Investing While In College: What You Need to Know

Most college students are barely scraping by. But if you find yourself with some extra funds while in college, what should you do with the money?

The most powerful action you can take with extra money is to invest it.

Recent research shows that only around 39% of Americans between 18 and 29 own stock, compared with 56% of U.S. adults. If you’re ready to be the outlier and get started on your investing journey early, this is the guide for you.

This comprehensive guide will cover everything that college students need to know to get started with investing.

Why investing in college makes sense

When you invest money, you benefit from compound interest. This means that as your investments grow, you earn interest on the original amount you invested plus the profits you’ve already made.

Compound interest can cause investment profits to snowball, growing faster as time goes on. For young investors, the effects of compounding can be substantial.

Benefits of investing early

The more time your investments have to compound, the more they can grow. Here’s an example to illustrate:

Isabella starts investing $100 per month starting at age 20. She earns 7% returns on her investments. After 45 years (when Isabella is at retirement age), she will have approximately $345,000 in her investment account.

Aki starts investing $100 per month, starting at age 30. He earns 7% returns on his investments. After 35 years (when Aki is at retirement age), he will have approximately $167,000 in his investment account.

Looking at this example, we can see that:

• Both people invested the same amount each month and earned the same 7% returns.
• Isabella ended up with more than twice as much money as Aki.
• Isabella got started ten years earlier, so she invested $12,000 more of her own money than Aki invested ($100 per month for ten years).
• Even though Isabella only invested $12,000 more, she ended up with $178,000 more than Aki, thanks to the power of compound interest.

What type of investment account should I use?

Before you start investing, you’ll need to open an investment account.

Here’s an overview of the different types of investment accounts you can open.

Standard brokerage account

Standard investment accounts allow you to invest in a wide variety of assets. This account type has no tax benefits but also has no contribution rules. You can put any amount of money in at any time and take out any amount. However, when you sell assets in a traditional brokerage account, you may owe tax on your profits.

• No contribution limits or rules.
• You can withdraw funds at any time without penalty.
• No tax benefits.
• Most flexible way to invest.

Individual retirement account (IRA)

IRAs are popular retirement accounts that offer substantial tax benefits. A traditional IRA offers an upfront tax break when you contribute money, while a Roth IRA allows you to withdraw profits in retirement tax-free.

IRAs offer significant tax benefits for retirement savers. However, there are rules concerning how you can put money in and take money out of an IRA:

• You can contribute up to $6,000 per year.
• You can only contribute “earned income,” so if you’re a full-time student and don’t have a job, you may not be able to contribute to an IRA.
• There are rules for how and when you can withdraw the money. In most cases, IRA funds are designed to only be withdrawn in retirement (although there are exceptions). Early withdrawals may result in a tax penalty.

Read more about Roth IRAs here and traditional IRAs here.

Other options

If none of these options are right for you, there are a few other options to consider.

• 401(k): A 401(k) account is another popular retirement option that’s a good choice for retirement savings. However, 401(k)’s are only offered through employers. If your workplace offers a 401k, you may wish to consider contributing to it. If not, opt for an IRA (which you can open on your own).
• Savings accounts: For a more conservative strategy, you can simply keep your funds in a savings account. These accounts pay very little in interest, but your money is safe and FDIC-insured.

Where should I invest?

Once you decide on an account type, it’s time to choose an actual investing platform, called a “broker.” These are the companies that will manage your account, provide customer service, etc.

College students should look for a broker that has:

• Low fees (ideally no fees for trading).
• Low investment minimums.
• A wide variety of assets available to invest in.
• Support for the type of account you want (Roth IRA, standard brokerage account, etc.).
• Support for fractional stock trading (this means you can invest in a company even if you can’t afford an entire share of that company’s stock).

There are hundreds of different stockbrokers out there, but here are some top options, broken up into categories.

Traditional stockbrokers

Standard stockbrokers offer the widest range of account types and investment opportunities. These are the older, more established firms that are great for long-term investing, as they provide all the necessary services to grow with you as your investing journey unfolds.

Most brokers offer commission-free trading. This means you won’t have to pay anything when you buy a stock or another asset.

Some top options include:

• Fidelity
• Vanguard
• Charles Schwab

Free investing apps

Many newer investment services are popping up, many of which are app-based. They offer free trades and a user-friendly interface. However, they tend to offer fewer account types (many don’t have retirement accounts) and fewer investment options.

Some top options include:

• WeBull
• Robinhood
• Ally Invest

For more details, check out our guide to the best free stock apps.

Robo-advisors

“Robo-advisors” are services that help you automate your investments by selecting a pre-built portfolio of investments. Robo-advisors are best for hands-off investing using passive approaches and index funds. They’re also useful for new investors just getting started.

Some top options include:

• Charles Schwab Intelligent Portfolios
• Wealthfront
• Betterment

What should I invest in?

Disclaimer: It’s wise to talk to a financial advisor to discuss your individual needs and come up with an investment strategy that works for you. This section is for informational purposes only and should not be considered investment advice.

There is no one-size-fits-all approach when it comes to investing. Ultimately, finding the right investment strategy depends on your financial goals and your willingness to take risks.

This section will introduce the different asset classes (stocks, bonds, real estate, cryptocurrency, etc.) as well as different investment products that you can buy.

