Investing for College Students: Where to Put Your Money While You're in School
If you’re like most college students, you don’t have a lot of free cash to invest. You’re carrying a massive amount of student loan debt, and your campus job doesn’t exactly have you rolling in wealth. With the volatility of the recent market, investing can be a scary prospect—and you might not be able to afford to risk what little extra cash you have on an unpredictable environment.
However, if you do have extra cash, there are a few smart decisions you can make about where you put your money now—whether you have hundreds or thousands in your current account—that can leave you in a better place financially when you graduate.
Of course, we’re not financial advisors—and you should always talk to an advisor about your specific situation before making any major decisions about money and investing. However, we can offer a few thoughts about what college students can do now to protect and grow their finances while in school.
Get a free checking account
Managing your money is never easy in college. Between living expenses, student loans, and the high cost of books and other supplies, many students are strapped for cash.
Instead of going with a bank, research credit unions in your area. Credit unions are not-for-profit financial institutions that usually give their customers a much better deal on their accounts. Most will offer no-fee checking accounts—and some may pay a small amount of interest.
Get a savings account with a good interest rate
Most types of savings accounts will pay you a small interest rate—approximately .1% to .3% per year. There are accounts with higher yields, however, that are worth looking into. For example, ING’s Orange Savings Account currently pays a 1% APY, with no fees—and you can open an account with any amount of money.
Look into a CD account
If you have a large amount to invest—such as $1,000 or more—consider looking into a short-term Certificate of Deposit (CD) account. CD’s often pay as much as 3% APY, and you can “lock in” that rate for as long as you want—usually from one month to 120. The drawback of a CD account is that once you set the amount of time you want to keep your investment in the account, you can’t withdraw the money until that time is up without incurring penalty fees.
Look into a Money Market account
Money Market accounts can have high yields—sometimes as much as 6% APY—but some Money Market accounts have a minimum amount requirement. In addition, while you can make withdrawals without penalties with a Money Market account, you are usually allowed only a certain number a month—and it’s important to be aware of that number.
Find out if your employer matches funds
If you’re working full-time in addition to going to school, it’s possible that you qualify for your employer’s retirement program. Many employers offer matching funds up to a certain percentage of your wage. For example, your employer may pay $.50 for every dollar you put into your retirement account up to 5% of your salary. If you’re contributing only 4% of your salary, you’re leaving some free money on the table—so make sure you contribute the maximum amount.
IRA or Roth IRA?
If your company offers you a choice, stick with the Roth IRA. Here’s why.
Both types of accounts allow you to invest money tax-free—but they tax you at different times. With an IRA, you aren’t taxed on any money you put into the account—you can write it off your taxes. But you will be taxed when you withdraw. With a Roth IRA, the opposite is true. You’ll be taxed on that money you invest—just like regular income—but once in your account, the money will grow. And you won’t be taxed on the dividends once you withdraw the cash.
If you’re a college student, you might think it’s better to invest in an IRA. You get a tax write-off, meaning your tax return will be bigger at the end of the year—and you could use that extra cash. However, over the long term, a Roth IRA is probably going to be a better deal. That’s because now, you’re making much less than you will at the end of your career—if everything goes well. You’re in a much lower tax bracket than you will be when you really need those dollars—so you’ll pay a lower tax rate now than you would when you’re older.
Stocks or bonds?
If your company offers you a 401(k), you may have the choice on how to divvy up your funds. Stocks are more volatile than bonds. It’s more risky, but you also have room for more growth than if you invest in bonds. The traditional advice is that when you’re young, you should invest in stocks. The rationale goes that on the good days you’ll make more money, and if something goes wrong, you’re young—so you have plenty of time to recover.
In a very difficult economy, however, you might want to rethink that advice a bit. It may be more prudent in a recession to reduce the amount of stocks you own. Invest a bit in emerging markets—that’s where most of the growth will happen—but that’s the most volatile market, too, so only invest a little in this area.
Diversify and thrive
You can reduce your chances of risk, however, by diversifying. Invest in many different types of stocks—and a few bonds, just for stability. Never invest all your money in just one business. Be sure your company offers matching funds in cash, not in company stock—which can make your account dangerously homogenous.
Managing your money is never easy in college. Between living expenses, student loans, and the high cost of books and other supplies, many students are strapped for cash—and if you do have extra money to invest, it may not be enough to meet certain minimum account requirements. Don’t let that worry you. Talk to a financial advisor today—and start putting your money in a place where it can work for you.