A Complete Guide to Investing for College Students
Learn how to invest as a college student. Discover and compare the different types of investments for college students.
Published on February 5, 2022 · Updated on February 11, 2022
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Ready to start your journey?
- College can be an excellent time to begin exploring investment opportunities.
- Stocks, bonds, and mutual funds are three common ways to invest money.
- You can plan for retirement while in college by exploring an IRA.
- Consider your finances, comfortable risk level, and goals when deciding your investments.
When you think of finances and college, do images like boxed mac and cheese and snagging condiments from the student center come to mind? Although making money in college can be challenging, there are ways for college students to tackle investing.
Depending on the investment, you may only need a small amount of money to get started. Investing while in college can help you graduate with extra funds and can even jumpstart your retirement plans.
Why College Is a Great Time to Start Investing
Although we may view college students as being broke, college can actually be a great time to start investing. Dabbling in investments during college gives you experience with real-world money lessons. Also, investing sooner can possibly set you up for larger payouts in the future.
Surprisingly, investing does not require you to have a ton of money upfront. Many brokerages do not require a minimum investment amount. In fact, you can invest with as little as $5. Investing minimal amounts at the beginning of your college career could leave you graduating with a small amount of money.
What Are the Primary Types of Investments?
Investing may seem complicated, especially with all your different investment routes. Below are a few popular investment options.
- Stocks: When you buy a stock, you are essentially buying a small percentage of a company. If that corporation makes a profit, your stock will go up in value. While stocks come with some risks, it's best to think long term when investing in stocks.
- Bonds: A bond is essentially an IOU. The person who takes out the bond pays the lender for it, and the bond accrues interest until the investor decides to cash the bond in. You can take out a bond with companies and government bodies. Bonds are typically considered low risk.
- Mutual Funds: Mutual funds are managed by a professional money manager. When you invest in mutual funds, your money goes into a pool of investor money. That collection of money diversifies toward various stocks and bonds. Risk levels with mutual funds depend on what types of accounts you're investing your money in.
- Certificates of Deposit (CDs): A CD is an agreement between a bank or credit union and a customer. The customer agrees to leave a lump-sum deposit of money in the bank for a specific amount of time without touching it. This money accrues interest at different rates until the time has ended. CDs are low-risk investments.
- Exchange-Traded Funds (ETFs): ETFs can be bought and sold similar to stocks. In fact, ETFs are a bundle of many different stocks or bonds that are managed by financial experts, similar to a mutual fund. ETFs hold a similar risk to mutual funds.
What Are Some Easy Ways to Start Investing?
Ranging from traditional to new online options, there are several roads to investment and many different platforms college students can pursue when choosing investments.
Open an Individual Retirement Account (IRA)
An IRA is a retirement savings account with different tax benefits. Because it is a long-term savings account, you're expected to keep your money in the IRA until you're 59 and a half. Withdrawing your money early is possible, but you'll be taxed a hefty sum on your withdrawal.
Several types of IRAs exist. Understanding the differences between IRAs can help you decide what makes the most sense for you. For example, Roth IRAs are a popular option for college students because they allow students to take advantage of being in a lower tax bracket. This is because with a Roth IRA, both your contributions and earnings grow tax-free. There's no tax deduction for making a contribution, though.
With a traditional IRA, you do get an income tax deduction for making a contribution; however, both contributions and earnings are taxed upon withdrawal.
Opening an IRA account is easy. You can open an IRA through a bank, broker, or investment company. Popular companies include the following:
Open an Online Brokerage Account
A brokerage account operates similarly to a bank account in that you can transfer money in and out of the account. The account allows you to buy and sell stocks, mutual funds, and bonds instead of just holding money.
What's important to keep in mind with a brokerage account is when you do sell a stock for a gain, that's a taxable event. You'll be taxed a short-term capital gains rate for stocks you hold less than a year and long-term capital gains for stocks you hold longer than one year. As such, you'll want to set aside a portion of your gains to pay for taxes.
