The Informed Investor

6 Tips for College Students Interested in Investing

Investment Counsel Company

August 10, 2022

It is never too early to begin planning for retirement. That means it is never too early to begin investing. There is no such thing as putting aside too little money, especially when you are in college. Even putting away as little as $50/month can add up significantly over decades. So, if you are a college student, consider forgoing a pizza night, skip the expensive coffee drinks occasionally, and start putting your money to work. Here are 6 tips for college students interested in planning for their future.

  1. Look for higher yielding savings opportunities

2022 is a great year to put money into a high-yield savings account or Certificates of Deposits (CDs). After years of virtually no interest accumulation, savings account rates may rise to 2% this year. Savings accounts are insured up to $250K by the FDIC at most banks, so there is no risk of losing money. CDs, though less popular than they once were, also offer the opportunity to earn interest with no risk. However, you should know that CDs have a fixed maturity date. If you withdraw from them before their maturity date, they usually charge penalty fees.

  1. Save or invest a set amount on a regular basis

It is an unfortunate misperception that investing is only for financially secure individuals. Nothing could be further from the truth. You can invest in a mutual fund or other investment for example, for $50/month. Commit to consistently investing that same $50 every month.

Using a strategy known as dollar-cost averaging, you may only purchase 2 shares at $25 each your first month. If the share price increases to $30 in the second month, you will only be able to purchase 1.67 shares. Suppose in the third month the share drops to $15. Your monthly investment then buys you 3.3 shares.  By the fourth month, the share price returns to $25.  You have invested $200.  But the value of your shares is now $225. So, you have earned $25 without changing your strategy at all.

Over time, your investment can grow exponentially. Consistency is key.

  1. Fund an IRA

The thought of opening an individual retirement account before your 20th birthday may seem extreme. Rest assured, it is not. It is a smart, strategic decision that all young people should consider. Roth IRAs in particular can be an excellent investment strategy for young people. With a Roth IRA, your contributions will be made after taxes. So your withdrawals, once you retire, will be tax-free. This is important because your money could grow to hundreds of thousands of dollars by the time you retire, and that money is available to use for your retirement tax free.

A traditional IRA also allows you to save for the future. You will be allowed to deduct your contributions from your taxable income each year. This can save you money immediately.  Keep in mind, however, that you’ll have to pay taxes on the money you contributed as well as the money the account has earned when you withdraw it later.

  1. Avoid Trendy or Emotional Investments

The meteoric rise and popularity of trendy stocks and cryptocurrencies should be seen as a warning to young investors. For example, as GameStop stocks rose to unprecedented prices, thousands of people bought stocks at extremely elevated prices, thinking the stock would keep climbing. Unfortunately, many of those investors wound up losing a tremendous amount of money. When you’re young, it is best to choose investments that are well-respected with a lengthy history to help you evaluate its performance.  If you do decide to invest in new opportunities, don’t bet all of your hard-earned money on any single investment.

  1. Consider Investing in ETFs

As an alternative to putting all of your money into a new or trending stock, consider investing in a well-diversified exchange-traded fund (ETF). ETFs typically offer lower fees than mutual funds, and they are traded on the open market, offering greater transparency, and the opportunity to buy or sell at will.  ETFs can be a great way to diversify your investments and various index funds may provide the benefit of automatic diversification.

  1. Get Help from a Financial Advisor

Learning to invest prudently is a process. While in college, you may not have a lot of spare time to research index funds and individual stocks, and/or weigh the pros and cons of various retirement accounts. So, it is wise to get help from an experienced financial planner. Just be sure you look for a financial advisor who is a fiduciary. Fiduciaries do not receive commissions for investing your money in specific products. Instead, they charge set fees for managing your money, so you have the assurance that they are focused on helping you achieve your objectives, not selling you products for their own personal gain.

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