6 Ways College Students Can Start Saving and Investing
The future is way off, especially when you're still a student in college. After all, studies, a social life, and extracurricular activities are enough to worry about as it is, right? Who has the time or desire to think about saving and investing? Turns out, college students can't afford not to.
The earlier you start saving and investing, the more time you will have to build a nest egg. And with retirement easily lasting thirty plus years, socking away as much as possible as soon as possible is imperative. Same goes for investing. Thanks to compounding, in which the interest grows along with the principal each year, investors can accumulate wealth via stocks, bonds, exchange-traded funds, and mutual funds.
Need more evidence? Consider this: if you start saving $1,000 per year at age 25 and earn 6% annually, you'll have just under $130,000 by the time you reach age 62. If you wait until age 35, however, you'll only have $64,000. Even though you only invested $10,000 less, you end up with a sizable gap thanks to compounding.
When it comes to saving and investing, the internet and mobile apps have made it easy for college students to accumulate wealth. From internet-based investment services that let you invest as little as $25 a month into ETFs, to mobile apps that will round up your purchases and save the change for you, there are a lot of options. Traditional banks also play a role in helping college students save. With that in mind, here's a look at how students can build a nest egg through saving and investing while still in school.
1. Safe & Secure in a High-Interest Savings Account
For risk-averse college students who are looking for a safe way to sock away money and earn some yield, a high-interest savings account can be an easy solution to achieve that. Offered by online banks, traditional banks, and credit unions around the country, these savings accounts give customers a higher interest rate than a conventional savings account and offer the same Federal Deposit Insurance Corporation coverage, protecting your money if something were to happen to the bank. Lots of financial services firms will offer these accounts to draw customers in, hoping they will use the bank for other services.
2. Certificate of Deposit
A CD is also FDIC insured and can be opened online or at your local bank. It is considered a short-term investment, but will lock up your money for the term of the CD—so don't invest funds needed for bills, groceries, or emergencies. When you open a CD, you agree to let the bank hold your money for a fixed term of your choice—typically between three months and five years—in exchange for a fixed interest rate. The interest rate improves the longer the term. But since penalties apply for withdrawing money before the term expires, you need to be careful not to overextend yourself.
With interest rates rising, which typically means bond yields decline, investors should try to stay away from long duration bonds. You don't want to purchase a bond now, locking in an interest rate for the next ten years only to see it climb. One way to make the most from the yields without tying up too much of your funds is to "ladder" your CDs. Laddering is a rather simple concept. If, for example, you have $3,000 to invest, you may decide to put $1,000 in a six-month CD, $1,000 in a one-year CD, and $1,000 in a three-year CD. This way, you can take advantage of higher interest rates available now without tying up all your funds in case you need them, or if interest rates improve before your longest term CD expires and you want to reinvest.
3. Don't Ignore the Company 401(k)
If you work during college and your employer offers a 401(k), you might consider investing in it. Funds are deposited pre-tax, which means you won't pay taxes until you withdraw them, and your employer may even match a portion of the funds you invest. If your employer offers a match, do everything you can to contribute at least up to that amount. Otherwise, it's like turning away free money.
Since 401(k) investments are geared for the long-term, you might consider being more aggressive in your investment choices, favoring stocks over more conservative, low return investment products. Most plans offer funds that are diversified, giving you exposure to different asset classes.
That said, be aware that unlike a CD or checking account, these funds aren't guaranteed against loss if your investments perform badly. The flip-side is that, historically, the market has offered much higher returns than can be found in safer, more conservative investments.
4. Roth IRA Amps Up the Savings
The Roth IRA is a solid choice for anyone investing for the long-term. Unlike a 401(k) plan or a traditional IRA, you pay taxes on funds you invest in a Roth but you don't pay tax on withdrawals during retirement. That means all of your gains are tax-free.
5. Low-Cost Online Investing
When it comes to investing, fees matter—a lot. The more you pay in fees, the less money you have to accumulate wealth. That is why it's important for college students to pick low-cost investment providers, which is where robo advisors may come in. These crop of online investment platforms will put you through a series of questions and use algorithms to come up with the best investment plan for your current situation. It will then invest the money for you in low-cost funds, typically exchange-traded funds, which are passive and not requiring a lot of expenses and overhead to operate. That way, you're freeing up more money to benefit from compounding.
6. Set It and Forget It with Mobile Apps
Saving money doesn't have to become a sacrificing chore that leaves you cash-strapped for the rest of the month. In fact, thanks to mobile apps, you don't even have to think about saving. Many new apps let you sync payment cards and will round up your purchases, with the spare change going into a savings account. Let's say you purchase coffee each morning and it costs you $1.50. The app will round the purchase up to $2.00, putting $0.50 in your savings account. Over time that money can quickly grow, giving you a nice savings balance with little effort. Chances are you won't even realize how much you're saving this way.
Saving and investing are two of the best life-long habits you can develop early on. Don't wait to invest if your excuse is that you don't have that much money—even $25 per month can go a long way toward padding your retirement or saving for a house. Once you get into the habit of saving regularly, it will become a normal part of your life. And when your income increases, adding to your savings will be relatively easy.
It can be hard to go against the grain in a culture that values instant gratification, especially when your friends may be flaunting the latest trends in fashion or technology. But resisting the temptation to follow suit can reward you greatly in the long run. When those same friends are worried about not having enough money for retirement, you could be planning an early one.
Article source: iGrad.com
January 2, 2019