You might think it’s impossible to invest as a student. When we’re young, we have lots of time and not much money. As we get older, we often have more money and responsibilities and less time. But thanks to modern technologies, investing in 2024 is multifaceted and more accessible. You don’t need thousands in your bank account or keep the actual physical stock certificates.
The statistics show that among Gen Z, roughly 50% of young people own at least one investment product. The rising popularity of investing can partly be explained by the COVID-19 pandemic, during which many people lost their jobs and didn’t have other income sources. Putting money into something turned out to be a very beneficial passive income; however, it requires some experience, patience, and analysis skills. That is why we recommend trying your hand at investing during your student years.
In this article, we’ll debunk the myth that you need a lot of money to begin investing and provide a guide on how to get to it as a student.
📖 Quick Investing Glossary
🎓 Investing for College Students: Common Questions
Why Should College Students Invest?
Investing is one of the tools that can help you gain financial independence and, more importantly, give you valuable experience. Money management is an essential life skill; the more experience you get, the better.
Some other benefits of investing as a student are as follows:
- It improves your financial habits. Before you graduate and build your career, you can learn valuable skills such as analytical thinking, budget planning, and decision-making.
- It helps pay off student loan debt. By starting to invest while at college, you can prepare yourself for paying off your student loans and ensure you never get behind on payments.
- It turns minor savings into major investments. For example, according to The College Investor, if you start investing $6 per day at age 18, you will reach $1 million by age 62.
How Much Money Do You Need to Start Investing?
Investing your savings to earn more money sounds great, but most students don’t have a spare $1000 lying around. The idea that you need a lot of money to start investing is a common misconception that demotivates many young people.
In reality, you can start investing for as little as $1 with the help of commission-free trading platforms. To calculate the right amount of money to invest, consider your budget, monthly expenses, money for emergencies, and other savings goals. You might end up investing $10 a month or $2,000 a month, but the amount should be sustainable so that you can commit to it every single month.
Should You Invest if You Have a Student Loan?
There’s no universal answer as to whether you should start investing if you have student loan debt. While some experts say you should get rid of debt before you begin investing, others believe that it can actually help you.
A general rule is to check if your student loan interest rates are lower than the average return on investment. Let’s consider a plausible return on assets of 6% per year. If the interest rates for your student loan are higher than that, it’s better to pay them off first. However, if your student loan interest rates are less than 6%, you might consider putting extra money into investing.
💰 Types of Investments for Beginners
There are many types of investment; let’s see which ones might work for you.
Certificates of Deposit
A certificate of deposit (CD) is an account that withholds a fixed amount of money for a certain period, such as six months, one year, or more. In exchange, the bank pays interest. A CD is one of the safest savings options, suitable for students.
Another advantage is that CDs offer flexible account options, so you can choose the amount of money to invest and the time frame that suits your needs. As of May 23, 2023, the average rate for a one-year CD is 1.59%.
Bonds
Buying a bond means lending your money to a government or a company for a set period, from about a year to as long as 30 years. In return, they pay you interest. Most bonds have fixed interest rates, but some might have floating rates that go up or down. On the bond’s due date, you’ll get back the money you invested plus the interest earned.
One of the main advantages of bonds for students is that they provide a predictable income stream. Usually, bonds pay interest twice a year.
Stocks
When you buy a stock, you purchase a small piece of a firm, called a share. If you buy stocks in a company that goes up in value, the company’s stock also increases in value. However, in the worst-case scenario, the company may go bankrupt, making your stock worthless.
There are 2 ways you can make a profit off stocks. Firstly, you can sell the stock for more than you paid and have a capital gain. Secondly, some companies pay shareholders dividends in cash quarterly. Buying stocks is a great opportunity for students to earn money and improve discipline and patience.
Mutual Funds
A mutual fund is a company that collects money from many investors and puts them in stocks, bonds, and short-term debt. Mutual funds are typically a good place for a student to start investing. When you buy mutual funds, you rely on professionals to invest money in multiple assets at no extra cost. Like with stocks, you can get regular dividend payments or sell your fund when it increases in value.
A mutual fund is a good choice for students because it’s affordable and offers professional assistance from fund managers.
Target-Date Funds
Target date funds (TDFs) mix different types of bonds, stocks, and other investments into a single portfolio for your future savings goals. TDFs are commonly used for retirement savings, but you may have different financial goals. As you get closer to your set date, the fund shifts from a mix of stock investments to lower-risk options.
It’s a good idea to consider TDFs if you have long-term financial goals and want professionals to manage your investments so that you can focus on other things.
