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How to invest as a college student

Young investors enjoy a long time horizon. Learn where and what to invest in so that your money gets the maximum amount of time to grow.

The younger you start investing, the better. Your money has more time to grow, and you have more time to weather the inevitable downturns in the market.
College students have several options when it comes to investing. We’ll explore some of the investment accounts available and the steps to get started in the market. Then, we’ll look at those different investment options and how they might fit into your portfolio.

3 steps to start investing for college students

While the best time to start investing is now, investing is only one facet of your overall financial plan. Getting rid of costly debts and building short-term savings help toward achieving your financial goals.
Even if you’re fortunate enough not to have any debt or bills at this stage in your life, these are some golden rules of money management that everyone should know.
Before you start investing, consider the following steps to get your finances in order:

1. Review your finances

Have an overall picture of your finances before you start investing, even if your finances aren’t complex. This can mean tracking any income and expenses, and organizing and staying on top of any bills and debts. You don’t need a strict budget, but knowing what’s going on with your money allows you to maximize it when it comes time to invest.

2. Build an emergency fund

While investing is unquestionably more thrilling, saving for unexpected expenses is crucial for long-term financial success. Experts suggest saving three to six months of expenses in case you lose your job or a large unexpected expense arises. As a college student, these scenarios may not yet apply to you — but saving for the unexpected will help prevent your investing momentum from being derailed.

3. Pay down high-interest debt

Nearly half of college students have a credit card, and 40% of students have more than $1,000 in credit card debt, according to AIG Retirement Services and EVERFI’s 2021 survey of over 20,000 college students nationwide.
Credit card debt is one of the worst forms of debt, mainly because it’s typically very expensive. On accounts with balances that assessed interest, the average credit card interest rate in 2021 was 16.45%, according to the Federal Reserve.
Meanwhile, the stock market has historically provided around 10% annual returns without accounting for inflation. So, if you’re paying 16% APR on your debt but only earn 10% on your investments, you’re not coming out ahead. Eliminating high-interest debts before you start investing is a strong suggestion for you.

Investment accounts for college students

As a college student, you have access to all the same investment accounts available to everyone else. We’ve listed here those most ideal for college students looking to get started building their portfolios, in no particular order.

Taxable brokerage account

  • Consider if You’re concerned about liquidity and want to invest without the restrictions imposed on retirement accounts.
  • Look elsewhere if You want to avoid paying capital gains taxes or want tax incentives.

A taxable brokerage account lets you buy and sell securities like stocks, index funds and, in some cases, cryptocurrency. These accounts don’t have any tax incentives, but they’re generally more flexible and have fewer restrictions than tax-advantaged retirement accounts like individual retirement accounts (IRAs) and 401(k)s. Simply put, you can withdraw your money at any time.

Pros of taxable brokerage accounts:

  • No minimum investment or contribution limits
  • Liquidity
  • Investment options are virtually unlimited
Cons of taxable brokerage accounts:

  • Not tax-advantaged
  • Capital gains are taxable

Robo-advisor

  • Consider if You want to passively invest and have your portfolio professionally managed at a low cost.
  • Look elsewhere if You want control over your investments or more personalized investment management.

Robo-advisors are investment accounts that use algorithms to provide financial advice and investment management. They have little-to-no human intervention and, as a result, are typically lower cost than their human counterparts.
But many robo-advisors limit their investment options to exchange-traded funds (ETFs), and the portfolio management isn’t personalized. Instead, it’s based on your responses to a handful of questions about your investment goals and risk tolerance.

Pros of robo-advisors:

  • Low fees
  • Portfolio recommendation
  • Hands-off investing
Cons of robo-advisors:

  • Not personalized
  • Limited flexibility
  • No human interaction

Investing apps

  • Consider if You want a simple way to invest and are content with investing only in stocks and ETFs.
  • Look elsewhere if You don’t want restrictions on your investment options or don’t like the idea of doing the majority of your investing from your smartphone.

Investing apps offer a straightforward way to access the stock market by letting you buy and sell securities right in the palm of your hand — via mobile app. These accounts are usually taxable, so selling a security for a profit will trigger a capital gains tax like in a regular brokerage account. While investing apps offer a painless way to invest, some charge a small monthly platform fee and investment options are often limited to only stocks and ETFs.

Pros of investing apps:

  • Simple to use
  • Convenient
Cons of investing apps:

  • Limited account options
  • Monthly fees can add up

IRAs

  • Consider if You want flexible investment options and tax advantages as you save for retirement.
  • Look elsewhere if You’ve maxed out your IRA and anticipate needing the money before retirement.

