With the cost of living going up, college students should start thinking about their financial future, allocating a portion of their available funds toward investment options. While growing financial capital from a young age is a smart decision, doing so can often be harder than anticipated.
Keeping a budget, while having minimal capital inflow is growing increasingly difficult, as the cost of everyday essentials, and college tuition inflation keeps going up.
Growing tuition costs have led to nearly 45 million, or 17.4% of American adults now sitting with student loan debt according to recent census data.
What’s even more surprising, is that more than half, roughly 55% of the class of 2020 graduates have an average of $28,400 in outstanding student debt.
Tighter job market conditions and economic hardships have done little to throw a lifeline for college students, making it increasingly hard for many of them to properly save their available funds for equitable investment opportunities.
In the past, investing seemed to be only reserved for affluent individuals, but with the rise of robo-advisors and digital investment platforms, any person can now safely invest in different stock options or a diverse range of investment vehicles suited to their risk appetite.
For college students, this poses an opportunity to take up a position that they can leverage, helping to grow their financial well-being over time, regardless of what their financial goals might be.
There are however some things one needs to consider before simply throwing cash at single stock options or buying into mutual funds. Take some time to read what we think every college student should know when they want to invest their money.
Know What Your Investment Goal Is
Being new to investing can be overwhelming, and often one can get distracted by all the available investment options you may have at your disposal. Before looking to invest in a range of diversified opportunities, consider what your end goal might be with your investment portfolio.
Understand that if you are investing to have enough savings to pay off student debt, or maybe buy your first car after you’ve graduated, you might want to consider taking up a more riskier position.
This could mean that investment vehicles such as Exchange Traded Funds (ETFs), index funds or perhaps a mutual fund might be a suitable option.
For these options, you will need to consider the minimum amount requirement, how much stake you’re looking to purchase in one of these funds, and what the long-term turnaround might be
Another possibility would be to invest in short-term saving options. This is suitable for college students who might need their money in under a year, or by the time they graduate. Although short-term savings accounts are lower risk and can offer some sort of financial growth benefit, they tend to have lower returns, and there are typically some costs involved when you’re ready to withdraw the funds.
Be sure to set up an investment goal, this way you may have a better idea of the type of investment options you should be considering. The better you know what the cash will be used for, whether it’s to pay off student loans or grow your nest egg, the less complicated it will be to start building on your portfolio.
Understand How Much Risk You Can Take On
As a college student, you might have a lower risk appetite than a seasoned professional who has years worth of investing experience under their belt. Investing comes with a great deal of risk, and the more you begin to grow your portfolio, the bigger your risk appetite can become.
Risk can be important for several reasons, and it’s important to consider how well you can position yourself to grow investment risk. Remember that high risks can often give you higher rewards, but this isn’t always the case, and one should be well-informed when taking on different levels of risk.
Two prominent types of risks include market or company risk, whereby the market risk is the possibility that the overall stock market will decline in value, while company risks look at the chances that a specific stock may lose its value.
Depending on where you might direct your cash, whether it’s broader market investment vehicles, such as funds, or perhaps single stock options, your risk appetite will largely depend on how much of your portfolio value is allocated toward these investment options.
Being a bit more risky can help you grow valuable returns, but at the same time, being safer can also lose you money. This is why it’s important to consider your goals, and how you can tie your investment strategy around the long-term outlook.
Remember that a lot of risks can also be dangerous, and for someone that might only be starting, it’s better to hold a safer position at first, while gradually growing interest in different investment vehicles as you become more comfortable with the market conditions.
Learn The Different Investment Vehicles
As already mentioned, there are several different investment vehicles you can consider when building up your portfolio. Choosing one or the other will largely depend on what your investment goal might be, your level of risk, how comfortable you might be with losses, and what your long-term position with these options might be.
Stocks
Buying stocks is equivalent to buying shares of a publicly traded company, meaning you become a partial owner of that company. Stocks can pay dividends, which is an amount paid to investors based on the overall stock performance.
Commodities
A bit harder to manage, and not always considered a strong investment vehicle for novice investors, commodities are investments into natural and raw resources such as gold, silver, or platinum among other options.
Exchange Traded Funds (ETFs)
These funds contain several different stock options within the fund, and are traded on an exchange. Prices of ETFs tend to grow and decline, similar to stocks.