Index Funds
Index funds are very similar to mutual funds. The main difference is that instead of employing a professional manager to build your portfolio of investments, you invest in all the stocks of a particular market index. For instance, the S&P 500 is a market index that contains stocks of the 500 largest companies in the US.
Investing in index funds is another good option for students because it is relatively low risk. Index funds have minimum investment requirements, meaning you can begin investing for less than $100.
Exchange-Traded Funds
Exchange-traded funds (ETFs) are quite similar to mutual funds because when you purchase ETFs, you’re also investing in the stocks of a specific market index. The main difference is that you can buy or sell ETFs like regular stocks.
ETFs are also considered more tax-efficient than mutual funds and more transparent. You can do an internet search and see price activity for a specific ETF. You should consider buying ETFs if you’re genuinely interested in investing and ready to do some research.
🪙 Other Investment Types to Consider
Investing comes in many forms, each with its unique characteristics and considerations. Cryptocurrencies, real estate, precious metals, and collectibles carry their own complexities – these investments require careful analysis and strategic decision-making.
Cryptocurrencies
Cryptocurrency is a digital asset that allows you to buy or trade goods and services for profit. Due to cryptographic techniques, people can purchase, sell, or trade digital currencies without assistance from the government or any financial institutions. When the demand for a particular cryptocurrency rises, so does its value, which attracts more investors. However, since cryptocurrencies are a high-risk investment, experts believe they shouldn’t make up more than 10% of your portfolio.
Top cryptocurrencies that could be worthy of investment include Chainlink ($6.92), Avalanche ($16.96), Binance Coin ($333.39), and Bitcoin ($28,412.93). Since some are very expensive, you can purchase a small part of one. For example, 0.000001 Bitcoin is worth 0.26 USD as of May 23, 2023.
Real Estate
Generally, students cannot afford to buy, manage, or finance property. But you can still invest in real estate and profit from it. The two options for investing in real estate are ETFs and real estate investment trusts (REITs). We’ve already discussed ETFs; here’s more on REITs. Since REITs trade on public exchanges, they are easy to buy and sell. However, there’s a significant disadvantage: most REIT dividends are taxed as regular income.
Collectibles
Collectibles are items that cost far more than they were initially sold for because of their rarity or popularity. Examples include antiques, toys, coins, comic books, stamps, fine art, and limited-edition sneakers.
Investing in collectibles is an excellent opportunity to expand your portfolio while owning things you love. However, there are no guarantees that your collectibles will rise in price. Moreover, the price is often determined by the condition of your collectible, making this an unreliable investment.
Precious Metals
Another way to invest outside the stock market is to buy precious metals such as gold, silver, and platinum. However, like other speculative investments, they can provide high returns or losses. If you don’t want to buy physical quantities of precious metals, you can invest in them through the stock market or ETFs.
As long as you don’t over-invest in precious metals, you can use them as an insurance policy for your portfolio since precious metals tend to maintain their value.
💻 Investment Options for Students
The next important step is to choose a platform or tool that will best match your financial goals. Here’re our top 4 recommendations for student investors.
🧑💻 How to Start Investing as a College Student: Step by Step
If you’re a college student who wants to start investing, don’t miss out on our step-by-step guide.
1. Determine Your Goals and Current Situation
If you plan to invest, it’s crucial to determine your goals. Your investment strategy will significantly depend on your short and long-term objectives.
Examples of short-term financial goals include making payments towards your student debt, buying a car, or taking a vacation. These are expenses you will have in the next one to five years, so you don’t want to invest in anything risky.
Your long-term financial goals might be purchasing an apartment, retirement savings, or a wedding. Since long-term investments usually have a timeline of five years or more, you can afford to be a bit risky with your investments.
2. Pay Off High-Interest Debt
Paying off your credit cards, student loans, or any other debt can be frustrating and leave you with less money to cover daily expenses. If you find yourself in this situation, it’s better to pay off debt before you start investing.
With no debt repayments, you have more money in your budget to invest and the opportunity for higher returns. Paying off your debts will take a weight off your shoulders, motivating you to make smart investment choices.
3. Decide How Much to Invest
The sum you can invest depends on your financial situation, investment goal, and time frame. The best strategy is to be consistent with your savings and regularly set aside a given amount. Remember that you can start small, even just $5 to $10 a week. This way, you can quickly generate surprising gains without breaking your budget. A regular investment schedule will also help you develop that investor mindset and boost your financial skills.