An IRA is a type of investment account that provides tax-advantages for retirement savings, and they can be opened at most brokerages. There are several types of IRAs, but the most common are traditional IRAs and Roth IRAs. Both allow you to invest in the same types of securities, but the tax implications differ between them.
Contributions made to a traditional IRA are typically tax-deductible, and you pay no taxes on the earnings in your account until you begin taking withdrawals in retirement. On the other hand, Roth IRA contributions made with after-tax funds aren’t tax-deductible, but earnings and withdrawals in retirement are tax-free.
Note that withdrawals from your IRA before retirement could be subject to penalties. You’re also limited to how much you can invest in an IRA each year. IRA contributions across all accounts are capped at $6,000 for 2022.
IRA investment options include:

  • Treasury bills
  • US savings bonds
  • Money market funds
Pros of IRAs:

  • Tax incentives
  • Plentiful investment options
  • Control over your investments
  • Straightforward setup
Cons of IRAs:

  • Contribution limits
  • Withdrawal penalties

8 investments for college students

As a college student, what you choose to invest in largely depends on your unique goals, risk tolerance and overall interest in investing.
The following list includes investments that are hands-on and some that allow you more passive investment. Some carry more risk but offer the potential for higher returns, while others are considered to be safe investments that trade the possibility of higher returns for the comfort of stability.

1. Index funds

  • Consider if You don’t have the time or interest in performing market research and picking individual stocks and want broad exposure to the market.
  • Look elsewhere if You want to take a more hands-on approach to investing and want to eliminate fees altogether.

An index fund is designed to track the returns of a market index such as the S&P 500 or Russell 2000 Index and usually trades as a mutual fund or ETF. Billionaire investor Warren Buffet has long recommended index funds because of their low fees — and, let’s face it: Picking winning stocks is no easy feat.
Investors can take the guesswork out of stock picking and instead get broad exposure to a larger portion of the market by buying index funds. Buying and holding index funds is widely accepted as one of the best ways to grow your wealth. Even if you like the idea of picking individual stocks, consider investing at least a portion of your money in index funds.

Pros of index funds:

  • Generally more affordable than other options
  • Broad diversification
  • Returns match the market the index tracks
Cons of index funds:

  • Lack of flexibility
  • Vulnerable to the downside if the overall market is underperforming
  • Little potential for massive gains

2. Individual stocks

  • Consider if You want complete control over your investment portfolio and want to avoid management fees.
  • Look elsewhere if You don’t have the time or interest to research and understand what you’re investing in and would rather have your money professionally managed.

Stocks are a type of security that gives investors a share of ownership in a company. And with the advent of fractional-share trading, you can even now own slices of stocks without needing the full share amount to buy in.
If you want the most hands-on approach to investing, there’s nothing more personally satisfying than investing in individual stocks that turn out to be winners. But there’s a downside too: Stock-picking requires more of your time and emotional energy. And it’s harder to achieve portfolio diversification, especially the less capital you have to invest.

Pros of individual stock investing:

  • Fractional shares
  • More control over your investments
  • No management fees
Cons of individual stock investing:

  • Harder to achieve diversification
  • Requires more time
  • Can be more emotionally taxing
  • Higher risk than buying and holding index funds

3. CDs

  • Consider if You want a relatively safe place to park your money and don’t expect needing access to your money until the CD expires.
  • Look elsewhere if You want the chance to earn a higher return or want quick access to your money without getting hit with early withdrawal fees.

A CD is a bank product that pays interest on a lump sum of money that remains untouched for a predetermined period, which can be anywhere from a few months to several years. In comparison, CDs typically pay interest rates higher than a traditional savings account because your money is tied up.
Withdrawing your money before your CD matures can result in a penalty. As a result, CDs with longer terms tend to pay a higher interest rate.
Compared to other investments, CDs are considered low risk. They’re insured by the Federal Deposit Insurance Corporation (FDIC), and you benefit from a fixed rate of return. CD rates are modest at best, but they provide security and a guaranteed rate of return.

Pros of investing in CDs:

  • Safety
  • Fixed, predictable returns
  • Wide selection of terms
Cons of investing in CDs:

  • Limited liquidity
  • Inflation risk
  • Low relative returns

4. High-yield savings accounts

  • Consider if You want to earn a competitive interest rate on your savings but want high liquidity.
  • Look elsewhere if You want to lock in a rate for a set time or want to potentially earn an even higher rate on your investment.

A high-yield savings account is another type of FDIC-insured bank product, usually offered by online banks. Online banks tend to have lower operating costs compared to traditional, brick-and-mortar banks, and so they can pay higher rates to their customers.
The downside is that these rates aren’t fixed like CDs. They can go up when the Federal Reserve raises interest rates and drop when the Fed lowers interest rates.