You can quickly open an online brokerage account with little to no money. Many people open online brokerage accounts with the following:
Sign Up for a Robo-Advisor
Robo-advisors were created to offer lower-cost managed portfolios for hands-off investors. They are digital platforms that do not require you to interact with another person or can greatly minimize human interaction. Using algorithms and answers to a risk-tolerance questionnaire, robo-advisors generate optimized portfolios for you to automatically invest your money.
You can find robo-advisor options at the following:
Start With a Micro-Investing App
Micro-investing apps are another trending way to invest money. These apps are easy to use and designed to take small amounts of money to invest.
For instance, you can set up your app to round each purchase to the nearest dollar and move that change from your account toward investments. Along with being able to invest without even thinking about it, your fees and minimal investment requirements are small.
While micro-investing apps are effective for small investments with small returns, they shouldn't be your only source of investing in your retirement. You're also able to easily invest large amounts if you wish, so you should have a good understanding of stocks before investing heavily.
Many micro-investors use the following apps:
What Are the Best Investment Options for College Students?
How to invest your money is a personal choice based on your finances, budget, and goals. As a college student, you have several investment options, from stocks to mutual funds and bonds. You can even explore retirement options like IRAs. Before investing your money, be sure to explore your options.
You should also consider your comfortable risk levels. For instance, high-yield savings accounts are low-risk investments but typically yield lower returns. Starting with safer assets may sound boring, but these can help you get your foot in the investing door without having to worry about constantly keeping an eye on your portfolio.
When it comes to choosing a platform, both robo-advisors and micro-investing apps are great options for students who are busy with school and have little time to handle all the investing details themselves. These platforms typically require nominal fees and offer a more hands-off approach to investing.
Saving for retirement while in college may seem premature, but if you have the ability to do so, you can make saving for retirement easier.
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How to Invest as a College Student: 5 Easy Steps
Ready to start investing? Navigating financial decisions can be intimidating. Here are five easy steps to help you invest in your future.
Step 1: Open an Account
The first step to investing is opening an account. Before you open one, though, look into the different investment options. Figure out what makes the most sense for your current situation and long-term financial goals. Make sure to also consider minimum investment requirements, tax rules, and fees for each option.
If you're not sure where to begin, go with a robo-advisor. It can walk a beginning investor through choosing an optimal asset allocation.
Step 2: Add Funds to Your Account
Once you settle on one or more investment accounts, you'll need to add funds. Depending on which account you choose, you may have a minimum amount you have to add. Start with your budget to determine how much you should add.
After meeting the minimum investment (if there is one), you'll need to decide how much money you'll add to your account and how often to do so. You could always start small and add a minimal amount — even $5 — to a robo-advisor account or a micro-investing app in hopes of graduating with a larger investment.
Step 3: Decide What to Invest In
Now that you know how much money you have to invest, you need to decide how you want to invest that money. Do you want to put money into stocks or do you prefer bonds or mutual funds?
If you have a managed account, your financial advisor can help you navigate the level of risk you're willing to take and how that aligns with your investment goals. As a college student, you may want to begin small with micro-investing apps, which can be lower risk.
Step 4: Make Your First Investment
Now comes the fun part: making your first investment. If you're working with an account manager, you may have already set up your investment funds and can sit back and monitor your accounts.
Jumping into the stock market can seem intimidating, but it's actually quite simple. Once you've selected your stockbroker, you can begin purchasing your shares online. When buying stocks, keep the endgame in mind. Although your shares may roller-coaster in worth in the short term, most likely your assets will grow over time.
Step 5: Periodically Review and Add to Your Portfolio
No matter how you invest your money, most of the time you should expect to be in it for the long haul. Be patient and periodically review your portfolio.
With so many investment opportunities at your fingertips, checking your app daily may be tempting. But doing so isn't always helpful. Many financial advisors suggest daily monitoring may discourage you from continuing your investments. Because gains can take time, many recommend checking in quarterly.
As you better understand your portfolio and gain confidence — or as your financial situation changes — you can add to your portfolio by increasing your investment amount or adding on other investment options.
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
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