5 Best Ways to Invest While You’re in CollegeAugust 29, 2022
When you think of investing, you might picture Wall Street types in power suits buying and selling stocks. But you don’t have to be a stockbroker to invest. Investing is something anyone can do — even college students.
There are many advantages to investing as a college student. For one, you have time on your side. The earlier you start investing, the longer your money has to grow. And since compound interest is like magic — it makes your money grow over time — the sooner you start investing, the more money you’ll have down the road.
By learning how to invest as a college student, you’ll be ahead of the game as you work toward your financial goals.
1. Open a Roth IRA
If you have a source of income while in school, such as a part-time job on campus or a side gig, you can open a Roth IRA. A Roth IRA is a retirement account. While saving for retirement may not seem like a priority in college, tucking money into a Roth IRA has several advantages:
- Tax-free growth: Your money can grow over time, and you won’t have to pay taxes on your earnings unless you withdraw your money early.
- Tax-free withdrawals in retirement: You make contributions to a Roth IRA with post-tax dollars, meaning the amount left in your paycheck after your employer deducts taxes and other expenses. When you’re ready to retire, you can withdraw money tax-free if you’re 59 ½ or older.
- Access to contributions: With most retirement funds, you can’t access the money in your account unless you reach a certain age. Otherwise, you’ll have to pay significant penalties. But with a Roth IRA, you can withdraw what you contributed to the account without penalty; you cannot touch your earnings until you’re 59 ½.
For college students, Roth IRAs can be excellent choices. Because you can tap into your contributions without penalties, a Roth IRA can double as an emergency fund, so it’s not as restrictive as other retirement accounts.
Small amounts can add up over time, even if you can’t contribute very much money. For example, Mary is 19 and works part-time in the college dining hall for 10 hours per week. She saves $10 per month in a Roth IRA. Assuming the account earns an 8% average return, Mary will have $67,407 by the time she turns 67. If she ups her contributions once she graduates and starts working full-time, she’ll have a substantial nest egg for retirement.
You can open a Roth IRA with an investment brokerage firm, such as Vanguard, Fidelity, Schwab, Betterment, or TD Ameritrade.
2. Set Up a Taxable Brokerage Account
If you don’t want to open a Roth IRA or other retirement account, another option for college students is to open a taxable brokerage account. Unlike retirement accounts, these accounts don’t have tax benefits, but you can withdraw money at any time without penalty. They’re a good choice if you want to invest for short-term goals, such as buying a car or a house, rather than planning for retirement.
Like IRAs, you can open a taxable account with an investment brokerage firm or an account with investing apps like Robinhood, Acorns, or Wealthbase.
3. Stash Money in a High-Yield Savings Account
Investing in college can be scary. You never know what emergencies or unexpected expenses pop up, so you may want to keep your money more accessible. If that’s the case, another option is to put your money in a high-yield savings account.
Traditional savings accounts generally learn a very small yield. By contrast, high-yield savings accounts may earn APYs of 2.00-3.00%. You can check with your local bank or credit union to see if they offer high-yield savings accounts, and you can also look at options from online banks.
4. Consider a Certificate of Deposit (CD) Account
A CD may be a good choice if you’re looking for a higher rate of return than a savings account but less risk than investing in the stock market. With a CD, you place a lump sum in an account for a specific period of time, such as 18 months. You cannot touch the money in the account during the CD’s term without paying a penalty on your earnings. But if you follow the rules, a CD can earn a higher APY than savings accounts. Many banks and credit unions offer CDs, but you can also open one with an online bank.
5. Pay Down Debt
When considering how to invest in college, you may not consider paying down debt a form of investing—but paying down debt while in school can be one of the best investments you can make. If you have high-interest credit card debt or student loans, you may save more by paying down your debt than you could earn by putting that money into other investment options.
Investing for College Students: Top Tips
Now that you know how to invest as a college student, you can decide which approach to investing is best for you. To get started, use these tips:
- Research Your Investment Options: When you open a Roth IRA or taxable brokerage account, you have to decide where your money should go. You can invest in stocks and bonds, but you can also invest in index funds containing hundreds of stocks or bonds. Index funds can be a good idea if you’re new to investing or want to diversify your portfolio.
- Choose the Right Platform: There are many investing apps and platforms out there. For college students, investment apps that create diversified portfolios for you can be a smart choice. The apps invest your money in index funds they select based on your financial goals and risk tolerance, and they adjust your portfolio over time.
- Make Regular Contributions: Don’t worry if you don’t have a lot of money to invest at once. You can establish good investing habits and grow your money if you contribute small amounts on a regular schedule — such as $10 every payday.
- Think Long-Term: When you invest your money, plan on keeping your money there for years; investing involves long-term planning for the future.
- Don’t Invest Cash You Need: If you’re investing in college, only invest money you don’t need for your essentials. If you’re thinking of using your student loan dollars or tuition fund, think again — the stock market can be volatile, and it’s wiser to use your student loan money for necessities or to pay down your debt.