Overview of asset classes

An asset is any possession or investment that has economic value. Examples include stocks, cash, vehicles, or even your cell phone.

When it comes to investing, though, these are the primary asset classes investors should be aware of.

Stocks (aka equities)

Buying a stock is essentially buying a very small percentage of a company. Therefore, you’re entitled to a percentage of that company’s earnings (which comes in the form of a dividend). As the company grows over time, the value of your investment may increase if the company does well.

• Stocks tend to have the highest returns long-term (about 10% per year on average for the last century).
• Stocks can be more risky and volatile, however.
• Most experts recommend that equities (stocks) should make up the bulk of an investment portfolio.
• Many stocks pay dividends, which is like interest on your investment.

Bonds

When you buy a bond, you are buying a promise that the bond issuer will pay you back your investment after X years, along with interest payments along the way. Bonds are issued by governments and corporations and vary from low-risk (U.S. government bonds) to risky (“junk” bonds issued by startups or risky companies).

• Bonds tend to have lower returns than stocks but are less volatile.
• Bonds pay a predictable stream of income.
• Many experts recommend holding more bonds as you get older and approach retirement age.

Real estate (and REITs)

Real estate is physical property (houses, land, commercial buildings, etc.) that you buy as an investment. Of course, most college students won’t be able to afford actual real estate, but real estate investment trusts (REITs) present a more approachable option.

• REITs are companies that invest in real estate and are publicly traded.
• REITs trade like stocks, so you can buy them with a small amount of money.
• REITs tend to pay higher-than-average dividends.

Alternative assets

Alternative assets such as cryptocurrency, precious metals, and commodities can also be invested in. In most cases, only experienced investors should purchase alternative assets, due to their higher risk profiles.

The importance of diversification

You’ve surely heard the old saying, “don’t put all your eggs in one basket.” The same concept is true for investing. If you invest all your money in a single stock, that company could go bankrupt.

For this reason, it’s important to diversify your investments. Diversification refers to building an investment portfolio with a variety of assets.

If you build a diversified investment portfolio, you’ll likely experience less volatility along the way. Plus, diversification can also improve long-term returns in many cases.

Diversifying with index funds

One simple way to improve the diversification of your investments is to utilize index funds.

An index fund is like a basket of investments that you buy all at once.

For example, there are many S&P 500 index funds that invest in the top 500 publicly traded companies in America. You can invest in a single S&P 500 index fund with any amount of money. This means that you’ll technically own a very small slice of these 500 companies.

Index funds come in the form of exchange-traded funds (ETFs) or mutual funds. These are investment products that you can buy and sell these investment products using most brokerage accounts.

Index funds are a simple, low-cost way to “hedge your bets,” so to speak.

Diversifying with different asset classes

In addition to buying index funds, investors may also benefit from buying a range of different asset classes.

So an investor might buy an S&P 500 index fund to cover stocks, a total bond market index fund to cover bonds, and a REIT index fund to cover real estate.

More experienced investors may also dabble in alternative asset classes like cryptocurrency or precious metals.

Should I invest or pay off my student loans?

Most students now have student loan debt. In fact, the average balance is $39,351 as of early 2022.

So, should students focus on paying off their debt or focus on investing? Here’s what to consider.

Potential returns vs. guaranteed savings

In the long-term, the U.S. stock market has returned around 10% per year. And as discussed earlier, the power of compound interest means that the earlier you start investing, the better.

The average student loan interest rate is currently 5.8%.

Looking at these two numbers, we can assume that invested money would grow at approximately 10% per year, while student loan debt would cost 5.8% per year (essentially a return of negative 5.8%).

In this simple comparison, it makes sense to invest rather than pay off your loans. After all, earnings on your investments should theoretically be greater than the cost of your student loan interest.

However, keep in mind that stock market returns vary significantly from year to year. And in the short term, investments can actually lose money.

On the flip side, paying off your student debt is a guaranteed benefit. You will save money on interest, and you’ll also have more room in your budget moving forward once your loans are paid off. Whatever you do, don’t fall behind on your student debt repayments in order to invest.

Too long; didn’t read

Okay, what’s the tl;dr here?

1. The earlier you can start investing, the better (thanks to compounding interest).
2. College students should prioritize low-cost brokers with low investment minimums.
3. Free stock apps like WeBull or Robinhood are fine options; full-featured brokers like Fidelity and Schwab are great for long-term investing.
4. Diversifying your investments is recommended to reduce risk and volatility.
5. You can invest in stocks, bonds, real estate, crypto, and more.
6. Index funds provide a simple way to invest in the entire stock market.
7. Try to avoid fees in order to improve your long-term investment performance.
8. Picking individual stocks is more difficult and riskier; index investing is generally recommended.
9. Invest in a retirement account for the most tax benefit or a standard investment account for more flexibility in how you use the funds.
10. Students should weigh the pros and cons of investing while in college vs. paying off their student loans faster.

Investing for college students can provide significant benefit

Investing can feel intimidating, but it doesn’t have to be complicated.

If you’re a college student and have some extra money in your budget, it’s wise to open an investment account and start investing in diversified index funds, such as an S&P 500 ETF.

For a more conservative approach, making extra payments on your student loans can also be a savvy financial decision.

To learn more about personal finance, check out our financial literacy guide. And if you’re looking to save more while in college, check out our ultimate savings guide for college students.