honestly, this is a travesty, especially considering how much free information is out there.
In reality, you may be able to start investing now — instead of waiting until you’re done with school.
Time is an investor’s best friend after all, and it pays to maximize your time in the market and to benefit from the power of compound interest,
It probably goes against every instinct to invest while in college. After all, everyone’s talking about the student loan crisis, and the rising costs of higher education are making it tough for this new generation to get ahead.
But despite the costs of a college education, learning how to invest in college is one of the most powerful lessons you can learn.
You don’t need to be rich or to be a personal finance wiz for this to benefit you. As long as you get some skin in the game the right way and build good financial habits, you’re making a change for the better.
Why Start Investing In College
An old proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.”
In other words, don’t let your past mistakes deter you from making good choices in the present.
Financially, this proverb totally makes sense!
The smartest thing you can do for yourself is to get on solid financial footing now instead of waiting until you graduate or until you get your dream job.
Basically, the younger you can start investing, the more time you give your money to grow through compounding interest.
Here’s an example: If you save (invest) $100 per month for 40 years, you’ll end up with more than twice the amount of money than someone who invests the same amount monthly for only 30 years.
Therefore, if you wait 5, 10, 15 years to invest, you’re leaving a lot of money on the table.
So, even if you can’t invest much right now, that’s okay. Set aside even a few bucks a week and put it towards your future. Future you will be glad you did!
How To Invest In College — What Are Your Options?
I think one of the things that scares people from learning to invest in college is that there are so many terms and options out there (or so it seems).
In reality, there are numerous ways to invest your money. However, in terms of investing for college students, the following options are probably the most practical.
1. Open An IRA Account (Or TFSA in Canada)
You can start investing in college by opening an IRA.
In the U.S., two great options are the Roth IRA or a Traditional IRA.
With a Roth IRA, you pay income tax on the money you earn, but once your money is in a Roth IRA, it grows tax-free. Typically, the earlier you start, the more sense a Roth IRA makes.
This is a huge benefit since you may be leaving this money invested for 30-40 years or more!
As long as you don’t touch the money until retirement and abide by Roth IRA withdrawal rules, this is the perfect investment vehicle for someone in college.
Currently, the maximum contribution for a Roth IRA is $6,000 per year, and this has to be from earned income.
Of course, as a college student, your income may be fairly limited. But as long as you are earning something, you can contribute a modest portion to an IRA to start funding your retirement.
Canadians, if you’re 18 and have a Social Insurance Number (SIN), you can invest in a Tax-Free Savings Account (TFSA). Similar to the IRA, the maximum contribution in 2019 was $6,000 for a TFSA.
You’re taxed on the income you earn and contribute to your TFSA. However, TFSA growth is not taxed!
Both the IRA and the TFSA are very solid ways to start investing for retirement, even while in college.
Note: a Roth IRA or TFSA is just an account that holds your investment portfolio. You still need to make decisions regarding which funds to invest in.
In terms of building wealth in your 20’s, you have time on your side. Taking a ‘set it and forget it’ approach to investing isn’t a bad call.
You can talk to a financial planner or someone at your bank for investment advice. Alternatively, there is a wealth of information online. To keep things real simple, you can also turn to some of the best Vanguard ETF funds out there.
2. try A Robo-Advisor
The era of the robo-advisor is upon us! For anyone looking for a completely hands-off, automated approach to their investing, this option is definitely worth considering.
In a nutshell, Robo-advisors provide online, automated investment management. Instead of working with a financial planner, you can invest your money using a robo-advisor and put your money to work.
Robo-advisors work by building an investment portfolio to match the investor’s risk profile, goals, and time-frame.
When you choose a robo-advisor for investing in college, you can keep things pretty simple.
You fill out your investor profile with the particular robo-advisor, open your desired investment account (i.e. Roth IRA, Traditional IRA, personal) deposit the money you want to invest, and you’re off to the races.
Some of the most popular robo-advisors on the market include:
- Betterment – $0 account minimum and 0.25% in fees.
- Wealthsimple – $0 account minimum and 0.50% in fees.
- M1 Finance – $100 account minimum and zero fees for standard accounts.
- Wealthfront – $500 account minimum and 0.25% in fees.
There are plenty of robo-advisors to choose from nowadays, and many of them have been around for over a decade.
Just note that robo-advisors basically invest in a mixture of low-fee ETFs to keep their own fees low.
There is nothing stopping you from using other options in this list to invest your money independently to avoid robo-advisor fees.
However, if you are completely lost and want a hands-off approach, using a robo-advisor is better than letting your money sit in a sad savings account.
3. Use A Free or Low-Cost Online Broker
Another way to get started investing in college is to use an online broker.
Online brokers facilitate the buying and selling of securities.
For example, you could use an online broker to purchase stocks or ETFs online instead of placing an order through your bank’s online interface or making a phone call.
Online brokers have grown in popularity in recent years. Many are low-fee or zero-fee, and online brokers are incredibly easy to use.
Plenty of online brokers also offer free stock trading and have access to most ETFs. Many don’t have a minimum account balance to open or maintain your investments either.
Some popular online brokers include:
- TD Ameritrade – $0 minimum deposit, zero fee stock trading, $0.65 per contract for options, commission-free ETFs.
- Charles Schwab – Same as TD Ameritrade.
- Fideltiy – Same as TD Ameritrade.
