How To Start Investing as a College Student

CDs and high-yield bank accounts are optimal choices in a challenging macroeconomic environment. They can generate higher yields with low risk than other bank accounts as interest rates remain elevated.

So, with CDs, investors can leave money in the bank for a specific period without moving it. After the period, the money saved and the interest yielded are returned to the customer.

How College Students May Start

Now that you’re familiar with primary investment types, it’s time to help you prepare for your investment journey. As college students, it’s understandable that you have limited resources. Hence, you may follow these steps to make a sound investment decision.

Identify the amount of money to invest

Preparing a budget as early as now is a great way to kick off your investment journey. Doing so helps you determine how much money you make before and after taxes and track your expenses. That way, you can determine how much money remains after covering your necessities.

From there, you can estimate how much money to save, invest, and spend. Be careful not to confuse savings with investment because they are different.

You can do the 80-20 or the 70-20-10 rule wherein 70% of your after-tax money goes to personal living expenses. The remaining 20% and 10% go to your savings and fun bucket.

After setting your 20% aside, you must figure out how much will go to personal savings, emergency savings, and investments. For instance, if you are making $10,000 monthly, $2,000 remains at your discretion.

You can divide it by three into $670 each or $1,000, $500, and $500 for bank savings, emergency funds, and investment, respectively. That way, you are targeting three things simultaneously— building finances, creating financial fences, and generating passive income.

Choose your preferred investment type

We have already discussed several investment types in the previous section. As an investment newbie, you can start concentrating on them to avoid overspending and over-diversification.

Examining your risk appetite is the best way to determine your investment option. How much risk are you willing to take? How much money can you forgo? If you want the safest choice, a certificate of deposit can be your best option. Yet, yields are lower than the other investment types.

Bonds can be a more viable choice if you want to have more yields while remaining conservative. They have higher earnings, albeit higher risks. But stocks are the go-to option if you are a risk-taker and wish to experience actual trading and learn more from it.

Again, you can mix and match your investments. If you have $1,000 and your risk-aversion is low, you can allot 80% for stocks and 20% for bonds or CDs. Of course, you don’t have to stress yourself out. You are still planning and making your investment blueprint.

Look for low-cost but reliable trading platforms and brokers

Trading platforms and brokers have varying requirements, from documents to the minimum amount required to start investing. The good thing is that you have plenty of options to choose from. And as the digital revolution peaks, trading apps have become more accessible and user-friendly.

Some trading platforms allow traders to trade in different investment types simultaneously. Others have an option to determine risk tolerance and offer suggestions for diversification.

However, you must be cautious to avoid fraudulent activities. To that end, you must research before listing your trading platforms. If you’re too busy to find time to trade on your own, you can start with mutual funds. But again, you must do some research and find low-cost but reliable brokers.

Begin by investing a little every month

After determining your preferred investment type and trading platform, you can start by investing a little every month. Doing this will allow you to test the waters and decide whether your chosen app and investment work for you or whether you should transfer to another one. Remember you are new to the platform with limited resources, so losing money can be risky.

You can set $20 aside and observe the money in action in the financial market. Some brokers in the stock market are now allowing investors to buy fractions of a share. Start as early as now, regardless of macroeconomic conditions. That way, you may be motivated to observe the market, conduct more research, and make more precise analyses. Who knows, you’ll be an expert and make millions out of it in the long run.

And once you get a better grip on it, you can start diversifying your portfolio. You can invest in different stocks or across various investment types. You can even invest in index funds, especially the S&P 500, since it holds a wide variety of stocks, so it’s highly diversified. Also, the volatility as a whole is more manageable than by specific industries.

Since the GFC, the average annual returns of the S&P 500 stocks have been 7.42%. It shows that the S&P 500 has remained durable regardless of macroeconomic disturbances.

Open an IRA

Opening an individual retirement account (IRA) while still in college may seem too early. Yet, it is an excellent opportunity to start building your finances even if you’re already making money with part-time jobs and investments. Having an IRA helps in deferring taxes on any income or dividends. Also, it allows you to deduct contributions from taxable income.

The earlier you start, the longer you will utilize the power of compounding interest to maximize your account. You may also turn to a Roth IRA. since contributions are made with after-tax dollars. As such, withdrawals during retirement will be tax-free. You can also avoid larger taxes when your income increases. Lastly, the amount you put is more likely to compound tax-free in this account.

Start Your Investing Journey Early

Investing while still in college can provide a unique opportunity to build wealth and gain financial freedom earlier. By exploring various investment options and opening an IRA, you can create a solid foundation for your future.

Starting early and staying consistent will allow you to succeed in your investment journey. Thus, it’s essential to understand the risks and rewards of each investment type to find the optimal choice.

Featured Image Credit: Keira Burton; Pexels