Mutual funds
These funds have a collection of different investments, including stocks, bonds, or cash. Investing in a mutual fund exposes you to different investments, but instead of going into it alone, you are pooling your cash with other seasoned investors. A mutual fund is usually managed by a professional fund manager.
Bonds
Investing in bonds means that you are lending your money to a company or the government. In return, the company or government will agree to pay you interest on the amount you loaned, with the additional option of paying the full amount of the initial loan once it is due. Bonds are often safer options, as it’s harder for governments to default on their loans.
Individual Retirement Account (IRA)
This investment vehicle is a traditional retirement savings option, which typically allows a person to save for retirement. Opening an IRA is relatively a safe option, but it needs to be monitored throughout your lifetime, to ensure it grows and hedges inflation. There are two different types of IRAs: traditional and Roth IRAs.
Index Funds
Something often reserved for more seasoned professionals, index funds track specific market indices such as the Nasdaq or S&P 500.
It’s hard to determine which option might be the best, as investment goals and strategies are not always similar, and depend on the amount of risk an investor can take on.
Invest In The Things You Can Afford
While the choice between the different investment vehicles may be overwhelming, consider choosing options that you can afford, and try not to go overboard, especially if you’re new to the investment market.
This is where it becomes important to set up an investment budget, not only for you to help take better control of your money, but also as a way to diversify your investments more appropriately.
Once you’ve established a budget for your investments, you can consider where you should be allocating money over time.
For long-term investments, such as retirement funds, consider how much you are willing to dedicate, as these funds will only be withdrawn once you’ve reached a certain age. This would mean that your money will stay in that account and will mature over time, meaning you might not have access to it in case of an emergency.
For more liquid investments, such as stocks or ETFs, you tend to have more access to these investments, as they can easily be sold off for a profit, or even a loss.
Keep in mind that if you do end up withdrawing your investments earlier than the agreed time, especially with certain bonds or retirement funds, you are exposed to the risk of paying higher withdrawal fees.
Make an effort of looking at options that are within your budget, but also within your determined time frame for when you might need to have access to the cash.
There’s No Right Time To Start
The best time to start investing is right now, and many experts suggest that the sooner you start growing your portfolio, the better it will be in the long term. This is where the power of compounding starts to make sense, especially for younger college students.
Think of it like this. The average college student has roughly $1,000 currently saved up. If you decide to invest even a portion thereof, in a long-term retirement account, ETF, or mutual fund, you can steadily start growing that thousand dollars into something bigger.
Every few cents or dollars you might have extra at the end of the month, or even earnings you’ve made on other investments, you can allocate accordingly to your portfolio.
The longer you have to grow your investments, the better, that’s why it’s important to start investing, and not simply leave your cash in the bank where it tends to lose value over time as inflation and costs keep going up.
Make a habit of spending at least a bit of time every day, or even every other week to invest a bit of your available cash into fruitful investment options that can help you in the near and long term.
Don’t Put All Your Eggs In One Basket
The saying “Don’t put all your eggs in one basket” is perhaps one of the most important things to remember as you start building a portfolio.
Although you might be fairly new to investing, make sure that from day one you spend enough time allocating funds to an array of different investment options, and not just throwing your cash into one basket.
See how you can diversify your portfolio among different investment vehicles such as stocks, bonds, or even a few ETFs. The better you diversify your portfolio, the more you increase your overall market exposure.
Additionally, diversification can help expose you to different market segments and risks, which in some instances can be a good thing
Dedicate your portfolio to market segments that present long-term growth, but also have enough allocated to IRAs or annuities. You can also have a bit of cash invested in different stock options, but remember to choose companies that offer growth opportunities against broader market volatility.
Each decision should be based on well-rounded research and an overall understanding of market conditions. The more time you spend reading about different investment opportunities, the more comfortable you will become in the long run.
Final Thoughts
Investing as a college student can seem like a daunting experience, and even some of the most clued-up novice investors still have a hard time navigating the market. While there are several risks associated with investing, starting sooner, rather than later is always a better option, and in the long-term, this will only benefit you more.
Be sure that you have an idea of what you are investing for, and how you can build a portfolio that supports your end goal. Have enough leverage to take advantage of different market segments, and be sure to invest in the things you can afford, without running into wider financial risks in the near term.
Being a young investor can feel intimidating, but rather take the risk now, while you still have the time, and have less to lose, than reaching an age where it may be harder to actively grow an investment portfolio that will only financially benefit you.