4. Decide on an Investment Type
When you start building your investment strategy, it’s time to revise your financial goals again. If you have a long-term saving goal, like retirement, almost all your money can be in stocks. Since it might be challenging for a beginner to pick specific stocks, you might want to invest in mutual or index funds.
For short-term saving goals, keeping your money safe and building a low-risk investment portfolio is better. If you can’t or don’t want to decide, you can always open an investment account through a robo-advisor.
5. Open an Investment Account
Choosing the right type of investment account for you is the next important step. Firstly, you need to consider what kind of investor you want to be. While some investors find it satisfying to monitor investments daily, others prefer a more passive approach. You should also consider fees and minimum balance requirements. It’s best to create a table to compare several investment account options and choose the one that best matches your needs.
6. Start Making Investments
Here comes the most exciting part: making your first investment. A great and safe place to start is a low-cost index fund, like the S&P 500 index. It is a cheap way to diversify your stock portfolio. However, if you want to invest in a specific organization, you can do that too. Just be sure to do your research. If you’re working with an investment manager, you can relax, sit back and monitor your accounts.
7. Invest Regularly and Diversify
When building your investment portfolio, you shouldn’t put all your eggs in one basket. Instead, diversify so that if one investment drops in value, another might increase. Experts recommend ensuring you have investments across a wide variety of sectors as well as risk levels. A complex and diverse portfolio might include a mix of stocks, bonds, index funds, and alternative assets.
To determine how to allocate your money among various assets, you might get advice from friends or an investment manager, but you also need to do your own research.
🙅 Beginner Investment Mistakes to Avoid
Investment can be risky, and some things are beyond our control. However, there are some common mistakes beginner investors make that you should avoid.
❌ Investing Before You’re Ready
First, you shouldn’t start investing until you’re financially and mentally ready. To build your financial foundation, you must create a budget, pay off high-interest debts, and set aside some emergency money. A general recommendation is to have an emergency fund that can cover your daily expenses for three to six months.
❌ Not Doing Research Before Investing
If you want to invest in a particular company, simply choosing a famous one like Amazon or Apple might be a mistake. The cost of stocks in these companies is too high for most beginner investors. To pick the best stock, you need to do your research. There’s plenty of information available online, and you can always make things easier by getting help from a financial advisor or starting with a micro-investing app.
❌ Looking for Short-Term Gains
Nearly 56% of experienced investors say that looking for short-term gains is the biggest problem facing beginner investors. Purchasing and selling stocks within a short period can be tempting, but it can also be dangerous. Doing this can make you risk losing all your savings. Instead, create a safe investment strategy based on your goals, timeline, and risk tolerance.
❌ Making Emotional Decisions
Many new investors make choices based on excitement, and even greed, without paying attention to how undervalued or overvalued the stocks are. Investors also sell in a panic if the overall market drops, not appreciating how often the market goes up and down. When investing, it’s essential to control your emotions and be as rational as you can.
❌ Trying to Time the Market
Another common investment mistake is getting in and out of the market based on your predictions. It is impossible to identify the market’s best or worst days in advance. In most cases, attempting to time the market will only kill your returns.
❌ Not Diversifying Enough
Many new investors underestimate the power of diversifying their portfolios. Imagine you own 20 different stocks. If 10 of those are tech companies and 10 are energy companies, you’re not diversified. A sudden drop in the tech market could change the fortunes of half your portfolio. Instead, try to invest in various industries and countries, too.
❌ Paying Too Much in Commissions and Fees
Once you start investing, pay attention to how much money you spend on trading commissions. These are the fees your brokerage charges for each purchase or sale. If you spend too much money on these fees, they will rob you in the future. The general recommendation here is to aim to pay no more than about 2% of the value of your trade.
🔮 Top 10 Investment Tips for College Students
To help you get the most out of your investments, we collected the top 10 tips from financial experts and more experienced investors.
🔎 Conclusion & Bonus Resources for Beginner Investors
Your college years can be an excellent time to begin exploring your investment opportunities. Surprisingly, investing doesn’t require you to have a ton of money, but it does demand you do your research though. Luckily, there are plenty of trustworthy sources from which to learn about different types of investments and platforms.
Remember that there’s no one right way to invest. How to invest your funds is a personal decision you make based on your financial situation and goals. Be sure to explore your options and your risk levels before investing your money.
Check out these resources to help you successfully navigate the world of investment.
⚠️ Disclaimer
The information provided aims to help you learn investment basics and share some personal opinions. Before making any financial decisions, it is recommended to contact a professional financial advisor.
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