Whatever the amount you have available to invest in college (even if it’s just 10 or 20 bucks a month), using an online broker is a great way to gain some investing experience.
However, you’re probably still better off to just use an online broker to purchase a low-cost ETF and to keep things simple. Don’t get carried away with individual stock picks or trying to time the market!
Learning how to invest in college is all about building habits and putting your money to work for the long term.
Keep it simple, and trust that ETFs are your best friend as a young investor.
4. Stick To DIY Investing With Your Bank
Another option for investing in college is through your bank.
This is also incredibly convenient if you already have a history and account with your bank, or if the town you go to school at has your bank near campus.
Just be sure to have a game plan before you go into a bank to set up your account.
Low-cost ETFs are generally your best option, so if you already know which one you want, your bank may work just fine.
Also, be careful of salesy tactics. Banks may try to sell you expensive mutual funds or CDs with a lousy return because some financial advisors are mandated to push the financial products that are offered in-house instead of what is actually a good idea.
Go in with some research and a game-plan. If your ETF of choice isn’t available at your bank, see what sort of investing account they can open for you to allow you to buy what you want.
If they can help you out great. If not, use an online brokerage account to buy exactly what you want.
5. Invest in an Income-Generating Asset
Something you can do while you’re a college student is to invest in yourself by buying an asset that generates income.
Of course, starting a blog can be a great earning strategy, as well as an opportunity to learn a tonne about digital publishing and marketing.
While it’s by no means easy to monetize a blog, with the right research and hard work, you can develop a blog into an asset that brings in extra money each month.
A blog is also fairly low-risk as far as investing in college, since the cost of hosting is minimal compared to the potential income.
Alternatively, you could look to invest in a piece of equipment that allows you to offer a service.
Lawn care equipment, a solid camera, or cleaning supplies to start a cleaning business are just a few examples of low-cost business ideas you can get started with.
Be sure to do your research before you jump into an investment asset. You want to be sure it’s got a solid return on investment (ROI) and that it’ll fit your lifestyle and schedule.
Tight On Cash? Consider Starting A Side Hustle
Obviously, money can be pretty tight for most college students.
However, there’s really never been a better time to make money as a college student given the tons of online and offline gig jobs or business ideas that now exist.
So, if you’re not sure how to invest in college due to cash flow issues, consider starting a side hustle!
Chances are, you’ve got at least a few free hours a month to work and make more money. And trust me, even a modest investment of $100 every month or couple of months will make a difference in the long run.
Of course, there are typical college side hustles like waiting tables or baby sitting.
But, don’t be afriad to get creative! Drive for a rideshare company, DJ at events, bake specialty cakes, write freelance articles, or start any number of other side hustle possibilities.
Don’t worry if you can’t bring in hundreds or thousands of dollars a month with your side gig. Your free time is probably limited, but you can definitely find side hustles to earn even $20 or $50 a month to invest.
Dealing With Debt Vs. Investing
Okay, it’s the elephant in the room.
College has become almost synonymous with taking on debt, right? So, why would we talk about investing at that point in your life?
First of all, if you’re working your butt off throughout college to pay your tuition and fees as you go, kudos to you! That’s amazing, and you should keep that trend going.
But you could really miss out on some serious wealth building if you ignore investing for another four or more years.
Here are a few reasons investing for college students can actually be a wise idea:
Time is on your side – You can make a massive difference for your future wealth by investing even very small amounts during college. No matter how little the amount, what you set aside now will be worth much more decades into the future.
Build your investing muscles – You get yourself into the habit of investing by going through the effort of setting up an account and recurring contributions. Even if it’s a few hundred bucks a year, this makes a massive difference.
Practice and learn from mistakes – Better to learn from your mistakes when you’re 19 or 20 and working with lower dollar amounts, right?
Investments can out-earn low interest debt – If you leave your money in a high-quality ETF, you can conservatively expect a 6-7% return each year in the long run (since there will be bad years and good years). If this interest rate is much higher than interest rates on your debt, investing may be a way to accelerate your way to becoming debt fee.
Bottom line: you should absolutely focus on getting your education, and for the lowest amount of debt you can possibly manage.
However, I think there’s still room to invest during those college years as well.
You can definitely put the majority of your income, plus any grants or scholarships, towards funding your education. But go ahead and take a smaller percentage of your income and funnel that into building wealth.
While you may be tempted to focus only on getting through school, starting an investment habit will help set you up for financial success because time is on your side.
Investing for college students may mean only $5 or $10 a month at first, but once you begin to earn more, you’ll already have the accounts set up and can increase your contributions.
Just imagine starting off your post-college years with little to no debt, plus a starter nest egg!
You’ll be light years ahead in terms of working towards financial independence than if you took no action.
Plus, once your income increases, you can really ramp up your investing game and build some serious wealth!
Thanks so much for reading! Hopefully this guide has helped clarify a few of the options about investing for college students.
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All views expressed on this site are the views of the author. This Online World does not provide licensed financial advice. The advice here is written by bloggers and not certified financial planners. Please use your discretion when reading and be sure to consult a professional if you are ever making major decisions with your money or anything that will impact your well being. This blog is merely a resource, not a definitive guide.
Kate Underwood is a personal finance fan who left teaching to write full-time. She is passionate about helping people to create opportunities for themselves through wiser financial choices. You can view her latest work at www.kateunderwoodwriter.com.