Pros of investing in high-yield savings accounts:

  • Safety
  • Some of the most competitive rates on savings
  • Highly accessible
Cons of investing in high-yield savings accounts:

  • Interest rates are variable
  • Inflation risk
  • Restricted number of monthly transactions

5. Target-date funds

  • Consider if You want to take a hands-off approach to investing with a portfolio that is automatically rebalanced on your behalf.
  • Look elsewhere if You don’t want to invest in a one-size-fits-all fund with sometimes high expense ratios.

Target-date funds are a class of mutual fund or ETF designed to provide a simple solution for retirement investment by focusing on your anticipated retirement age. The fund comprises a portfolio of investments that are periodically rebalanced as you get closer to your target date, helping you manage risk and optimize returns.
So while the assets in your target-date fund may be heavily weighted toward stocks when you’re younger, they may transition more to bonds and cash — less risky investments — as you near your expected retirement age. The fund manager rebalances your portfolio on your behalf, and all you have to do is continue to fund it.

Pros of investing in target-date funds:

  • Simplicity of choice
  • Offers hands-off investing
  • Already diversified
Cons of investing in target-date funds:

  • Expenses can add up
  • Not individualized for a person’s specific situation
  • Loss of control

6. Cryptocurrency

  • Consider if You want to gain direct exposure to the demand for digital currency and its long-term prospects and possibly significant returns.
  • Look elsewhere if You aren’t comfortable with high price volatility.

Cryptocurrency is decentralized digital currency that, in most cases, runs on blockchain technology. For many, it’s treated as an alternative investment that is bought and sold just like the stock of a public company is traded. The first and most popular cryptocurrency is Bitcoin.
Cryptocurrencies are a relatively new asset and, as a result, are still very volatile. Cryptos are known for their quick and significant price fluctuations that can lead to both substantial gains and losses. For this, crypto investors must have high risk tolerance.
The long-term investment potential of cryptocurrencies isn’t yet known, but they’ve become more mainstream in recent years and are closer than ever to becoming a recognized asset class.

Pros of investing in cryptocurrency:

  • Accessibility and liquidity
  • High return potential
Cons of investing in cryptocurrency:

  • High volatility
  • Understanding crypto takes time and effort
  • Hasn’t proven itself as a long-term investment

7. REITs and real estate investing apps

  • Consider if You want to diversify your portfolio with commercial real estate without having to own and manage physical property.
  • Look elsewhere if You’re more interested in high potential returns than steady income.

College students who want to add real estate investments to their portfolios without needing the upfront capital to invest in physical real estate might consider real estate investments trusts (REITs) and real estate investing apps.
REITs are companies that own, operate or finance income-producing real estate. These can include office buildings, shopping malls, apartments, hotels or other income-producing properties.
When you invest in a REIT, you can earn a share of the income the property makes. This comes in the form of a dividend, providing you with monthly or quarterly cash flow. Many REITs are publicly traded on a stock exchange, which makes them a convenient option for investors.
Investors can also buy into commercial real estate through real estate crowdfunding platforms. These platforms pair developers and other real estate professionals with individual investors, giving investors another way to gain exposure to real estate without the hassles of owning and managing properties.

Pros of investing in real estate:

  • Can provide steady cash flow
  • Access to commercial real estate
  • Portfolio diversification
Cons of investing in real estate:

  • Long-term investments
  • Property-specific risks
  • Potential for high fees

8. Invest in yourself

One of the best investments you can make is in yourself, and you’re already doing this by deciding to continue your education.
While assets like stocks and crypto are exciting and can help you build a profitable portfolio, investing in yourself by learning how money works and constantly improving your professional skills may be the most profitable investment you can ever make.

How to add investments to your portfolio

Your portfolio is the entire collection of all your financial investments. It can include stocks, bonds, cash and alternative investments like real estate and cryptocurrency.
It takes time to build your portfolio, but follow these steps to get started:

  1. Choose an account that will help you work toward your goals. Decide on the type of investment account that best suits your needs and choose a suitable broker based on considerations like fees, features and reliability.
  2. Choose your investments based on your risk tolerance. Research and decide on investments based on how long you’ll be invested and how much risk you’re willing to tolerate.
  3. Start investing. Purchase your investments and rebalance your portfolio over time so that you stay in line with your investment strategy.

Bottom line

Investing for college students is no different than investing for everyone else. Start with a clear picture of your finances, decide on the type of investment account you want to open and choose your investments.

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Written by

Matt Miczulski

Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions. Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University. See full profile

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