College is often hailed as the prime chapter of young adults’ lives, marked by optimism for a promising future, the creation of lasting memories and friendships, and self-discovery. What many students may not realize is that this phase also serves as a golden opportunity to kickstart their investment journey and begin building wealth.
The prospect of investing while being a college student with limited income might seem daunting. The copious investment options available, coupled with the misconception that substantial capital is necessary for meaningful returns, often deter students from exploring this avenue.
But, as a former director of admissions and current Director of Admissions Consulting at QuadEducationGroup.com, I understand that preparing for a prosperous future extends beyond pursuing a degree.
To truly set yourself up for success in an increasingly challenging economic landscape, acquiring financial literacy and initiating the wealth-building process early on are essential. Here’s a simplified guide on how to get started.
The Three Rules of Investing
Before delving into the details of investing, it’s essential that I stress the importance of the top three rules of wise investing, or, as I like to call them, the three “keeps” to maintain financial stability.
The first rule of investing is to be realistic with the amount of money you can allocate to saving or investing. As a college student, you likely won’t have hundreds of dollars to invest each month and that’s okay!
Any investment will accrue interest over time. Set achievable goals, whether it’s $50 or $500, considering your budget and ensuring your education won’t be compromised without this money.
Consistency is key! Determine a monthly investment amount and stick to it. Avoid missing any contributions to maintain a steady investment routine.The more you invest, the greater your potential for building wealth. This practice also instills mindfulness in your spending habits, fostering better financial responsibility.
The first two rules lay the groundwork for the third—patience. Resisting the urge to touch the invested money is crucial for maximizing compound interest, which calculates interest on both the principal amount and the interest earned.
To witness significant growth, it’s recommended to let your investments grow for at least five years. This underscores the necessity of being realistic about the amount you can invest monthly without having to dip into your investments prematurely.
Open a High-Yields Savings Account
The easiest and safest way to begin building your wealth is opening a high-yield savings account that offers substantial interest on your savings. This method stands out as one of the simplest ways to build wealth. The concept is straightforward—deposit funds into this account and watch them grow. Here are some options to consider:
- Mili Bank Mobile Savings: 5.50% APY (no minimum deposit or annual fee)
- Western Alliance Bank Savings: 5.32% APY ($1 minimum deposit, no annual fee)
- UFB Direct Secure Savings: 5.25% APY (no minimum deposit or annual fee)
These options are the best for students as they have no restrictions or fees. You can save as much or as little as you want each month!
Use an Investing App
For a well-rounded financial strategy, it’s ideal to have both a high-yield savings account and an investment portfolio. To simplify the investing process, consider using an app. There are several out there but two of the most popular include:
- Betterment: This app stands out for its robo-advising capabilities and the convenience of automatically creating an investment portfolio for you. It’s particularly beneficial for those who prefer a hands-off approach to investing.
- Fidelity Spire: Designed to cater to both novice and experienced investors, Fidelity Spire allows for fractional share investing. What sets it apart is its comprehensive educational resources, making it an excellent choice for those looking to enhance their understanding of investing.
These apps will not only help streamline the investing process but can also help you feel more confident in your investment choices!
Invest in Index Funds
While investing inherently involves some level of risk, there are low-risk options with minimal volatility. One popular choice among college students is investing in index funds—a type of mutual fund or exchange-traded fund (ETF) that mirrors the performance of a specific benchmark, representing a diverse range of the stock market.
A standout index fund for many is the S&P 500, which tracks the movements of 500 of the largest U.S. companies. Over the past few decades, it has maintained an average compound interest rate of around 11%.
The beauty of these investments is that just one index fund can be enough to build significant wealth. For instance, consider you invest $200 monthly in the S&P 500. Over five years, this could yield approximately $3,550 in interest, and over a decade, an impressive $16,610.
Consider Opening an IRA
It’s never too early to begin thinking about retirement! An IRA, or Individual Retirement Account, is a type of tax-advantaged investment account designed to help individuals save for retirement. They offer a range of investment options such as stocks, bonds, mutual funds, and more.
The two most common types are Traditional IRAs and Roth IRAs. Traditional IRAs provide an immediate tax deduction for contributions, grow tax-deferred, and are taxed upon withdrawal in retirement. On the other hand, Roth IRAs use after-tax contributions, allowing for tax-free withdrawals of both contributions and earnings in retirement.
Take Advantage of the Resources Available to You
In the age of the internet, college students have a wealth of opportunities to start building their financial future. Take the initiative to become financially literate by conducting thorough research and exploring various options.
Dive into finance podcasts, participate in webinars, and read books to understand the ins and outs of investments, savings, and earning strategies.
Make wise financial decisions by prioritizing low-risk options. This approach ensures that you can build wealth as you prepare for your future, rather than risking potential setbacks before it even begins!
Craft a realistic budget and stick to it diligently. Leverage student discounts to trim your expenses and maximize the benefits from scholarships, grants, or financial aid.
Although it might feel like you have a lifetime ahead of you to consider finances and wealth-building, initiating these practices early can pave the way for a more secure future. Financial literacy isn’t a skill you’ll learn in college but it’s arguably one of the most important for long-term success!
Mary Banks is the Director of Admissions Consulting at Quad Education. She is also the former Director of Admissions at the Columbia School of Nursing and former Director of Admissions for the School of Education, Nursing, and the Arts at NYU.