What To Consider When Investing As A College Student

2. Index Fund Exchange Traded Funds (ETFs)

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Thanks to events like the Gamestop market mania of early 2021, or the sudden rise of Dogecoin, SPACs or other meme stocks, many people expect quick and high returns on investing in the stock market. But because of its volatility, this is not guaranteed.

One way to diffuse this risk and still earn good returns over time, consider using index funds as an ETF to build diversification into your portfolio.

For beginning investors, using these funds to build entire investment portfolios can make a lot of sense. They provide instant diversification with low costs all-in-one investment. Over time, these are safe investments that build considerable wealth.

To understand what makes diversification powerful, let’s go through a thought experiment on these long-term-oriented, low-risk investments.

What’s better than one company that generates an average annual return of 10%? Two companies that earn an average annual return of 10%.

What’s even better than that? Thousands of companies taken together that generate this kind of return consistently.

Why? Because any one company can befall a disaster, suffer a significant setback or even go out of business. Your risk tolerance need not be as high to invest in these safe investments (over long periods).

Suppose you own shares of a fund holding stock of different companies. In that case, you avoid torpedoing your portfolio because you spread the risk out to several companies.

While markets overall can drop in tandem on major economic news, by holding several companies in index funds simultaneously, your portfolio won’t take on any added risk of specific companies failing.

If you can hold through this market tumult and continue to stand firm for years to follow, the market has always rewarded you in the last century.

As an example, think back to the Great Recession back in 2008. If you had owned an S&P 500 index fund, your eyes might have watered as you saw your position lose almost half its value in just a few months.

But, if you managed to hold, your same S&P 500 index fund investment would have averaged 18% per year over the next decade. Just imagine if you’d bought more of the index fund when it fell!

The lesson here? Suppose you can see your stock portfolio as an illiquid basket of securities and can only add to them. In that case, you can rest easy knowing your money will come back strong over the long term.

Related: 11 Best Stock Portfolio Tracking Apps [Stock Portfolio Trackers]

3. Mutual Funds (All-in-One Investment Portfolio)

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Investing can be a daunting task for any investor. Still, many believe that young investors benefit from setting up mutual fund accounts at an early age.

These investment vehicles act like ETFs by purchasing a securities bundle attempting to fulfill some stated investment aim.

Mutual funds build portfolios of underlying investments through pooling your money with that of other investors.

This creates a more extensive collection of stocks, bonds and other investments, called a portfolio. Most come with a minimum initial investment requirement.

When a mutual fund’s securities’ values change, the net asset value (NAV) adjusts accordingly by calculating how much more—or less—the fund would have to sell its investments for to fulfill shareholder redemptions.

This price changes based on the securities’ value in your portfolio at the end of each market trading day.

Owning a mutual fund in and of itself does not grant the investor ownership to the underlying securities. They only own the mutual fund shares themselves.

Mutual funds can be stock funds, bond funds, a combination of them or investments in other assets.

Retirees tend to hold a combination of stock funds and bond funds in their retirement portfolios because they both can pay dividends and deliver the upside of stock investments.

Mutual funds come in two types: passively managed and actively managed mutual funds.

Managers of an active mutual fund management company buy and sell investments based on their stock research and the fund’s investment strategy.

The goal of portfolio management is typically to outperform a comparable benchmark—a commonly used but risky approach.

Passively managed mutual funds attempt to recreate the performance of a benchmark index like the S&P 500, Dow Jones Industrial Average or Barclays Corporate Bond Index. These are simply index funds but in mutual fund form.

You can invest in mutual funds through:

  • IRAs (Traditional and Roth IRAs)
  • 401(k)s
  • 403(b)
  • 457 plan
  • 529 Plans
  • Education Savings Accounts

All of these types of investment accounts will allow you to reap the long-term rewards of compounding returns in a diversified investment.

Related: Best Investments for Beginners [Build a Diversified Portfolio]

Should You Invest if You Have Student Loans?

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You never want to default on your student loans. Doing so would substantially hurt your credit score, possibly result in wage or tax refund garnishment, or even have the loan servicer sue you.

The question isn’t about whether you should always make your student loan payments (you should!) but instead what you should do with other money you have.

Let’s say you earn enough money to cover your expenses and have a fully-funded emergency fund.

Should you use the extra money, such as a stimulus check, to pay more towards your student loans? Or should you invest it?

In general, when people have debt, it’s advised to compare the interest rates on your debt to the expected returns on investments.

For this reason, it’s usually advised to pay off credit card debt before investing because credit card interest rates can be extremely high.

However, many types of student loans have low interest rates. The average interest rate for federal student loans falls between 2.75% and 5.30%.

Private student loans typically have higher rates, often double digits. The stock market averages a 10% return per year (slightly less after accounting for inflation).

Suppose your student loan interest rates are lower than what you can make through the stock market. In that case, it’s often wise to invest simultaneously while paying off your student loans rather than paying extra towards your loans.

This strategy assumes you have fixed-rate loans.

For example, let’s say you’ve calculated that you have an extra $100 you can contribute either to your student loan balance or invest towards retirement each month.

You currently have a student loan of $28,000 with a 5% interest rate and a monthly payment of $296.

You’ve opened an investment account and put in an initial $1,000 but haven’t added to it yet. You’re expecting the stock market to have a 10% annual return rate.

If you choose to pay an extra $100 per month towards your loan, you could pay off the loan in seven years and save $2,435 overall.

Comparatively, if you invested $100 every month in that same seven years, you could earn an extra $8,400. This is a situation where you should be investing while you still have student loans.

How do You Invest and Manage Student Loan Debt?

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It can be challenging to pay for essentials (food, shelter, etc.), chisel away at student loan debt, save for a house, and still invest as much money as you want to.

