The College Student’s Guide to Investing in College

So you’ve been working all summer and now you have some extra cash on hand, maybe $1,000 or more. If so, nice work! Do you take the $1,000 and spend it on beer all year long? Or do you take the money and invest in college?

Well, once you’ve spent it on beer, you’ll be drinking well all year round. But if you invest it, it could be worth around $13,000 by the time you retire, assuming you don’t do anything with that initial investment. So was the beer worth $13,000?

Investing is a great way to save for the future as long as you are responsible and disciplined. It doesn’t require a large initial investment, and it doesn’t take a lot of time or effort. All it requires is a low risk tolerance, a dedicated time horizon, and an hour’s upfront investment.

Why invest in college?

First, let’s talk about why you should start investing in college. The big reason is TIME.

The market time beats the timing of the market.

This means that the best way to grow your money is simply with time. The earlier you start investing, the more time your money has to grow.

Unfortunately, too many college students are impatient — and it’s not sexy to see your $1,000 investment grow to just $1,080 by the end of the year. While you’re watching your money grow, $80 is great – it’s not life changing, and that can be discouraging.

But where you really see the gains is in the future. If you start investing at 18 versus 30, you have a 12-year lead over the same person. Look at this: How much do you have to invest per year to get to $1,000,000 by age 62.

Age

Amount To Invest Per Year To Reach $1,000,000

18

$2,100 or $175 per month

19

$2,292 or $191 per month

20

$2,520 or $210 per month

21

$2,772 or $231 per month

 

As you can see, if you start investing at 18, you only need to invest about $2,100 per year to be a millionaire by age 62. This number increases significantly with age. If you wait until 30, that figure is $6,900 a year to invest — more than triple the amount a year. All because of the time .

I also firmly believe that most college students can make $175 a month by working part-time at college or by working during school.

Where to open an account
In the last decade, technology has made investing affordable for anyone, even free. Gone are the days when you had to sit down with an “investment advisor” and plan your investments (at high cost).

Nowadays there are many places where you can invest and buy stocks for free. There are also mobile apps that you can use to invest for free.

We have a few recommendations on where to open an account depending on how you want to invest.

M1 Finance
M1 Finance is a revolutionary platform that allows you to invest in stocks and ETFs for free. With M1 you can build a portfolio and automatically invest in your portfolio for free! It’s a great way to get started at no cost to you. Check out M1 Finance here.

Robin Hood
Robinhood is great if you want to invest in individual stocks or trading options. This isn’t recommended for beginners, but their platform is free – and that’s great. The downside of Robinhood over M1 is that Robinhood doesn’t allow fractional equity investments, which can make it difficult for beginners with little money to get started. Check out Robinhood here.

loyalty
Fidelity is one of our favorite brokers because it is a full service company that can grow with you as you invest and make more fortune. Fidelity offers a few free investment options — including no minimum IRAs and commission-free ETFs. Check out Fidelity here.

contentious
If you’re looking to build a real estate portfolio, check out Streitwise. It’s a private equity REIT, which means you invest in a basket of properties and share in the income and appreciation (or losses, if any) of those properties. It’s a great way to invest in real estate for very little money. Check out disputewise here.

If you want other options, check out this great comparison chart of the best brokers for you.

What type of account to open?

If you are new to investing, the first thing you need is a brokerage account. Investments cannot be made with a bank but must be made with a separate entity (although some banks have brokerage operations in them). To get started, we recommend M1 Finance or Fidelity.

When you log in to the desired platform, you have several options:

Cash Account : This is the simplest account. It allows you to buy any type of security you want with your cash. This option is suitable for most investors, especially those who are starting out and those who don’t want to have their money locked up until retirement.

Margin Account: This account is similar to the Cash Account except that you can borrow money to invest. This account allows for some features that a cash account does not, such as B. shorting investments and selling naked options.

Traditional IRA: This is the traditional vehicle for retirement accounts. Similar to the cash account, you can buy securities with the available cash. However, this account has a limitation that you cannot withdraw this money until you are at least 59 1/2. However, you get a tax benefit for all funds invested up to the limit (that’s $5,000, or $6,000 if you’re over 50). You have to pay taxes on any money you withdraw once you retire.

Roth IRA: This is similar to the traditional IRA, except you don’t get a tax benefit the year you invest, but in retirement all your withdrawals are tax-free.

So what is the best option? If you want to save for retirement now and you’ve earned your income (that is, it came from work and not Mom and Dad), a Roth IRA is the way to go. This is because you now pay so little tax on your income that you will have huge tax savings when you retire. But if you don’t want to tie up your money for 40 years, a call money account is a good place to start. If you want more detailed guidance, see What type of investment account do I open?

So I opened my account, now what?

Once you open your account, the money just sits there and does nothing for you. This is where a bit of time to educate yourself is required and a bit of discipline with your time horizon comes into play.

I would like to start by saying that you can and are allowed to lose money for a short period of time. For example, the S&P 500 (the 500 largest companies in the United States) returned a nice 27.11% in 2009. That’s great. However, in 2008 he lost a whopping 37.22%. There are huge fluctuations in the market. However, the reason people invest is because the annual return of the S&P 500 over the past 20 years has been 8.12%. There have been ups and downs, but if you just didn’t do anything you would have gained 8.12% annually. This beats the standard for a savings account, which grew at just 2.81% annually.

With this in mind, it’s highly recommended that you look at index funds if you’re investing for the long term. Index funds are either mutual funds or ETFs and track an index such as the S&P500 or the Dow Jones Industrial Average. The most common and recommended mutual funds and ETFs are here:

iShares S&P500 Index (IVV)
Schwab S&P500 Index (SWPX)
Vanguard 500 Index (VFINX)
Vanguard Total Stock ETF (VTI)
Vanguard Total Stock Market (VTSMX)

When you buy these funds, you pay a commission on the purchase (unless you use a service like M1 Finance). This is paid every time you make a trade. If you read the post above about where to invest, you can see that commissions vary widely and there are often special offers or promotions that you can take advantage of.

Also, you will most likely be asked if you want to reinvest your dividends or take them as cash. Most large corporations in the US pay dividends to their shareholders. As a small owner of every company in the fund you buy, you will also receive your dividends. The fund usually pays this out quarterly or annually.

If you’re investing for the long term, I recommend reinvesting your dividends as it increases your returns.

I did it! What now?

So now you’ve got your $1,000 invested in a good index fund. Congratulations. Now just wait and add more money every month or every year. Set up an automatic deposit and investment option so you can continue to grow your portfolio.

The stock market will go up and down. The worst thing you can do is panic when the market falls and sell your investments. The market will recover and if you invest for the long term you will reap the rewards.

Always remember that it is important to start investing early. If you can start investing in college, you’ll have a huge advantage over everyone you know!

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