According to a TIAA-MIT AgeLab study, 84% of American adults say student loans negatively impact how much they can save for retirement.

Some people can’t make any retirement contributions at all, and 26% of those people blame their student loan debt as the reason.

Ideally, you pay off your student loans and invest simultaneously. Your student loans likely have lower interest rates than market returns.

How much money a person can invest varies significantly. You don’t want to default on your student loans, so always pay your minimums.

Only invest small amounts if that is all you can afford. For most people, it makes sense to prioritize investing over paying ahead on student loans. Compare your loan interest rates and expected market return to see if this is true for you.

Even if you can only invest a few dollars each month, it will make a difference. Unexpected money, such as a prize or tax return, represents excellent investment opportunities as it doesn’t hurt your budget.

If your budget is too tight to manage your student loan payments and invest, make your loan payments. Look into refinancing your student loans with a service like Splash Financial. You may be able to lower your monthly payments and then have extra monthly cash to invest.


What is the Best Investment Plan for a Student?

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An investment plan considers your financial goals to determine what you should invest in, how long you hold your investments and other investing details.

No one investment plan works universally for all students. While students’ investments plans should have similarities because they are around the same age, the specifics may vary.

When creating an investment plan, new investors should start by writing down realistic, specific goals. The goal of “becoming a billionaire as soon as possible” represents a vague and unrealistic goal.

A better goal would be to “have $1,000,000 in retirement savings by age 65.” After setting your goals, calculate how much you would have to invest each month to make that goal a reality.

It’s a bit trickier to estimate investment earnings than what you would make with the money in a high-yield savings account. has a compound interest calculator that can help you estimate your earnings.

Remember, these aren’t the exact numbers you will eventually earn. Depending on how the market performs over the years, you may have more or less money in your account.

After calculating what you would need to invest monthly, see if it is realistic in your budget after subtracting living expenses. Adjust your goal and monthly investment budget if necessary.

You can then choose your investment style. College students with long-term goals should invest aggressively in high-risk investments, such as stocks.

Decide what types of investments you want, let’s say a mix of stocks and index funds to start. You’ll then need to pick your specific investments.

Always thoroughly research investments with websites and other apps or tools before purchasing.

Learn what data investors look at when researching stocks and have set criteria that investments need to pass for you to invest in them.

You don’t want to make a purchasing decision based on a fear of missing out (FOMO) or a biased internet thread.

Your investment plan might include a step where you consult with professionals, whether from a stock investment newsletter you subscribe to like the Motley Fool, a robo-advisor, or a certified financial advisor.

Track your investment plan and make adjustments as you see fit.

College students should focus primarily on long-term investments, so don’t stress too much about temporary downturns. Allow the market to correct itself.

Is a Roth IRA Good for a College Student?

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Roth IRA is one of the best investments a college student can make when they start investing because of the tax benefits.

The vast majority of college students will end up making more money post-college than during college. A Roth IRA lets you take advantage of your currently low tax rate. Money contributed to a Roth IRA is after-tax money set aside toward retirement.

Since you’ve already paid taxes on the money, you get tax-free withdrawals later when you’re likely in a higher tax bracket. You also don’t pay taxes on the capital gains.

Roth IRAs have many investment options, such as stocks, ETFs, bonds, mutual funds, REITs, and more.

Note that a student can’t contribute more to a Roth IRA than they earned that year. For example, suppose a student only made $3,000 through a part-time job. In that case, that is all the person can contribute, regardless of the current year’s maximum contribution limit.

Only the income you report to the IRS counts, and scholarship money or money from parents doesn’t count.

A college student has more options for using a Roth IRA than just saving the entire account for retirement. Once you’ve gotten a job after graduation, you’re allowed to take distributions up to $10,000 to use towards buying a first home.

Distributions also won’t be taxed if used for qualified higher education expenses, such as tuition, fees, or supplies.

Related: Roth IRAs for Kids: Can I Open a Custodial Roth IRA for My Child?

Should College Students Invest through a Traditional IRA?

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A benefit of traditional IRAs is that contributions are tax-deductible. However, most college students don’t have very high tax rates.

It’s almost always wiser for college students to invest in a Roth IRA rather than a traditional IRA.

It’s possible to contribute to both a traditional and a Roth IRA. Still, the maximum yearly contribution you can make applies to both IRAs combined. Rather than put some in each account, college students should max out their Roth IRA with the best investments, if possible.

While the Roth IRA contributions aren’t tax-deductible, they are only taxed at your current tax rate (typically low in college). You can take tax-free withdrawals later and don’t pay taxes on investment income either.

If you have money you could contribute to a traditional IRA, usually it would be best to invest it in a Roth IRA instead. Remember, you can’t contribute more than you earned that year.

How Much Money Should College Students Invest?

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College students should invest as much money as they can afford after accounting for all expenses, including money towards an emergency fund. Don’t spend more than you can afford.

Some simple math can help you calculate how much you would need to invest to reach your goals. Let’s say your goal is to max out your Roth IRA for the year.

The current annual contribution maximum is $6,000. To reach your goal, you would therefore need to contribute $500 per month.

Rather than a certain number, you may choose to invest a percentage of your earnings. Let’s say you have a part-time job and a significant emergency fund built up.

You might set aside 10% of your wages to put towards investments.

If your brokerage allows fractional investing, you won’t have to wait until you have enough for a full share of a stock you desire. You can buy a partial share.

Even $20 a month helps. Once you see how your money grows, you’ll likely want to invest more.

You don’t need to invest every spare penny, and it’s fine to use some of your funds on recreational activities. Just remember that the more you invest now, the brighter financial future you will have.

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